Shell offers lessons on outsourcing contracts

Shell's IT outsourcing deals totalling about £2bn that were signed last month represent a break from the normal pattern of multi-source outsourcing deals.

Shell's IT outsourcing deals totalling about £2bn that were signed last month represent a break from the normal pattern of multi-source outsourcing deals.

Shell signed three IT outsourcing deals last month with EDS, AT&T and T-Systems. EDS will take over day-to-day management of the oil company's of AT&T and T-Systems. It will also take over responsibility for the risk of those projects as well as its own.

But unlike traditional prime contractor relationships, the oil company will still retain overall control of the other suppliers and its IT strategy.

EDS will provide end-user computing services and integrate Shell's infrastructure services AT&T will provide network and telecommunications and T-Systems will support datacentre computing including hosting, storage and most of Shell's SAP services.

Albert Sprokholt, executive director at outsourcing advisor EquaTerra, said, "Shell would previously have had to deal on operational issues with T-Systems, AT&T and EDS itself. Now EDS takes control, which reduces Shell's risk and costs."

Shell has been planning to use outsourcing to simplify its IT since 2005. The approach it has now taken promises to simplify the way Shell manages its IT, enabling it to focus its resources on projects that makes it more competitive.

Alan Matula, Shell's Chief Information Officer, said, "This deal allows Shell IT to focus on IT that drives competitive position in the oil and gas market, whilst suppliers focus on improving essential IT capability."

The deal raises some interesting questions. How does EDS exercise control over AT&T and T-Systems, especially given that certain desktop support functions, such as a roll-out of Windows Vista, is predicated on AT&T's network service? Similarly, how does EDS exercise control over decision support desktop software, which needs to take a data feed from the SAP system, managed by T-Systems. The other dilemma for Shell is how it can trust EDS to deliver the outsourced service if EDS faces a default by one of the other parties?

Shell has tackled these problems by putting multiple service level agreements in place. Each of the three suppliers have their own service-level agreement with Shell. Additionally, there are service-level agreements between each supplier to ensure they are contractually obliged to co-operate when needed.

John Madden, from Ovum, said, "[The contract] takes the burden off Shell's internal staff to manage multiple relationships with third parties."

Elesh Khakhar, partner at TPI, the advisory service used by Shell, said, "Shell's approach combines all the advantages of decentralised service provision with the benefits and efficiency of a centralised governance structure.

The contracts will come together over the next few months and the combined outsourcing IT service is due to go live in July 2008. While Shell appears to have put in place an innovative SLA structure to ensure the delivery of IT services it needs, its success will be a measure by how these agreements stand the test of time.

Advice for IT departments considering multi-supplier outsourcing

1. CIOs need to scope the contract with their outsourcers in a way that does not encourage them to compete for the same business

2. Take into account companies that have a track record of collaborating

3. Ensure IT suppliers that are unable to cooperate share the pain

4. Try to avoid creating an environment of competition, where the suppliers work against each other to compete for business

Source: Elesh Khakhar, partner at TPI

See also: Podcast - Shell VP for IT infrastructure and services reveals their innovative outsourcing approach. In this podcast Cliff Saran speaks to Swee Chen Goh, vice president for IT infrastructure and services for Shell globally, about this innovative contract.

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