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Halfway through a £105 million outsourcing contract, investment firm Skandia UK’s operating model changed radically. CIO Rob Hornby explains how he managed to steer the engagement through the upheaval

For investment firm Skandia UK, everything changed in 2006.

First, after a six-month battle for ownership, its Swedish parent was acquired by South African savings group Old Mutual for £3.6 billion. That meant Skandia UK was merged with another Old Mutual subsidiary, Selestia, whose operations differed in a number of ways.

Later that year, Skandia UK decided to outsource its application development and management functions to Indian IT services provider HCL Technologies. The five-year deal, worth around £105 million, saw 250 jobs move to the Indian company.

To begin with, HCL was contracted to support Skandia UK’s legacy applications, which were based on IBM’s iSeries platform (formerly AS/400, now Series i) and which supported the mainly paper-based processes through which the company had traditionally sold investments to customers.

In early 2009, however, it was decided that Selestia’s online portal, which at the time brought in only a small proportion of the group’s revenue, would become Skandia UK’s primary sales channel. The company predicted that the industry would soon be moving online and wanted to get a head start. “It was a risky bet but a potentially lucrative move,” recalls Rob Hornby, CIO of Old Mutual Wealth Management Group.

Hornby drew up a two-year plan to recalibrate the IT department’s staffing resources and operating model for the online world. “For this online business context you need an entirely different skill set, and in some cases a different mentality,” he says.

However, it soon became clear that this plan drastically underestimated the pace of change that was already under way. “The transition accelerated like a Formula 1 racing car,” Hornby explains. “Skandia’s sales team had embraced the new model, resulting in a sharp decline in sales of its traditional products; all new business was coming in online. The comfort of a two-year transition period was no longer a possibility.”

This meant that Skandia UK was midway through a £105 million outsourcing contract to provide skills it needed less of by the day. Clearly, the outsourcing engagement needed to change fast.

The long game

At this point, Skandia UK considered its options. One of these was to exit the HCL contract altogether and find a new partner to provide the Java programming skills it now required.

Two factors prevented it from doing this. “Exiting the contract and negotiating a new deal from scratch would have cost a huge sum of money,” explains Hornby. “Also, our priority is execution; we are trying to serve the business and enable it to compete. Creating a hiatus by transitioning to a different supplier is probably the biggest risk to execution we could have come up with.” However, staying with HCL put Skandia UK in a difficult position. “If they had been so minded, they could have held us to the original contract,” Hornby says.

"Transitioning to a different supplier is probably the biggest risk to execution we could have come up with"
Rob Hornby, Old Mutual Wealth Management

Fortunately, the Indian company was not so minded. Effectively scrapping their original contract, HCL and Skandia UK developed a “cross-over plan” that described what Skandia wanted and how HCL would change it’s offering to deliver that. “The cross-over plan laid out how we would move from where we were to where we needed to be,” explains Hornby.

The plan asserted three new goals for the engagement: to build a high-availability platform for online business; to extend that platform into global markets; and to maintain the legacy systems for as long as they were needed. “Achieving these involved establishing some new delivery models, such as working with our internal IT service provider, which had some Internet development capability already, and some new skill requirements,” explains Hornby. “For example, the Siebel CRM application is one of the key components of [the ecommerce platform], but we hadn’t looked to HCL for any Siebel skills before.”

HCL was prepared to renegotiate its engagement with Skandia UK so comprehensively because it was at risk of becoming a legacy supplier, Hornby says. “HCL knew that if the old world they had contracted into was becoming our legacy business and that all our investment was going to be in something they were not engaged in, then eventually they would have become marginalised,” he says. “They took a long-game view.” Indeed, he credits HCL with being a “strategic” partner to Skandia UK, in that it is prepared to take a longer-term view of their shared best interests.

Many Indian IT providers aspire to become “innovation partners” to their customers, and Hornby reports that HCL does suggest modifications to Skandia’s IT systems that are valuable, but this has not always been the case. “Earlier in the relationship, HCL brought things that were innovative but not necessarily strategic,” he explains. “It’s only as the relationship has matured that HCL has genuinely understood our business and brought things that are strategically valuable.”

Hornby adds, though, that he is happy with the level at which HCL attempts to innovate. “We definitely expect them to come up with new ideas on the fine line between IT and business, but we’re not looking for HCL to tell us what sorts of products to sell,” he says. “From my own previous experience, some of the other global IT services providers might have had a lot to say about our business itself, and we overtly do not want that from our partner.”

Time for change

While Hornby broadly praises HCL for its flexibility, he believes that Skandia UK’s experience has shown the shortcomings of traditional outsourcing contracts.

The company’s contract with HCL is up for renewal in 2012, and Hornby says the new engagement must make allowances for a greater degree of change than would previously have been considered. “We need to anticipate dimensions that might change and pre-negotiate how that change will occur,” he says. “Rather than relying on each other’s goodwill and creativity when that change happens, we need to have already rehearsed some of the shifts that might happen.”

“Of course, we need to have a sensible and tangible start point,” he adds, “but we have to spend more time working out how that will change during the life of the deal.”