President Obama quipped in an interview with CNN. On May 14, 2010 "you had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else...The American people could not have been impressed with that display, and I certainly wasn't." The legal wrangling continues and will take considerable time and expense to resolve. We need not go into the gory details of dollar numbers too big to even fully comprehend, but from our perspective in this Chapter three key points stand out:
While these 3 key take-aways are still relevant to our discussion here, what is more relevant is the fact that all the companies in question will have to continue to outsource (and insource). So the practice of outsourcing itself will continue unabated. What will change after this learning experience is that the practice will be carried out in a much more sophisticated manner. That is the whole point of this book.
Before more on to newer, more sophisticated models of outsourcing that are emerging and examining them in more details in the next few chapter, let us consider the evidence on the satisfaction from current outsourcing arrangements.
Data, anecdotes and case histories abound on the misapplication of information technologies for supply networks. Not too many years ago, a very large corporation operating worldwide, made news with the downgrading of their earnings expectations due to supply chain system’s implementation setbacks. The expectation was that the new system would reduce the new production cycle from 1 month to 1 week. Furthermore, it would better match the demand and supply of its products to place the correct products in the right locations and quantities, all at the right time - a very lofty goal. The company spent an enormous amount of money, exceeding US $400 million in order to achieve its aim. However, the software system 'never worked right'. It caused the factories to crack out too many unpopular products and not enough of the trendier ones in high demand. While making the earning downgrade, the CEO asked the rhetorical question, ‘is this what we get for $400 million?’
The market analysts were not surprised. One respected market analyst [AMR] commented, ‘fiascos like this occur all the time but are usually kept quiet unless they seriously hurt the bottom line.’ Another respected market analyst commented that while the CEO made it sound like it was a surprise for him, if he did not have checkpoints for the projects, he does not have control over his company. A third analyst commented that companies are confused by escalating market hype and too often underestimate the complexity and risks. Another [Forrester Research] commented 'when the software projects go bad companies are more likely going to scurry up and cover it up because they fear that they are the only ones having trouble. But far from it; our conversation and research reveals this company was not unique or the only one having this kind of trouble'.
Despite their lofty goals, many of the large information technology deployment projects derail. It takes time for the word to filter out because, in most cases, the executives involved in the process are far too embarrassed to talk about what happened. They do mutter among themselves; after several similar instances the mutterings become more vocal and a trend emerges where a number of people start talking about the shortcomings of the system itself or the implementation process or of the time taken for implementation. Because the cost of this failure is so high – greater than $400 Million in the above case – it is instructive to understand the real root causes of this failure. I am not looking to apportion the fault or apportion the blame in this chapter.
30 Years Of Accumulated Wisdom Is Now Available
However, it will be a fallacy not to learn from all the accumulated wisdom of the past. After all, those who do not learn from history are condemned to repeat the same mistakes again and again. This will enable us to understand the steps we can take from the very beginning to increase your probability of success. This will also allow you to confidently move forward with Business Network Information Technology system selection, integration and use in order to achieve the results that you set out to achieve.
The supply networks information technology projects have become bigger and bigger over the last 15 years. It is quite customary now to start with an expectation of spending around $ 50 million but end up spending in excess of $200 million on systems renewal projects.
Rough estimates indicate that, even today, about one third of these projects are cancelled without delivering any benefits, after spending more than $100 million. Another third of the projects are not cancelled, but fail to deliver significant parts of what they set out to achieve. Only one third of the projects achieve most of their strategic goals, but many still incur several budget upgrades and time overruns.
Why is this pattern of failure repeated over and over again?
To answer the key question above, let’s first examine a typical project cost structure. It is estimated that the software costs are no more than 15-20% of the overall cost of systems renewal. Programming and configuration costs run from 20% to 25%; external consulting costs generally associated with process changes run from 15-20%, data conversion costs run around 10-15%, training costs run from 10-15%, systems startup costs run around 10%, applications support costs are between 5-10% and hardware costs are between 2-5% of the overall cost structure. Out of these costs only the software costs generally remains fixed through the systems renewal cycle. Pretty much all the rest of the cost buckets are estimated ambitiously at the start and tend to run over quite considerably as the project progresses.
We will however, briefly focus on three relevant parties - BP, Transocean and Halliburton for the sake of discussion relevant to this Chapter - on modularized outsourcing. BP had outsourced the task of drilling to Transocean. At the same time Transocean had bought the Blowout preventer from Cameron International Corporation. Whether it can be argued that BP or Transocean had outsourced the task of Blow-out Prevention (BOP) to Cameron is not certain; neither is the liability on malfunction of the blowout preventer because of allegations of lack of proper maintenance. Cameron agreed to settle all claims related with the Deepwater Horizon tragedy with BP for $250M - without any admission of guilt. The situation with Halliburton is still unclear. As per a CNN news-report:
BP and Halliburton sued each other in April 2011 claiming each is to blame for the deadly explosion on the Deepwater Horizon rig and resulting disastrous oil leak. Halliburton was in charge of cementing the Macondo well and claims that its contract with BP indemnifies (releases) Halliburton of any legal action resulting from its work as a contractor...
In a response filed Sunday, BP asserted that "maritime law prohibits indemnification for gross negligence."
As part of that four-page filing, BP reiterated that it was seeking to recover from Halliburton "the amount of costs and expenses incurred by BP to clean up and remediate the oil spill." BP has estimated in the past that the total cost will be around $42 billion, and by the end of November 2011 the oil company it has paid out or agreed to pay out $21.7 billion to affected individuals, companies and governments around the Gulf.
In an e-mail to CNN, Halliburton spokesperson Beverly Stafford said "Halliburton stands firm that we are indemnified by BP against losses resulting from the Macondo incident."
As the exploratory well it was digging nearly came to completion, on 20 April 2010 Deepwater Horizon became front page news on nearly every newspaper on earth. The incident was reported in a press release by Transocean as follows:
“Transocean Ltd. (NYSE: RIG) (SIX: RIGN) today reported a fire onboard its semisubmersible drilling rig Deepwater Horizon. The incident occurred April 20, 2010 at approximately 10:00 p.m. central time in the United States Gulf of Mexico. The rig was located approximately 41 miles offshore Louisiana on Mississippi Canyon block 252.”
“Transocean's Emergency and Family Response Teams are working with the U.S. Coast Guard and lease operator BP Exploration & Production, Inc. to care for all rig personnel and search for missing rig personnel. A substantial majority of the 126 member crew is safe but some crew members remain unaccounted for at this time. Injured personnel are receiving medical treatment as necessary. The names and hometowns of injured persons are being withheld until family members can be notified.”
The details of the incident, as per the figures from popular mechanics were attention grabbing:
4.9 million: Barrels of oil (205.8 million gallons) leaked from the Deepwater Horizon well, about half the amount of crude oil the U.S. imports per day
19: Times more oil leaked from Deepwater Horizon than spilled from the Exxon Valdez in 1989 (10.8 million gallons)
62,000: Barrels leaking per day when the wellhead first broke, roughly the amount of oil consumed in Delaware each day
53,000: Barrels leaking per day when the well was capped on July 15, roughly the amount of oil consumed in Rhode Island each day
397.7 million: Dollars' worth of the oil spilled at current market prices ($81.17 per barrel)
665: Miles of coastline contaminated by oil
The resulting investigation to establish the causality, contributing factors and liability will fill up a book many times the size of the one you are holding.