The Art Of The Deal

But rather than seek a traditional outsourcing arrangement with typical service-level agreements and fixed-cost terms, AXA wanted to pay only for the capacity it was using at a given time. For example, when Web traffic or transactions were on the upswing, AXA would pay more data-center capacity. When transaction levels were down, it would pay less.

"We wanted to retain control of the architecture, and we wanted to retain control of the equipment," says Leon Billis, president of AXA Technology, the company's internal IT services unit. "We didn't want to transfer any functionality,capacity-planning and security,and we didn't want the [partner] to be providing any of that functionality. We wanted to provide all of it."

Potential partners balked at the time; that wasn't how IT services companies historically have structured their outsourcing deals. And although IBM Global Services recently won the $1 billion business, it was only after a year of trying to negotiate a deal that underscores how adamant many customers are about driving costs out of their businesses and reshaping the terms of services deals. Notably, earlier this year IBM Global Services agreed to a similar usage-based infrastructure outsourcing model with JPMorgan Chase in a deal valued at $5 billion (see "Banking On Outsourcing, "www.varbusiness.com/sections/customer).

Deals that provide usage-based pricing are not unusual in the mainframe world. When the customer owns its system, however, services-based arrangements are emerging as a growing trend in the Unix and Intel-class server world, observers note. One might liken it to using electricity, many observers agree.

"I think their initial reaction was that this model might not work," says Billis of his potential outsourcing partners. "But then we spent some time with [IGS senior vice president and group executive] Doug Elix, who got an understanding that the model, in fact, would work [and] would be a very attractive model. And they would credit us a bit with helping them define some of the boundaries and some of the opportunities of the model."

Eduardo Joia, a vice president at IBM Global Services and manager for the AXA account, recalls the negotiations as typical of any large services deal. "Any deal as large and as complex as this has many ups and downs," Joia says. "You have to make sure each party understands what the other wants."

Clear From the Start
According to a recent survey of Gartner's panel of 30 CIOs representing Global 2000 enterprises, 30 percent prefer not to own their IT assets, notes analyst Jennifer Beck. AXA's determination that it didn't want a traditional outsourcing arrangement came early on in the process. The company,a France-based conglomerate of 60 companies that gained its footprint in the United States with its acquisition of insurance giant Equitable,felt those deals never worked out as promised. At the same time, AXA didn't want to bear the cost of owning and maintaining its computing assets any longer.

"We didn't want to give up any of our people, and we didn't want to give up architectural, operational or governance control," Billis says. "We liked the idea of moving from a fixed-based to a variable-based pricing model, and we liked the idea of paying only for capacity we use for mainframes, servers and storage."

Naturally, IT service providers prefer the more traditional approach to outsourcing because they are higher-margin services. Pay-as-you-go type services offer solution providers less predictable revenue streams, yet require similar up-front investments. Nevertheless, outsourced capacity-on-demand is not going away anytime soon.

"Since the vendors have started talking about capacity-on-demand, it has become sort of a race I don't think any of them wants to be running. But if they don't run it, they're going to lose," says Gartner analyst Tom Bittman. "The way IBM sees this utility-services offering somewhat commoditizes its own outsourcing business." In other words, the pay-as-you-eat model of computing comes with thinner margins and less predictable revenue.

But IBM's Joia disagrees. In the case of AXA, IBM Global Services is providing access to IBM's research labs and applying the newest technologies, such as virtualization. IBM Global Services is also providing the services and labor to help consolidate 6,000 servers down to less than 1,000, a key component of building this utility-based architecture. "It's not only a utility play," Joia says.

Beyond Plumbing
The outsourced infrastructure is a major IT transformation in its own right from the standpoint of allowing AXA to treat capacity and bandwidth as a utility. But it is also serving as the foundation for a key business transformation.

That effort began in earnest more than two years ago, when AXA decided it needed to take advantage of the synergies among its disparate businesses,it sells everything from insurance to brokerage products,from a clientele perspective. That was critical to the future growth of AXA's business.

How vital that need was became apparent when AXA brokers were pitching clients who were either long-deceased or had not done any business with the company in years,or decades. There were also cases where clients

had investments spread out through AXA's different companies. Because of those disparate customer silos, the

company was often overlooking account holders who had more assets in aggregate than they did through any one of its subsidiaries.

AXA recently addressed the latter problem through a partnership with SAS, which deployed the software vendor's Enterprise Miner software on Sun Starfire 4500 servers running on the SunOne Portal Server. Cary, N.C.-based SAS is a Sun iForce business partner.

By building the CRM application, AXA was able to analyze each broker's book of business for synergistic sales opportunities, says Sharon Sibtroth, managing director of AXA Financial's technology organization. The Web-based application let AXA develop an adviser "Web station" that basically provided a more "holistic view of our clients," Sibtroth says.

In addition to creating new cross-selling opportunities, the data-warehousing effort has enabled AXA to develop marketing campaigns based on demographics such as age, income and life stage. Those campaigns even take into consideration the profitability of specific customers.

The data mining/CRM integration effort was the beginning of AXA's overall IT consolidation effort that will ultimately be hosted through IBM Global Services. And in addition to providing better selling opportunities for AXA brokers, it will provide AXA with a more cost-effective approach to the business application software it runs.

"When we were flush with money, we could buy whatever we wanted," Sibtroth says. "More realistically, this has made us think, 'Do we need that second or third software package to go along with this?'"

It is exactly this realistic approach by customers that is forcing solution providers and outsourcers to look at the way they offer integrated hardware, software and services.

The results of the Web portal and CRM integration effort have already paid huge dividends; the utility computing arrangement with IBM Global Services will be telling over the coming years. Will IBM Global Services be able to profit as handsomely as it has from more traditional outsourcing pacts? Will AXA be able to achieve the variable-based results it is seeking, and what impact will that have on its bottom line and overall business? Only time will tell.

Vendor Showdown
Why did AXA, a multivendor organization with lots of Sun gear, ultimately go with IBM Global Services? The RFP prompted a who's who of top executives to visit AXA officials in Paris, including IBM chairman and CEO Sam Palmisano, HP chief Carly Fiorina and EMC CEO and president Joe Tucci. While AXA spent the better part of last year considering prospects, global services firms like EDS, CSC and Accenture were ruled out quickly.

"In fact, we spoke to EDS very early on, and they said, 'Look, this wouldn't work for us. If you want to talk about pure outsourcing, talk to us,'" says Leon Billis, president of AXA Technology, AXA's internal IT services unit.

In the end, it was a two-horse race between IBM Global Services and HP Services. But IBM had more scale, particularly in the mainframe space, Billis says.

"HP put a good proposal together, but the issue was they didn't have the same opportunity that IBM had because of the mainframe," he adds. "When you talk about infrastructure-on-demand or capacity-on-demand, you've got to have the models in place, the tools in place to be able to manage the utilization, and bill for what's utilized. HP's moving in that direction, but they weren't quite in the ready state that IBM was."

While Meta Group analyst Robert Schafer says IBM perhaps was more ready than others, the technology for implementing on-demand pricing is still under development and probably will be for at least another year or so.

"What is required is the software hooks down to the line code of storage that can say, 'Of these 10 terabytes, I'm only going to charge the user for 2 terabytes for this application,'" Schafer says. IBM already offers that Utility Management Infrastructure, or UMI, within its own software environment. The goal is to link it to other software.

Overall, Billis is bullish on the partnership. "It's a pretty attractive and unique solution set," he says. "I think it's going to have more and more application as time goes on because I think large global corporations are going to shy away from the pure outsourcing we've seen in the past.", --J.S.