Nissan and IBM Outsourcing Agreement

Nissan and IBM Outsourcing Agreement -

Introduction

During the year, before the end of the millennium, Nissan was a company in severe financial distress. Debt had approached $ 22 billion by 1999. The company had been too complacent, and had taken his first success, for granted [2].

Perhaps Nissan's decision to outsource their IT infrastructure to IBM in 1999 make good sense? Nissan has been a very troubled car-manufacturer in late 190. The company's executives were known for their conservative vision for business, and 'old boy network,' their mentality. Profits were falling dramatically, forcing the company to the debt of $ 22 billion which then faced. There were no signs that indicate a change in the market that could encourage the growth of profit. Sales of vehicles needed reinvigoration.

The mergers were the flavor of the day in the automotive industry during the late 190s Nissan executives approached Daimler Chrysler and Ford to discuss a possible merger, but there was no interest on the part of both enterprises [2]. There was only one alternative left, which was to reinvent itself and to reduce unnecessary costs. This was the defining point that led to the business process outsourcing decision.

This article tries to answer the question "does the implementation cost of an in-house solution outweigh the benefits or makes Business Process Outsourcing (BPO) makes more sense?" We looked at the example of the car manufacturer, Nissan, when they decided to outsource the entire IT department to IBM in late 1999, in response to our question.

Nissan - A brief history and the events that led to the BPO decision

I. The boom years

Nissan was founded in Japan in 1933 as a manufacturer of heavy industry. After World War II, they have turned their attention to automotive vehicles. In 1950, they finally had an impact on the global market with the introduction of the brand Datsun sedans and small pickup trucks. The company eventually opened operations full time in the United States in September 1960 [6].

The company has experienced dramatic growth with the introduction of the series 'Z' sports sedans in the early 1970s, with the 240Z becoming the fastest selling sports cars of all time. This success led Nissan to the top of the vehicle importers by 1975. Vehicle sales in the US market United States exceeded 250,000 units per year in 1970 [6]. The company was young, its dynamic leader, and the future seemed very bright. They were competing for the US market, with artists of the caliber of Ford, Chrysler and General Motors, showing increased efficiency and production quality than their competitors.

The company was growing at a phenomenal rate, the opening of new production facilities around the world on a regular basis, such as Australia (1976), Spain (1980) and the UK (1984) [6]. There was no respite for the pace of growth and new business generation from the company.

In 1983, the company began the worldwide marketing of vehicles under the Nissan name, which was felt to have an image of stronger quality and began the transition of six years from Datsun Nissan vehicles, dealers, facilities and marketing materials. Sales continued to grow, reaching 830,767 in 1985 [6]. The decade ended with great success for Nissan with their domination of the North American market.

In 1993, midline sedan Room has been replaced with an all-new Altima and non-competitive Japanese MPV designed has been replaced with a new created us Quest, which was the first minivan with car handling similar. Sales came roaring back in 1994 to almost 774,405 of peak levels [6].

In 1996, sales began to slide again, fueled by a change in the tastes of the American vehicles. Trucks and SUVs have gained market share at the expense of cars and sports cars [2]. Nissan's position as a production company led, that helped them in the '80s and early' 0s, has new problems with the dollar / yen balance, which has begun to harm their competitiveness against companies led market.

Unlike their competitors, Toyota and Honda, which have been focused on key volume segments, Nissan did not dominate any single segment and competed in identical segments against Toyota and Honda.
Unfortunately for Nissan in 190, the Japanese "bubble economy" burst, a decline in Europe coincided, so there was more pressure in the US to perform. Unfortunately US customers do not have a real reason to shop Nissan brand except for the 'best price' deal.

The former president of Nissan, Mr. Nakamura, announced a plan for "Back-to-Basics". Key elements of the plan were to reduce inventory, eliminate unrealistic sales targets, and increase dealer profitability. Unfortunately for Nakamura and Nissan, the plan did not work [2].

II. Problems looming for the car-manufacturer in 190 of

In early 190, trouble began to brew in the organization. Executives once revered Nissan are now seen as arrogant members of the old-boys club, and were ignorant to the changing needs of its customers and the global automotive market in general.

As society progressed deeper into debt, they met with more challenges. business partners and Nissan providers were charging a premium for their goods and services. Nissan was forced to meet its financial commitments and, in doing so has set itself further into debt. Finally, the company was in debt to the tune of $ 22 billion. Even the company's lenders have been tightening the noose around them. Nissan felt the situation was desperate.

III. Measures taken to solve the problems

Nissan executives were looking for a way out, a way to save the company going into bankruptcy. The first approach was to find a partner. Both the new constitution DaimlerChrysler and Ford Motor Company were approached, but both organizations have rejected the idea of ​​a merger [2]. Finally, Renault, the French carmaker recovering from a similar situation, has decided to start negotiations with waving the Japanese company. A senior executive of Renault, Carlos Ghosn, has been a great supporter of this merger idea.

After many negotiations, the Ministry of Economy, Trade and Industry Japan has agreed to allow Renault to buy a substantial stake in Nissan. The Nissan-Renault alliance was born and Ghosn was named Chief Operating Officer.
Nissans executive decisions and major events

I. Creating a global vision covenant:

The following is taken from the vision alliance Nissan / Renault:
"The Alliance Renault- Nissan is a unique group of two global companies linked by cross-shareholdings. They are united for performance though a coherent strategy, common goals and principles, results-driven synergies, shared best practices. respect and reinforce their respective identities and brands " . [2]

The Alliance itself set three goals, with the goal of being among the best three automotive groups in the following areas:

1. Quality.

get customer recognition to be a quality product and added value.

2. Technology.

Lead in the key technology development and implementation with a focus on excellence in specific areas of the automotive industry.

3. Operating Profit.

Consistently generate a high operating profit margin and vigorously pursue growth.

II. Appointment of a new leader

Ghosn, given his enthusiasm for the merger, its demonstrated tenacity, and his experience in the automotive industry, it was a natural choice for a Nissan senior position. His initial appointment as Chief Operating Officer (COO) was only a temporary assignment. In 00, he was appointed President and, in 01, he was appointed Chief Executive Officer (CEO).

As CEO, Ghosn was very aware of the fact that the 'blame game' made with them. E 'was the final decision maker. Some important and very serious decisions are being made to save the company in difficulty. Ghosn has had to use all his valuable experience gained bailout of other organizations, such as Michelin and Renault, Nissan to save.

III. The decision-making process to save a troubled car-manufacturer

With the arrival of Ghosn in Japan in the spring of 1999, it has undergone set of research problems at the root of Nissan. The newly appointed COO has had a management philosophy that said: "you should always start with a piece of paper, because the worst thing you can have is prefabricated solutions ... it must begin with a zero-based thinking, cleaning everything out of your mind. " [2]

For the first months, Ghosn flew across Japan, meeting and greeting employees at all levels, absorbing the information and formulate a plan. He used this information to draw a Nissan framework from a global perspective, identifying problems, and the problems that had developed the dispersed, non-profitable organization.

One of the many problems identified Ghosn was the lack of communication around the organization. Elderly worldwide managers were aware of some of the problems that caused the crisis of fortune in the company. They also had the solutions to them, but they lacked the necessary authority to implement or communicate solutions to their headquarters.

Finally, the main problems have been reduced to five key themes: [2]

• The lack of clear guidance to profit. Nissan has not focused on profit guidance, but were rather focused on market share and ended up having to buy their market share at the expense of declining profits.

• insufficiently focused on customers and too much focus on competitors. The company was too concerned about the competition by introducing a new line that would have dug in Nissan's market share. For example, when Volkswagen introduced their new Jetta sedan Nissan has seen a significant drop in their sales Maxima.

• There was no cross-functional lines, cross-border and intra-hierarchical work in the company. Nissan seemed to work as separate islands scattered around the world. There was no centralized purchasing function, and in fact any other major businesses. The organization was not making maximum use of its global presence and purchasing power.

• The lack of sense of urgency. The Nissan executives were complacent in their activities. Things had gone so well for the company in the previous 60 years that they felt that there was no reason to embrace change.

• No shared vision or a common long-term plan. Senior management within Nissan did not have a joint plan for the different brands within the company. Each division has done what they want with little or no thought for the good of society. An example was the Z series that had reached the phenomenal success throughout the 1970s and '80s but was suddenly dropped from production, when sales declined. The most obvious thing to be done was to test the market with a modernized design. Instead Nissan has chosen to ignore the market and release the mark.

To solve the problems, Ghosn announced the Nissan Revival Plan on October 18, 1999. This seven-point plan aimed at reducing costs and debt as well as the creation and launch of new car brands to increase sales and market awareness. The objectives announced in the plan were comprehensive and included: [2]

• The reduction in operating costs, the net financial debt, global head count, and assembly plants of vehicles and drilling rigs (the latter in Japan).

• The generation of new investment products through the launch of twenty-two new models.
The cost-cutting plan called for the centralization of purchasing, procurement, human resources and information technology. By centralizing these essential functions, the targeted plan to help the company achieve its aggressive cost reduction.

Expenditure, in particular as a function of information technology, has been perceived as being out of control. The Ghosn of senior executives message was clear, "cut costs in every area possible." If it meant outsourcing non-core activities because someone else could do it cheaper, then it had to be fully investigated and determined. The management was ruthless in their execution of the plan [2].

Nissan looks Business Process Outsourcing as a means of

I. It will be outsourcing non-core businesses to save money?
There are well-documented record of saving the company money and other outsourcing horror stories. The very success depended on the situation and the provider.

Most of the experts agreed, however, that you needed to use BPO in strategic decisions, such as refocused efforts on core competencies and not only for the reduction of activity [1] costs. Stephen Withers ZDNet said in his online article that you should just "use BPO for strategic purposes, not to take advantage of a (possibly temporary) reduction in costs." Withers then asked readers, "Does outsourcing IT Infrastructure make sense?" To meet this business demand for Chief Information Officer (CIO) would need to have completed extensive research and have made a thorough analysis of their business processes.

This is exactly what Nissan IOC has done, or rather what Ghosn told him to do. The company has invested more than 80 billion yen ($ US760million above) in 1998 on IT services, but their processes are not yet provide management with the infrastructure that will be useful to build their competitive advantage [5]. The final decision was made to bring the various providers of outsourcing services for the help so necessary.

II. Outsourcing IT infrastructure makes sense?

If the Information Technology (IT) was really good, like gasoline or electricity, so companies compete only on price, with very small profit margins. In that case, the decision to shoot on it for an outsourcer was as simple as it was a century ago to turn to motor vehicles instead of using the horse and cart. However, while personal computers and networks they run on can be standardized, the services provided by IT outsourcer vary in many ways. Services such as data analysis, application development and IT decision allowed companies more competitive on the market, therefore, the elements of IT are far from being seen as raw materials [8].

As for the decision to outsource, many factors were considered in the case of Nissan. Ann Moynihan in his article on the Albany Business magazine says "Outsourcing can help: .. [3]

• Reduce operating costs and control

• free staff to focus on core business

• access to expertise and specialized technologies.

• Introduce positive change.

• gain control over a hard to handle function caused by irregular workloads, insufficient resources or unskilled. "

with Nissan in 1999, this was exactly what they were looking for. Redefine personal commitment, the introduction of positive change and control gained in all critical areas have led to the outsourcing decision.

The choice of IBM as Nissan was a strategic outsourcing partner. In the late 190s there were not many outsourcing companies that have had the breadth and global reach that IBM had. Competitors such as EDS and CSC were not considered because they were only outsourcers and could not offer the hardware and software technology that Nissan needed to upgrade its infrastructure [5]. If any of these competitors were selected IBM as partner Nissan it would still have to face the same infrastructure problems. IBM is the only logical partner.

did the work relationship between Nissan and IBM?

I. A further look at the relationship between IBM and Nissan

In a joint IBM and Nissan posted to Tokyo press release June 19, 00, the two companies announced that they were "stretching their global partnership for the information system (iS) operations Nissan Motor Co., Ltd. and IBM have agreed in October 1999, Nissan and IBM jointly announced today that Nissan will outsource their operations in Japan, to IBM Japan.

the service includes regular maintenance of Nissan and operational activities, as well as part of its application development, but excludes the planning and design of new systems. the two companies will start operations from 1st October [7]

in North America, Nissan has outsourced the same operations for IBM Corp. from October 1999. This latest agreement in Japan is expected to further accelerate the standardization, the Nissan integration and centralization on a global level. "

Ghosn further noted," The Nissan revival plan can not be achieved without effective information systems. Following the recent agreement with Japan Telecom, this latest collaboration with IBM puts in place the global infrastructure that is key to sustain long-term profitable growth for Nissan. "[4]

II. Look hypothetical Return-on model: investments used

before they could calculate the return on investment (ROI), Nissan has had first to look at the total cost of ownership model proposed by IBM. Total cost of ownership (TCO) is a type of calculation designed to help consumers and enterprise managers assess the costs and benefits both directly and indirectly related to the purchase of any iT component. the intention was to arrive at a final figure that will reflect the actual cost of purchasing, overall [8].

TCO model used, had to calculate the costs that have been requested, beyond the outsourcing fees. l ' organization had to evaluate specific that could have added expenses for the outsourcing project criteria. They had also to calculate the ongoing expenses for the duration of the contract [8].

Then, after calculating the period depreciation, Nissan was able to calculate ROI. Once the numbers were crunched, a thorough financial analysis and risk was conducted. ROI measured the gain or cost reduction that occurred. E 'was calculated by estimating, for a period of 3 years, the investment has been made and the resulting profit created through this investment.

The results were conclusive. Nissan and IBM signed their agreement and operations are scheduled to commence on October 1, 1999.

Conclusions

I. He BPO Nissan achieve its stated goal?

stated goal of Nissan for outsourcing of IT infrastructure was to control spending, improve efficiency, and upgrade infrastructure. By outsourcing to IBM, Nissan has achieved all its objectives.

In control spending, outsourcing has given companies the opportunity to have a predictable monthly budget for expenses. This amount may or may not have been lower than current expenditure, but the component that is critical for a large organization like the Nissan was that the amount is predictable. There was no variable component for the price. The only time that the price may have fluctuated was when additional services which were outside the scope of the contract, have been requested.

In the case of Nissan, which has never been a requirement. The company was the first phase of a major renovation project, global and there were no new initiatives taking place.

The second objective of BPO was to improve efficiency. IBM is the largest information technology company in the world with a turnover close to $ 100 billion [9]. When companies outsource their IBM operations are gaining best-of-breed technologies, excellent consultants and some of the best architects of the money systems can buy.

The way in which each global outsourcer makes money is by achieving economies of scale. The only way to achieve these economies of scale is to ensure that they implement the best hardware, software and infrastructure and can do that job for maximum efficiency equipment. Taking full advantage of this best-of-breed technology, Nissan has met his second and third stated goals.

II. What if the IT infrastructure had been kept in-house?

If Nissan has decided to keep its IT infrastructure in-house and attempted to implement a system updated and modernized, would lead to a significant increase in their spending. primary objective of Ghosn, when he took over the company in 1999, was to reduce spending 700 billion yen [2]. He was not interested to spend additional money to upgrade existing equipment.

To support the expected improvement in terms of competitiveness, Nissan had to ensure that their infrastructure supported the additional workload. There was no way they could do the expected improvement in efficiency without external support. Nissan has not had the experience and the work force to handle the required updates and business process reengineering.

III. The final evaluation and the sum of the ratio

Robert Greenberg, Nissan North America CIO was publicly stated in 06 that, "We were pleased with the IBM services, but the world had changed." This review summarizes the relationship as it is now, almost eight years after [5]. When Nissan announced its rebirth Plan, in 1999, the company had very clear objectives; reduce costs, and return to profitability.

Nissan was looking for help in 1999, and IBM performs this role for their IT infrastructure. Greenberg also said in his Q & A that "One of the things that took place with the original IBM outsourcing was probably outsourced too." [5]

Greenberg was not working for Nissan when the outsourcing initial decision was made in 1999; he joined the company only in 05. He is on record although, as saying that he thought that they should be retained some of the infrastructure in-house, or maybe they have multiple sources, thereby ensuring that they had the best possible solution and price .

In 06, when the contract came up for renewal, the IOC decided to put everything out of offer and compare what the other suppliers were offering with what IBM had provided for so many years. The decision to look for new suppliers was actually excellent timing for the company such as Nissan had decided to transfer their North American corporate headquarters from Los Angeles, CA to Nashville, TN, and any transition may be in conjunction with the move.

Ultimately, what Greenberg chose to do was to IBM to accept the proposal to "manage desktop systems, networking, help desk, dealer systems and other key infrastructure elements for Nissan North America. " Then outsource the application and maintenance for an Indian company, Satyam and led the rest of the services back in house [5].

When asked about the decision to bring it back in-house, Greenberg said, "By bringing in-house increases the alignment. It 'a matter of building the house Knowledge [that] can be used to help drive the business, which is much more difficult when a business analyst function is sitting inside of a third party. "[5]

IV. Makes an in-house implementation cost solution outweigh the benefits or BPO more sense?

As Stephen Withers said in his article, the BPO decisions should not be made to the cost-cutting exercises, but rather for strategic directions [1]. In other words, businesses should not view BPO as a savings vehicle. Outsourcing the operation makes sense when an organization is trying to improve efficiency and business processes or when they can not attract, or retain the human capital they have the competence and ability to modernize or improve infrastructure.

Nissan CIO Robert Greenberg thought it would actually save money by bringing a part of the new work at home because it was "not paying the margin on the single [headcount]." [5]
Some of the lessons that Greenberg Nissan has learned from the outsourcing contract with IBM was that some services developed by the IT organization can indeed be outsourced or externally developed. However, he felt strongly to maintain in-house IT skills in areas of value generation as business analysts who have a strong understanding of the business, sometimes even better than the client company does. Insourcing these skills could lead to ideas and dialogue with the company, with the end result is a delivery service or product development that can then be outsourced.

In summary, the answer to the question, 'does the implementation cost of an in-house solution outweigh the benefits or do Business Process Outsourcing more sense?' It is that it depends. It depends on the available capacity; It depends on the general objectives (saving vs. process improvement) and depends on the organization. For the most part the majority of large companies around the world that have gone through an outsourcing contract, or in an outsourcing contract will agree that there are considerable advantages for the implementation of an outsourcing contract and there substantial benefits to maintain those capabilities in-house. What every organization must do is determine which of these benefits outweigh the other and base their decision on that analysis.

Works Cited

[1] Withers, Stephen. "BPO: saving money or correct processes?" ZDNet.com
[http://www.zdnet.com.au/insight/business/soa/BPO-Save-money-or-fix-your-processes-/0], 13023749,139156391-10,00.htm August 17, 04. Downloaded 22 October 07

[2] Magee, David. Turn Around: How Carlos Ghosn rescued Nissan. New York: HarperCollins Publishers Inc, 03.

[3] Moynihan, Ann. "Outsourcing allows the owner to focus on core business." Http://www.bizjournals.com/albany/stories/02/10/14/focus10.html October 11, 02. The downloaded October 22, 07

[4] IBM press room printing. IBM.com "extending their global partnership, Nissan, and IBM announced outsourcing is for Japan" Http://www-03.ibm.com/press/us/en/pressrelease/1670.wss 19 June 00. 19 October, downloaded .07

[5] Thibodeau, Patrick.

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