Reinventing Customer Value.

LOOKING BEYOND the bottom line, companies are seeking out new business models--and inspiring customer loyalty--with a careful mix of technology, outsourcing, and collaboration.

You've come a long way in the last decade. You've halved development time, implemented new technologies, integrated far-flung suppliers into a seamless chain, and introduced automated customer service.

But it's not enough. Thriving in a time when only the agile survive requires continual reinvention. To build customer value today, CEOs must look beyond the bottom line to a less tangible goal -- creating and nurturing a corporate culture that seeks out flexible new business models, structures, and relationships.

That's no easy feat. And achieving it, agreed CEOs at a recent roundtable held in partnership with Accenture, often demands jettisoning protectionism in favor of collaboration. "Clearly the world is now too complex, changing too fast, and far too competitive for any firm to do all of the functions within their business on their own," said K. Blake Darcy, CEO of CSFBdirect. "Value wins out overall, and the only way you can provide that value on a consistent basis is to be cost effective by using outsourcing and partnerships."

These days, of course, both are stock items in the standard CEO toolbox. In outsourcing relationships involving everything from back-end accounting tasks to front-end customer service, companies are entrusting one another with sensitive data and enormous responsibility. Similarly, partnerships are evolving to encompass joint development of intellectual property and capital investment.

But as relationships deepen and firms become more intertwined with their partners, the prospect of finding, forming, managing, and expanding appropriate relationships grows ever more daunting. After all, risks are inherent in any partnership effort--and the deeper the partnership, the messier its demise. Yet the consequences of missing out on a collaborative opportunity and potential payoff can be just as dire.

Clearly, the ability to both forge relationships and skirt the dangers intrinsic to them has become an invaluable CEO skill. As Benchmark Electronics CEO Don Nigbor noted, "It's a very scary thing for most companies, and it takes the CEO to make those decisions.

It's not easy, and it's not without risk, but neither is it optional.

Taking a Fresh Look

Martin Cole (Accenture): Historically, outsourcing has been all about cost reduction. How can I take a business component and have somebody else provide it at a lower cost? But we've been looking deeper, saying, "Are there ways to improve speed to market, return on capital, and overall market position, and deliver top-line growth and overall profitability growth in addition to just achieving cost reductions?"

Our focus is on how to use outsourcing as an enabling tool to transform a business. The UK-based grocery retailer Sainsbury is perhaps the premier example of this type of business transformation occurring through outsourcing.

About two years ago, Sainsbury brought in a new CEO, Sir Peter Davis, who was charged with developing a new business model. The company had lost market position, profit margins were under pressure, the cost structure was out of line, and its share price had dropped.

We partnered with him to deliver significant cost reductions--including 30 percent to 50 percent reductions in IT operations--and to enable him to launch a more efficient Web presence where customers could shop for groceries online. By looking at these multiple areas and outsourcing some components, Sainsbury significantly improved its position over the 12 months this program has been under way.

The question is how do we engage business transformation using technology outsourcing, and collaborative arrangements as enablers to a much broader program than just focusing on cost reduction? Transforming an organization starts with vision and aggressive leadership.

I'd like to leave you with two questions that should be considered as you get into these types of collaborative relationships. First, how do both sides share in the risks and rewards to really get market improvement? And, second, how do you finance change? Often, in order to make a significant change, you have to make an initial investment. If cost reduction is part of your focus, how will you make that investment in order to achieve the downstream improvements?

Bob Prieto (Parsons Brinckerhoff): We ingrain into our senior project managers that they're acting as an extension of the client's staff. We go into the job with the attitude that we're an integral part of that client's staff and work hard during the selling phase to get the client, the prospective buyers of our services, into the same mode of seeing us as a full partner.

The skin in the game is that on a given project where we're fully integrated with the client, using these project collaboration tools, we may make no profit or we may make twice what would be typical based on the integrated ability of the team to perform on our client side as well as our own staff side.

Michael Graff (Bombardier Aerospace): Building an airplane is a $ billion investment, and we took on a number of those investments when we didn't have much revenue, let alone equity. So we couldn't have done it without partners. You save capital with partnerships because other people put their capital at risk, and you pick up a lot of capability.

We took a high-level view of the requirements that the aircraft needed to be able to deliver, created detailed technical specifications, and sat down and worked through the process over six months or longer with each of our major partners, who put up their own development capital. Then they did the detail design for the structure or the systems that they supplied. So it was practical financing.

The program is successful and our partners share in the increased volumes we're able to achieve. Also, obviously, when we have a successful collaboration, our tendency is to go back and work with the same people again and again on future programs.

Farooq Kathwari (Ethan Allen Interiors): One has to be creative in finding solutions and partners. We recently made an alliance with a fairly large company in our industry in China. We will help them develop designs and products. They will own the rights to those designs in China but we will own the rights outside China. They benefit and we benefit. One of the main jobs of a CEO today is developing strategic alliances so that we are able to use resources globally.

K. Blake Darcy (CSFBdirect): Our core competency is technology, product development, and customer service. Going into Japan, for example, we knew we would be good at building the infrastructure, building the product capabilities, and understanding the service organization. We knew we wouldn't be good at understanding the market culturally or knowing what we'd need to do from a marketing or product-building standpoint. So we picked a very strong partner, the Sumitomo Financial Group, and it's worked extraordinarily well. We've taken the same approach in Hong Kong and in the Middle East.

Here in the United States, on the other hand, we have a core competency in things like technology and service, and other financial services firms should be able to outsource to us.

Arthur Selkowitz (Bcom3 Group):The vocabulary in the outsourcing area -- suppliers, partners, alliances, joint venture partners-is interesting. You can have many different kinds of relationships, so how do you determine when you go from a supplier to an alliance to a joint venture? How do you determine the degree to which you want to get in bed with somebody?

George Conrades (Akamai Technologies): One of our people described how in-depth a potential relationship can be as, "You can get a kidney replaced if things go bad." If you're going to give somebody a kidney, you had better really like them, the business model, and the reason for doing it. There should also be specific agreement on the downstream implications of working together, not just the financials, but how will we deal with channel conflict? Under what set of circumstances is intellectual property transferred or not transferred, and who owns it? That should all be clear before you ever do a deal like that.

Prieto: It can also depend on your industry. Ours is in the first phases of consolidation on a global basis. In that phase, alliances are a lot harder to do because you may be getting in bed with your principal competitor.

Jeffrey Parker (Genesis Capital): Marty and Joe, as you advise clients on systems integration, have you brought clients together?

Joe Forehand (Accenture): When no single company wants to make the bet themselves, we often bring multiple clients together. That's possible if it's not an area where they want to competitively differentiate and there can be collaboration within an industry to reduce capital requirements.

For example, British Petroleum decided several years ago that it was critical that they master the drilling and finding of oil, and that everything else was pretty secondary. We did all the outsourcing of the finance and administration, which, other than actually finding oil, is one of the more complex parts of the business. There are 10 companies that we do all that processing for and it drives cost out of an entire industry structure.

That's the next evolution of operating efficiencies. How do you get operating efficiencies across an industry to actually improve the overall economics of an entire industry?

Closer is Better

Arthur Mirante II (Cushman & Wakefield): Our experience has been that regardless of the label--relationship, partnership, alliance, preferred vender--unless it's a true partnership, there's a value connection at the very beginning and a sharing of objectives at the end, you just don't get the commitment of the people and the organization. To me, the looser the relationship, the less likely you are to realize the benefits you're after.

Ed Kopko (Butler International): In my business we know we could have a better outsourcing relationship with companies, but we're stuck in some zone in IT, purchasing, or another area. In many cases, we're dealing with people way down in the organization who are not empowered to make those kinds of decisions. So the biggest obstacle to successful outsourcing is our own organizations.

As CEO, I don't spend enough time with our suppliers to hear their ideas about outsourcing opportunities. The issue of empires is an obstacle to the whole concept of outsourcing. I know people in my own company will think, "I don't want to even go near those areas, because you're talking about blowing up my empire." I don't know what we can do to help break down that kind of wall, because we're all so busy we don't have enough time to say, "I'm going to listen to all my suppliers' ideas every year." I have to delegate that, and then as soon as I've delegated it I've built the wall that I'm afraid of.

Selkowitz: We set up an internal company whose purpose it was to spearhead consolidation and speed the process. This company's mission is to operate as a very efficient company serving as an internal resource to the operating companies. That helped us accelerate the whole process of breaking down empires and finding the best source, no matter where it was.

Don Nigbor (Benchmark Electronics): Outsourcing means restructuring inside a company. Somebody's going to have to give up responsibility and authority, and that doesn't happen unless the CEO is behind it. Then you need to put in a structure to interface with the outsourcing companies. But you also need to pull back on the people you had focused on that area.

Kathwari: We have talked a lot about outsourcing in terms of buying products and services. But companies like Dell outsource the selling process by getting consumers to become part of it. In our system, we have 3,000 interior designers who work for us somewhat like an outsourced resource. So I think outsourcing is not only a question of the back end; it's on the other end too.

Bob Devlin (American General): Looking at the distribution side is very important, and it's incumbent upon the organization to have an agenda or strategy on certain areas. We focus on efficiency of operations, which we term as delivering products and services to the consuming public at the same or lesser cost.

Effective distribution through nontraditional sources of distribution is another key area. And the third is, how well do you manage your capital structure? Because if we're doing a good job with that, it cycles back to operational efficiencies and allows us to deliver more value.

Alexandra Lebenthal (Lebenthal & Co.): Ultimately one of the biggest potential problems is that if you're not satisfied with the service of an outsource partner, moving to another can cause an unbelievable disruption for your customers. So you are very much wedded to that partner for better or for worse.

Paul Gudonis (Genuity): We are a network-based outsourcer, but we also outsource a lot of our services to other partners. What we found works on both ends is a service-level guarantee, where we will guarantee our outsource customers a service level in terms of response time, uptime, security, and so on. Then we do regular customer surveys; the teams measure us using a vender scorecard. If we fall down, we notify our partner, our customer, of that, and of the remedy, whatever that is. Then we also apply those same rules back to our suppliers. It's service-level guarantees and a strong vender management function.

Cole: We're finding we can determine the current levels of service in almost any area. In the IT area, it's about uptime, mean time between failures, productivity improvements, and the like. In HR, there are transactions that occur between an employee and the company's HR function in terms of the speed of response to an employee's request for information, accessibility of information on benefit programs, and the ability for an employee to update benefit declarations via the Web.

At Accenture, we recently outsourced a large portion of our HR services because we determined there are certain areas that were not core to our own business. We are very effective and successful at recruiting, but we've determined there are other ways to do benefit administration and other employment transactions.

Wayne Cooper (Kennedy Information): The obstacle we've found to creating value through outsourcing is that some of those softer areas are harder to measure. 'What metrics do you use to measure employee satisfaction and responsiveness, or how good is somebody in dealing with your customer from a customer service point of view? That's been our hurdle in getting to the next level of value-added outsourcing.

Greg Owens (Manugistics Group): There are different degrees of value propositions around customer service, cost, and getting more sales out there. It's not any one factor.

John Chisholin (CustomerSat): You could include a question in the survey questionnaire: "How are your purchases over the next 12 months likely to change relative to the past 12 months?" That becomes a dependent variable that you're trying to maximize. The independent variables are all the things that we have control over, such as customer service, responsiveness, courtesy, promptness, and so forth. By isolating the data down to the customer service level, we can come up with the ROI on that individual customer service.

Selkowitz: We haven't talked objectivity. One of the reasons most companies don't do their own advertising in-house is that they like an objective pair of eyes. If you have a good partnership relationship, you have the ability to look into another company and be honest about its faults and strengths. Objectivity and the ability to draw on experiences across other companies that you might not have in-house internally are really value-added benefits of going to outsourcing.

Dennis Bookshester (Fruit of the Loom): Wayne Gretzky is probably the best hockey player of all time--because he knew where the puck was going. That's our responsibility as CEOs, to know where our businesses are headed and be there in front of it.

Lebenthal: That's where objectivity can be tremendously important because you may have a different perspective of where a business is going m terms of marketing and communications than those who are actually involved in it on a daily basis.

Cooper: It's best practices, too. If somebody is handling your accounting department and doing that for 150 other companies, they might have great metrics and best practices from other companies that you get to tap into. Most of us are not good at managing every single part of our business. I don't have any metrics on our customer service. 'With a customer service outsourcing company, that's their primary business, so what would be a back-office worker for one of us becomes a front-line worker for the outsourcing company. There's a lot of power to that.

Gudonis: Yet, typically, most CEOs have the attitude, "I'll do it inside unless I have to outsource," rather than saying, we're going to look for outsource, best-in-breed partners first, and then only if we can't find that, will we consider building the competency internally."

Peter Michel (Brink's Home Secrity): There really is no function inside any company that you can't give up. Understanding what your customers want is the true core competency. If you keep thinking, "I can control this," you'll never get there. But if you say, "How do we serve the customer? 'What does the customer value?" then you ask how you can deliver that to the customer most effectively. Frequently it's through outside resources. So I think the key is information resources within the company. If you don't have that, you can never get where we're talking about going.

Arnie Pollard (CE): We started doing outsourcing-related roundtables maybe half a dozen years ago. And if you look back at some of the dialogue there, it described a much more limited, less-sophisticated happening. We've really entered a virtual world where everything is up for grabs, and where, if the CEO doesn't have his fingers on that trend, he's probably missing one of the great planks of the company's future strategy.

Devlin: The key is in the execution. A lot of us have similar strategies or models, but how we execute that is really with our people, our structure, and systems.

Lebenthal: When my husband asked my father if he could marry me, my dad put his foot on the table at dinner. He had on a very beautiful sock with an intricate pattern. He said, "Look at my sock. On the outside it's a beautiful pattern, and now look." He turned the sock over and showed this net of thread and weaving, and apparently that was a metaphor for what a marriage was going to be. [Laughter]

But we should look at our role in outsourcing as presenting to our customers that sock, which has an intricate pattern and looks like we put it all together ourselves, but underneath is actually a very intricate pattern involving a number of suppliers.

Selkowitz: I think we need to stop using the term "outsourcing." It immediately raises a red flag, and it's an intimidating concept internally. Equally important, it sets up a supplier-vender mindset. And business today is far too complex to think in terms of one-way relationships.

Parker: To me outsourcing is managing colliding spheres in your business. We can all decide what the nature of our core business is, but we need to decide what we want to control and what we want to let someone else control. If they screw it up--and we talked about sharing on the upside--are they going to help me on the downside?

Nigbor: That's why it takes the CEO to do that, because it's a big risk. You now have to take the family jewels, manufacturing or whatever, and give them to somebody else.

Peter Francis (J. M. Huber): Coming up with the conceptual model for outsourcing is relatively easy. The difficulty is in executing them. Why? For the same reason it's difficult to run a business. Because you've got to manage strategy, structure business systems, and the culture all at once. Now you're extending that across multiple boundaries. So the complexity is daunting, and that's why it's so difficult and so rarely done well.

Who's Who 

* Dennis Bookshester is CEO of Chicagobased Fruit of the Loom, a $1 billion apparel company.

* John Brennan is chairman and CEO of ICT, a global telemarketing company based in Langhorne, PA.

* John Chisholm is CEO of CustomerSat, an enterprise systems provider based in Mountain View, CA.

* Martin Cole is managing partner specializing in outsourcing at Accenture, a global management and technology consulting organization based in Chicago.

* George Conrades is chairman and CEO of computer software and services provider Akamai Technologies based in Cambridge, MA.

* Wayne Cooper is president and CEO of Kennedy Information, a Fitzwilliam, NH-based custom publishing company.

* Michael T. Dan is chairman, president, and CEO of Richmond, VA-based The Pittston Co., a $3 billion freight transportation, security devices, and logistics management company.

* K. Blake Darcy is CEO of jersey City, NJ-based CSFBdirect (Credit Suisse First Boston), a financial services provider with $23 billion in assets.

* Michael Dell is chairman and CEO of Round Rock, TX-based Dell Computer, a $31 billion computer products and hardware provider.

* Robert M. Devlin is chairman and CEO of Houston, TX-based American General, a $22 billion financial services organization.

* Douglas Dick is president of Large, PA-based Dick Corp., a $600 million construction services provider.

* Joe W. Forehand is CEO of Accenture, a global management and technology consulting organization based in Chicago.

* Peter Francis is president and CEO of Edison, NJ-based JM Huber, an $855 million specialty mineral manufacturer.

* Michael Graff is president and COO of Montreal, Canada-based Bombardier Aerospace, a $10 billion civil aircraft manufacturer.

* Paul Gudonis is chairman and CEO of Woburn, MA-based Genuity, a $1 billion telecommunications provider.

* Farooq Kathwari is chairman, president, and CEO of Danbury, a-based Ethan Allen Interiors, a $762 million manufacturer and retailer of home furnishings.

* Stephen Kaufman is president and CEO of Melville, NY-based Arrow Electronics, a $12 billion distributor of electronic components.

* Edward M. Kopko is chairman, CEO, and president of Butler International, a $450 million provider of technical and technology services.

* Alexandra Lebenthal is president of New York City-based Lebenthal & Co., a $1 billion asset managed brokerage firm specializing in municipal bonds.

* Peter A, Michel is president and CEO of Irving, TX-based Brink's Home Security, a $1.5 billion security systems provider.

* Arthur J. Mirante II is president and CEO of New York City-based Cushman & Wakefield, a $700 million real estate services provider.

* Donald Nigbor is chairman and CEO of Angleton, TX-based Benchmark Electronics, a $1 billion electronic manufacturing company.

* Gregory J. Owens is chairman and CEO of Rockville, MD-based Manugistics Group, a $268 million supply chain management software company.

* Robert Prieto is chairman of New York City-based Parsons Brinckerhoff, a $1 billion construction management company.

* Jeffrey Parker is president of Genesis Capital, a financial services firm based in New York City.

* Arthur Selkowitz is vice chairman of New York City-based Bcom3 Group, a $1.9 billion marketing communications company.

Direct From Dell

The following are excerpts from a pre-roundtable Q&A session with Chief Executive of the Year winner Michael Dell of Dell Computers.

John Brandt (CE): What do you see as the key advantage of Dell's supply chain integration?

Michael Dell: Well, yesterday we sold about 70,000 computers, and we know that because we sell them directly to the customer. So we can see every morning how many we sold the prior day. When those orders come in, they're essentially electronic signals that go through our supply chain in a matter of minutes or, at most, a couple of hours.

You actually know within a few hours how many of that particular component Dell's demand engine required on that particular day. Our suppliers and our suppliers' suppliers literally get millions and millions of demand signals based on the exact demand input from our customers. So there is complete transparency and incredible speed in this.

Not only is trying to anticipate demand and then stock up all these materials extremely difficult, but it's often very expensive, especially when you're wrong. I pity the fool who has to guess what people are going to buy. It especially doesn't work when the value of the materials declines at one percent per week.

Arthur Selkowitz (Bcom3 Group): Will the direct model always be at the core of Dell's strategy?

Dell: It has been so far. Our company is 17 years old, and I think at some point there will be another component to the business. We always try to think about what could be more efficient, more capable, or more valuable to our customers than our business model. So far, the only thing that's even come close has been the Internet. We were very aggressive in using the Internet, and it actually accelerated our ability to reach out to our customers.

Steve Kaufman (Arrow Electronics): To what extent does Dell take advantage of outsourcing by having PC models manufactured or assembled by other companies?

Dell: We haven't really outsourced system assembly. The vast majority of system assembly we do ourselves, because customer information is critical in the way we build the product. What we do outsource is the sub-assembly of components and sub-assemblies themselves. We've never, for example, assembled printed circuit boards. Even though we designed the printed circuit board, we have others build them for us.

Frankly, our analysis of the value add shows that there are firms that can do that far more effectively than we can. Assembling those is not a great use of our capital and it would be very hard for us to grow and expand at the rate we have if we were trying to do all those things ourselves.

Greg Owens (Manugistics): Is part of the strategy that's driving you from PC sales toward the storage and server markets that you have to offer this breadth of services to your customers?

Dell: For us, services is not so much a way to run away from the hardware business as it is a complement to the product business. And we try to work very closely with the services firms that do things that we, quite frankly, don't have the capability to do well. We find that to be a better model for us than trying to shift the company into a radically different business.

Selkowitz: As you expand and broaden your product offerings, where do you see Dell in five years?

Dell: If you look at our market in a broad sense, it's a $1 trillion market, and we have about 3 percent of it. So I see lots of opportunity to continue to apply the business model to other adjacent products. So far we've picked the ones that are most lucrative, a pretty fractional choice, but there are plenty of other markets where this business model could apply.

We see global opportunities. Our country is in a totally different stage of industrialization than other countries that still need these technologies but can't afford them yet.

K. Blake Darcy (CSFBdirect): What would a competitor need to do to beat Dell at this point?

Dell: They'd have to be more efficient, to have a lower cost structure, and to deliver more value to customers. At our scale that's a bit of a challenge. If you ask me who our most effective competitor is, it's a company in China called Legend.

But it's when you feel secure that you're most vulnerable. So we make a habit of worrying all the time, because that kind of keeps us on our toes. We worry about our existing competitors catching up with us, and about changes in technology or other new entrants for radical changes that could occur. I worry about those things more than necessarily our existing competitors catching us.