Outsourcing is often seen as a way to cut costs and get rid of the management headaches of running routine, stable systems. But for Internet start-up Affinity, outsourcing was a key competitive weapon in its business strategy. "Outsourcing enabled us to go to market quickly by supplying us with all the infrastructure to support our offers," explains June May, chief executive officer of Affinity's UK operations.
Affinity is a provider of Internet, telecom and e-commerce services and technologies. Its clients, which include major brands such as the Royal Bank of Scotland, Tiny Computers, Powergen, LineOne and Egg, use Affinity's resources to offer these services to their customers under their own brand names. "Our focus has been to understand technology and offer it commercially," says May. "The strengths of the company are sales and marketing but with the particular ability to package and market technology and applications."
Founded in 1995, Affinity achieved a listing on the London Stock Exchange last year and now operates in Europe, Africa and Asia-Pacific through three different divisions. Affinity Internet offers branded Internet service provision to about 150 clients, which now have more than 1.6 million registered user accounts between them. Affinity Telecom supplies branded fixed and wireless telephony services, as well as a convergent billing platform, delivered through an application service provider (ASP) model, that allows multi-utilities such as Powergen to provide customers with a single bill for all services. Affinity Commerce provides brandable Web, mobile and interactive TV content, e-commerce, software, portals and advanced customer relationship marketing services.
Not surprisingly, IT is a major area of investment for Affinity. Although the company has only 200 staff and a turnover last year of just £11m, May estimates that it is investing about £10m each year in IT. "Our belief is that investment in infrastructure is core to our becoming profitable in the long term," she says. "There's just no way you can be effective in either the Internet or mobile market unless you have that scale of investment in infrastructure."
The bulk of this spend is in the form of outsourcing contracts, with Affinity's IT operations outsourced to ICL from the outset. May says the choice of ICL for such a strategic role was very simple. "It goes back to the origins of the business and our need to share risk," she explains. "ICL was prepared to do business with us even though we didn't know ourselves quite what might happen. The other outsourcers we spoke to were not prepared to take the risk. They were initially enthusiastic, but they weren't prepared to commit to the timescales we needed." ICL was willing to take this risk in part because it saw that it could use the relationship with Affinity to help it to fulfil its own ambitions to become an e-commerce player. "For both of us, the timing was right," says May.
She adds that the relationship with ICL brought other benefits to Affinity's operations. ICL is a company that has credibility in the IT infrastructure sphere and that helped Affinity to create confidence that it had the scale and capability to deliver among its target customer base of major brands. For instance, the company's ISP platform was capable of hosting a million registered users on launch. ICL also gave Affinity a strong distribution channel - both directly and indirectly - which it would not have been able to create for itself, while ICL's global presence has helped Affinity to move into new markets overseas.
Affinity has created a similar close relationship with customer services outsourcer ClientLogic, ensuring a first-class customer service function from day one. "There's no way we could be experts in customer service because we didn't have the skills, bandwidth or infrastructure," says May.
While the relationship between Affinity and ICL may have started off on the right foot, both companies have had to work hard to ensure it has remained successful in the longer term. The services ICL has provided to Affinity have changed dramatically over the past six years, not just because Affinity has grown but also because it has developed new offerings for its customers which ICL's infrastructure must support.
"Outsourcing has enabled us to get to where we've got to, but we have had to manage our outsourcing partners," says May. "We're a small business with few managers and a lot of time and effort is required to ensure that our key partners continue to understand our business. The Internet side in particular is constantly changing. But it's important to make sure your outsourcers understand your business and how it is changing; if they don't, that's your fault."
To make sure this happens, Danny Sullivan, director of Affinity's Internet division explains, "We have bi-monthly reviews to look at what the market is doing, what our competitors are doing, whether what we're doing still fits, what we should be doing and the applicability of what ICL and our other partners can offer." Affinity also holds high-level quarterly strategy reviews with ICL across all business areas.
Existing outsourcing contracts are subject to monthly service reviews, while Affinity and ICL regularly discuss which of a long list of proposed new developments is to be undertaken next. In each case, Affinity needs to negotiate with ICL over how much work is included in existing contracts and how much is special. Everything is kept on track by Affinity's large project management group, headed up by six professional project managers. "It's basically about project management, communication and negotiation," says Sullivan. "It's inevitable that in any big outsourcing project that you'll drop the ball at some point and the trick is to realise that you have to then catch up and bring things back on track."
May confirms that the number of people who are actively involved managing and driving forward the outsourcing relationship between Affinity and ICL is significant on both sides. "At any one time, there are at least 10 of our people talking to our outsourcers, at all levels and all project stages. It's a big investment on our side and we expect to be treated seriously on their side, but outsourcing goes wrong when you have just one person on each side channelling all the communication," she says.
The role and size of the in-house IT team has also changed from its early days of primarily managing the relationship with ICL. Affinity has grown, partly through a number of acquisitions, which have brought with them systems developed and run in house. Some of these have been outsourced to ICL and the in-house teams have moved into new roles providing consultancy and training to Affinity's own clients. "Acquisitions have given us the opportunity to look at the strengths of both outsourcing and in-house strategies and use what makes most sense in each area," May says.
Affinity has also brought in house some elements which were initially supplied by ICL. May cites the example of the company's e-mail system. "In our early days, ICL ran that for us, but as we've grown and added offices, we've invested in our own e-mail system because we see that as a core function we need to own. But there will always be a role for outsourcing in the infrastructure we are selling to customers, because it allows us to be more adaptable to their changing needs than we could be trying to re-engineer our systems ourselves."
At the same time, Affinity recognises that it does need to develop some customer-facing systems itself. "On the mobile telephony side, we do provide a lot of the added-value technical infrastructure ourselves, because our differentiator in that business is trying to make it easy for people to use their mobiles," explains May. "The technical infrastructure for the mobile business is very different to the Internet and the big outsourcers are not as well up on that side, so we have a strong IT department at our Gloucester office to handle all of that."
With such rapidly changing business needs, May admits that Affinity constantly faces the danger that it might not always end up with the best deal for new service elements if it sticks with a single major outsourcer. The risk is reduced by a willingness on both sides to develop new contracts cautiously.
"Where we are dealing with established business and we know the rules, we have long-term contracts, but on new business ICL is very good at committing to us on shorter terms, such as a year, and not committing us to longer-term contracts until we both understand the upside and downside and the real costs," explains May. It is worth noting that this also protects ICL if it gets its sums wrong and quotes too low a rate for a service that proves more complex than expected.
In such a fast-moving marketplace both sides also have to be willing to revisit existing contracts. "We are constantly being challenged in our strategy by the fact that we are investing in an industry that turns itself on its head every three months," May points out. "For example, we had to work with ICL to change the way it provided services to us in order to handle a change in our ISP business from pay-as-you-go to subscription services. Our original contract was built in a way that allowed us to have that conversation."
She adds that, in any business relationship, it is important to understand the business dynamics for the other side as well as your own. "Within commercial realities, you have to be prepared to compromise to some extent and to create a win-win situation because, at the end of the day, you both have to succeed," she warns. "The true measure of any outsourcing contract is that it will work for both sides in the long term. We know we need to pay sensible rates to get the services and flexibility we're looking for and that our outsourcer needs to make money out of the deal over the longer term as well."
May is also confident that Affinity has retained the right skills in house to ensure that it continues to get value for money and the right technical solutions from ICL. "At a day-to-day level, we have as much access as ICL to information about what the market is doing and where it is going," says May. "We can make up our own opinions as to whether we and our outsourcers are on the same page. We also have very knowledgeable people in house who can challenge whether the technology being offered to us by ICL is suitable. That's essential, otherwise you're going in blind."
At the same time, she points out, Affinity can take advantage of the thought leadership provided by its best-of-breed suppliers. "They are assessing new technologies and products all the time and they are very good at offering us the opportunity to take advantage of those, although we are under no obligation to do so and it's always on commercial terms," she explains. "We usually have a couple of pilots going on with ICL and our relationship does allow for exploratory developments." In return, ICL can get Affinity to test its own ideas about technology propositions.
Furthermore, Affinity is not afraid to swap outsourcing suppliers or add new ones if it feels it can get a better deal elsewhere. On the telecoms side, it has used several network providers, including BT, Cable & Wireless and Energis. On the IT infrastructure side, Affinity and ICL chose not to work together when Affinity was developing a new service aimed at small businesses; Affinity wanted to move more quickly and provide a greater range of functionality than ICL was able to deliver within its own current business plan.
May certainly doesn't play down the hard work that is involved in creating a successful outsourcing relationship. It requires good project management and continued open, two-way communication between client and outsourcer. The result is that Affinity and ICL are now able to hold mature conversations about both companies' capabilities and whether or not to undertake certain activities.
And with six successful years of growth behind her, May has no doubts that outsourcing has been the right strategy for Affinity. "We don't want to be all things to all men, we never could be and we shouldn't try to be," she says. "We've been able to get where we are quite quickly because we've worked with major brand names that are experts in their field."
Affinity at a glance
Affinity is a white-label provider of Internet, telecom and e-commerce services and technologies. Its clients - which include major brands such as the Royal Bank of Scotland, Tiny Computers, Powergen, LineOne and Egg - use Affinity's resources to offer these services to their customers under their own brand names.
As a start-up company, Affinity needed to create a robust and credible infrastructure as soon as possible which would convince major brands that the company could deliver high quality services to consumers. Once the company was established, it needed to be able to extend and refresh that infrastructure regularly and quickly.
A strategic outsourcing relationship with ICL has allowed Affinity to tap into a huge infrastructure from day one and then add new services as its business model has developed.
Top 10 tips: Secrets of Affinity's outsourcing success
- Open and honest two-way communications at all levels of the companies and at all stages of projects
- Heavy investment in time and effort to manage contracts and the wider relationship, with strong project management of specific initiatives
- Retaining the right skills in house to assess technical and commercial proposals from outsourcers
- Putting in place the best procedures and practices in both partners' operations
- Flexible and intelligent use of outsourcing: bringing operations in house, developing solutions internally or working with other outsourcing partners where appropriate
- Finding an outsourcing partner that is willing to listen and to share the risk created by a dynamic corporate and technical environment
- Use of short-term contracts in new business areas to allow both sides to understand the dynamics of the new service before committing to long-term deals
- Ensuring contracts are written to allow variation in services to meet changing business needs at a reasonable price
- Understanding the business dynamics of outsourcers and how collaboration might help them to meet their business goals, while recognising their need to be profitable over the longer term
- Drawing on the thought leadership that can be provided by a leading player in the technology sector and leveraging the strengths of the outsourcer in areas outside the original contract.
What the experts say...
Alistair Fulton, BuyIT chairman and president of the Computing Services & Software Association
At first, outsourcing was hyped as a solution for all situations and like all hype it actually turned out to be true:
- Only for some situations
- Only if the decision had been made for the right reasons, and then
- Only if both sides had the skills to work in this new way, because it is not easy.
This case study shows a start-up using outsourcing to give it a competitive advantage. It demonstrates the three principles very well. A key feature of the relationship between Affinity and its suppliers is the extent to which both sides have invested in making the relationship work.
Another is the sharing of strategic market information on a regular basis and the ability to work closely to develop solutions for problems as they arise. Flexibility in contractual terms and in day-to-day relationships is key here, with the pace of change in the IT and telecoms market capable of wrong-footing even the best-informed organisations.
Finally, Affinity has understood the need to focus clearly on developing and maintaining in-house those skills that differentiate it in the marketplace and both sides have recognised that they are operating in a complex market where other partners may be better suited to specific areas. This takes a sophisticated original contract.
Colin Thompson , deputy chief executive, British Computer Society
This case describes a set of very successful outsourcing relationships and serves to illustrate just how far outsourcing has matured over the past 10 years.
With a green-field start, Affinity was able to take a totally strategic view and design outsourcing relationships into its operation from the start. Clearly, that will not be possible for those running an existing organisation, but there are valuable lessons in this case for anyone contemplating outsourcing, whether a new or existing organisation.
Inevitably, when outsourcing contracts fail, the supplier collects most, if not all, the blame. This case illustrates just how much success is dependent on the understanding, attitude and capabilities of both parties. Clearly, ICL and the other partners have played a major part in the success of Affinity and they deserve the credit for that. But that contribution was made possible by the fact that Affinity itself had a clear idea of what it was outsourcing, knew what it expected from its outsourcing partners and understood what that meant in terms of the nature of the relationships required. Above all, it was prepared to put in the very considerable effort needed to establish and maintain those relationships.
This case teaches us that the quality and maturity of the relationship between the parties, over the life of the arrangement, is the essential ingredient. Where that relationship is right, all other elements, including the contract, can be tuned to achieve success.
This was first published in November 2001