Frans van der Horst, the chief information officer of ABN AMRO, wanted the bank’s IT services to become more flexible, agile, and innovative. In a ten-year outsourcing deal with IBM, announced last December, the bank aims to accomplish these objectives through the transition to cloud technologies.
The deal represents a coming of age of cloud technology and standards within the banking industry. Banks have been slow to move to the cloud because of security concerns. A move to the cloud also forces them to address their overhang of legacy technologies—an array of different systems and incompatible data structures.
By signing a ten-year deal, ABN AMRO is making a major commitment to the cloud and to a new way of working that is built on standardization, simplification, and trust. The prior agreement with IBM was thousands of pages long, laying out in great detail the processes and activities that IBM had to follow. Realistically, employees from both sides often did not understand what the deal said, so the bank’s employees would try to lower costs and IBM’s employees would try to boost revenues.
The new agreement is a fraction the size of the previous contract in length, and does away with the tug of war by establishing a fixed annual value, providing predictability for both sides. Assuming that it hits key performance metrics, IBM has greater flexibility to perform work the best ways it sees fit.
The ABN AMRO–IBM agreement covers the bank’s data center and end-user computing, including help-desk and application support. The bank will deploy cloud standards in its on-premises data center with the goal of moving to the public cloud when regulations permit. The bank’s customers and employees ought to benefit from the faster deployment of new and innovative technologies.
End-user satisfaction will become an increasingly important KPI. In the past, the help desk was the only major function covered by this KPI.
This is the third outsourcing agreement between ABN AMRO and IBM. The second deal would have expired at the end of 2015, but van der Horst wanted to negotiate a new deal in conjunction with the start of the bank’s IT transformation. (The deal was primarily negotiated by Jan den Boer, head of sourcing and vendor management at ABN AMRO, and Eric Koek and Javier Lages, directors at IBM.)
BCG's Wouter Pomp and Heiner Himmelreich recently interviewed Frans van der Horst and Piet Bil, IBM’s managing director for ABN AMRO, about the landmark agreement.
What was the motivation for ABN AMRO to enter a new agreement with IBM?
Van der Horst: IBM was involved in the setup and planning of our transformation, and we wanted IBM involved in the execution, which will require extensive cooperation. It made more sense to reach a new agreement that covered the scope of the transformation rather than hold a contractual discussion halfway through it.
Why could you not have performed the transformation under the previous contract?
Van der Horst: Technically, it would have been possible. We decided that it made sense to make a new arrangement so that we could establish joint objectives at the start of the transformation program.
Bil: After nine years, I think both of us realized that we needed more flexibility. They say that the first house you build is for the next buyer. The second house you build is for your friends, and the third house you build is for yourself. This is our third contract, and I think it will work well for both sides.
What are the elements that make this contract a success?
Van der Horst: The migration to the cloud to achieve scale and standardization, a reduction in complexity, and the ability to become more agile.
Bil: We both have a common understanding of what we are trying to achieve in terms of standardization, the cost model, and several other conditions. This common view allowed us to lower costs considerably.
Van der Horst: We are not operating under a traditional “revenue is price times volume” model, where one party thinks, “How can I raise the revenue?” and the other party thinks, “How can I lower costs?” Instead, we will have discussions on the conditions, the solutions, and the approach. I prefer to not talk about money anymore. I prefer to talk about the work that needs to be done on both sides. [See “ Measuring Output Rather Than Monitoring Processes .”]
One of the novelties of the outsourcing deal is the degree of freedom it permits IBM to accomplish work. The focus of the new agreement shifts from how things get done to what gets done. The two sides are planning to implement “output-based contracting” in three areas: the help desk, end-user services, and data center services. Bank employees will spend less time monitoring IBM’s processes and more time measuring its performance, such as progress toward standardization and movement of applications to the cloud. In other areas, such as infrastructure projects and the overall transformation, the bank will continue to monitor both processes and performance.
Bil: We will no longer have the moment when the bank has a request and we say, “Yes, but that will increase the price.” The conditions of the work we need to deliver have been defined. My interest in this is as large as Frans’s interest.
Van der Horst: We need to have discipline in the bank. If somebody wants to request work that is out of scope, he will have to pay for it. Is it then still worth doing? Most often, it is not. [See “ The Governance Agreement .”]
The outsourcing deal is a fixed-price and fixed-volume arrangement with built-in flexibility. Work that is outside the scope of the agreement needs to be approved by a “change board” consisting of both ABN AMRO and IBM executives. The board will also actively manage the volumes negotiated in the agreement and make adjustments to reflect changes in the market, demand, or technology. After all, it is hard to predict what will happen next year, let alone ten years from now. Ten years ago, for example, YouTube had just been created, and the iPhone was still on the drawing board.
What other elements are in place to make this contract work?
Van der Horst: We do not have a document that is hidden and locked away. It is instead a working document that we need to live by. We have an intensive education program in our company about rights, obligations, and dos and don’ts in the contract.
Bil: The contract is fully transparent. That has an impact on people. For example, we had a training session about the contract where IBM employees showed up. Someone from the bank asked, “What are you guys doing here?” Then everyone started to think and realized, “Why not?” That is a new style.
What was the reason for a ten-year agreement?
Van der Horst: IBM is investing in our transformation, and it will take time for them to earn back these investments. We like to think about this as a partnership rather than a pure supplier relation.
Bil: For IBM, this is an unusual contract because it really is a ten-year contract. It is not a contract that either party can step out from after seven years. It brings a sense of calmness. We can align our resources and investments.
You mentioned the transition to the cloud as an important part of the contract. What is the exact scope of the cloud, and what is your vision on achieving these targets?
Van der Horst: We will start with a technical replatforming of 1,100 applications. This will require the cooperation of the two main application-development-and-maintenance vendors we are working with. They will work collectively under one roof in India on ABN AMRO’s transformation program. We will all need to be quite innovative to ensure that the content and process of the transformation work.
Bil: One of the most important things you can do on the cloud is execute a delivery model built around standardization. The bank has taken an important step forward that is unique in the market. We did not need to hold endless workshops about requirements because we will be using a standard. This will require a change in thinking and a change in culture on both sides.
By making this choice, ABN AMRO will become much more agile. When regulators eventually allow the public cloud for banking, it will be relatively easy to switch over to it because of the standardization.
Van der Horst: Enforced standardization is easier to accomplish than if you would ask for standardization. Standardization is now a fixed wall that you cannot get through. Everything stops there. This is the standard.
Are there other elements that are important for IBM to make the contract a success?
Bil: Security. ABN AMRO recognizes that security is critical. IBM has therefore aligned its top team on security regarding this part of the engagement.
The next element is the end-user services transformation. A lot of what we are talking about here involves the back office and will lower costs for the business. But the end-user service transformation is a nice example of what the end user will see in the short term.
Van der Horst: The end-user experience is our fifth priority for this year. Numbers one, two, and three are the cloud, and four is security because that is our lifeline. But after those, we want to provide collaboration tools and new ways of working for all users.
When will the end user notice these changes?
Van der Horst: This summer. Then there will be sequential improvements in functionality.
What would you see as the critical success factors?
Bil: We have to deliver the cloud. The technical replatforming needs to start running so that people will start to see this happening. Next, the end-user services transformation needs to kick off, as it has been under discussion for a long time. We can create a lot of goodwill on the work floor when employees say, “Now, I see a difference.”
Van der Horst: The joint governance described in the agreement is also very important. This governance will provide much more alignment at all levels. The goal is to help one another rather than have edgy relations between the supplier and the customer. We really have to bring this alive. We did not design it for nothing. It will really help us.
We started negotiating at a very high level about the principles we wanted to achieve in this agreement. These principles were agreed to at the board level. Then we made sure that the agreement embodied those principles. These principles have allowed teams to talk about whether something is in the spirit of the contract, instead of what the contract literally says. We are trying to have teams working with each other rather than against each other. [See “ The Principles Matter .”]
Both ABN AMRO and IBM wanted the negotiations for this outsourcing deal to be different from other negotiations. The two sides had a long history together and were looking to extend it ten years into an uncharted future. They started out by agreeing on a set of principles, such as improving overall quality and relying on end-user satisfaction to measure performance, that would guide the negotiations. These principles were documented in a letter of intent and a “heads of agreement,” which outlines the main issues. Rather than gather dust, as many similar documents often do, the heads of agreement became a working document that was commonly cited and mentioned during negotiations. Both van der Horst and Bil said that their teams continue to refer to the initial principles that were laid out in those initial documents.
How would you like to measure outcomes and whether you are on the right track?
Van der Horst: We have several output measurements and critical success factors. [See “ Defining Success .”] There are also clear metrics for the three providers working on the transformation.
Ten years is a long time to maintain a productive relationship. The ultimate success of this outsourcing deal depends on several ongoing mechanisms and processes. The bank and IBM will need strong program management to keep processes on track. They will need to ensure that IT is not operating in a vacuum but is aligned with its business partners. They must remain committed to the governance process to help resolve small issues in the future before those issues become large. Finally, employees of both ABN AMRO and IBM must continue to focus on culture, especially the need to work cooperatively and to accept standards rather than push for custom solutions.
Bil: End-user satisfaction is key. I would like to see end-user satisfaction go sky-high.
Van der Horst: Both the bank and IBM have agreed to pay for an independent third party to track end-user satisfaction using academically based methodology. It will not be subjective. We will conduct surveys regularly. Both IBM and the bank will jointly decide on the questions that are included, and we will jointly analyze the results.
Bil: I do not want only to measure whether we have made our commitments in the contract. I really want to know: Are people satisfied with what we deliver? Has the help desk really helped?
Van der Horst: If we are both managing the measurement, you cannot say, “We should have asked other questions.”
So, actually, the end user determines how successful the contract is?
Van der Horst: This is what it is about. If 23,000 people are happy, we are more than happy too. And if they have remarks, we should jointly work on these.