Mobilizing For Value Added Partnerships

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Mobilizing For Value AddedPartnershipsSteve Burdona & David Feenyb

a (Author for correspondence) Visiting Professor of TechnologyManagement University of Technology, Sydney, Australiab Emeritus Fellow and Professor of Information Management SaidBusiness School University of Oxford, UKPublished online: 12 Sep 2014.

To cite this article: Steve Burdon & David Feeny (2011) Mobilizing For Value Added Partnerships,Journal of Information Technology Case and Application Research, 13:2, 22-41, DOI:10.1080/15228053.2011.10856206

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Mobilizing for Value Added Partnerships

MOBILIZING FOR VALUE ADDED PARTNERSHIPS

Steve Burdon (Author for correspondence)

Visiting Professor of Technology Management University of Technology, Sydney, Australia

[email protected]

David Feeny Emeritus Fellow and Professor of Information Management

Sa'id Business School University of Oxford, UK

David. [email protected]

ABSTRACT According to Krishnamurthy et a1 (2007) the building of competitive advantage from alliances via innovation with technical partners is the most challenging of the objectives sought in partnerships. Academic research in the last decade has examined the prerequisites and success factors and general agreement has been reached on the critical issues. They include, for example, the concept of relationship capital - mutual trust, mutual commitment and information exchange (Sarkar et al, 2001). However, it is not clear that this knowledge has led to improvements in the historically poor success ratio. This case explores the successful implementation of an innovation partnership, endorsing the recent work by Sturgess & Cumming (2011) on the importance of a focus on implementation.

Previous academic research on such partnerships has tended to focus on manufacturing; in particular the automotive engineering and pharmaceutical sectors. Relationships were typically asymmetric with the supplier being much smaller in size and power relative to the manufacturer. The authors wanted to explore a different power and size relationship emerging from the growing needs of a number of service industries, where technology is becoming a strategic imperative for gaining competitive advantage. Organisations in the aviation, retail banking and retail communications sectors are seeking IT and telecommunication skills that will help them build competitive advantage from better services, systems and products. The most knowledgeable organisations with this technical knowledge tend to be large ones. Our case examines how Westpac, a large retail bank in Australia, went about the task of reviewing their existing commercial relationships and selected the most promising one for the objective of building a trusted value adding partnership. In the process, they identified the critical pre-requisites and developed a five-stage key success model for implementation. It is hoped that the study will encourage other researchers to look more closely at the implementation challenge.

Keywords: Competitive advantage, Innovation, Value added partnerships, Strategic sourcing, Outsourcing, IT & Telecommunications management, Organisational learning

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INTRODUCTION Since the mid 1990's outsourcing has experienced significant growth (Kakabadse and Kakabadse, 2003), and in some sectors such as biotechnology (Sapienza and Stork, 2001) and automotive manufacturing (Sako. M 2004) the number of core services outsourced has increased five-fold in the last ten years. In other sectors such as retail banking, airlines, and telecommunication carriers, outsourcing has grown more slowly and has focused more strongly on the customer supplier model (Clegg et al, 2005). Often the cultural challenge of the major players in these sectors is particularly testing since many of the leaders were previously government owned and do not have experience in alliancing and dealing with partners as equals. However, the increasingly competitive landscape resulting from government deregulation and global competition is pushing these organisations to seek additional competitive advantage in support of cost minimisation and revenue growth. We report here on one such story, the case study of how Westpac - a large Australian Bank - set out to build competitive advantage through a 'value-added partnership' with Telstra - the telecommunications company that grew from the formerly government owned Australia Telecom.

THE RELEVANT MANAGEMENT LITERATURE Creating competitive advantage from ICT is commonly believed to require access to the specialist skills of external IT providers (e.g. Hunter and Cooksey, 2004). This does not imply abandonment of the host firm's own IT capabilities, but does require evolving and retaining 'core' capabilities (Wilcocks et a1 2007)' alongside engagement of a technology partner who is charged with supporting the goal of business innovation. The challenge, as recognized by authors such as Rottman and Lacity (2006)' is how to develop, manage and leverage the relationship to move beyond considerations of IT cost and quality in pursuit of higher-level business goals. But according to Krishnamurthy et a1 (2007), 70% of enterprise respondents claim that their IT outsourcing partner is failing to meet expectations regarding innovation.

Why should this be? Within the information management literature Weeks and Feeny (2008) identify seven enablers that must be in place to achieve strategically significant levels of business innovation from IT partnerships. These range across the complementary capabilities that the partnership must bring together, the need for joint governance of innovation, the importance of executive level IT leadership in the host firm. Perhaps because of the complexity of this equation, Poston et a1 (2009) stress the importance of managing external IT partners as a portfolio, of carefully selecting innovation partners and not expecting that all existing external IT partnerships can realistically be transitioned to an innovation focus.

Otherlwider sections of the management literature can also provide insights into the enablers of successful partnership at a more generic level. For example Lassere (2003) notes that the concept of outsourcing generally has evolved over the last few decades: initially it involved the transfer of non-core activities, with the aim of reducing transaction costs (Quelin and Duhamel 2003); whereas more recent definitions (Sen and Shiel 2006) take a more holistic approach, seeing outsourcing within the scheme of the value chain of primary activities. Dyer and Singh (1998) suggested that alliances lead to competitive advantage via long term relationships, an emphasis highlighted earlier by Kanter (1994) and by Das and Teng (2002) indicated various developmental stages of strategic alliances.. Perhaps most helpfully for our purpose, Sarkar et a1


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(2001) set out the factors in relationships that affect alliance performance: they hypothesize that the performance potential of a partnership that contains both diversity and compatibility is mediated by relationship capital which is a composite of mutual trust, mutual commitment and bilateral information exchange. And drawing on organizational learning theory Kohtamaki (201 0) posits that the learning that innovation oriented partnerships need to achieve will be facilitated by a hybrid form of governance: this will include a moderate level of hierarchical direction by the customer partner; a limited competitive dimension as a catalyst for development; and a social dimensioi to encourage trust and open interaction within a relationship that-is expected to have continuity.

Drawing together these strands, the prior literature provides a table of elements we can expect to feature in our case study of the experience of Westpac and Telstra as they set out to transition from customer/supplier relationship to value-added partnership:

Key Factors

Inter-Firm Diversity & Compatibility

Expected Elements

Relationship Capital

Example Authors

Resource Complementarity Cultural Compatibility

Reciprocal Commitment Bilateral Information Exchange

Table 1 - Expected Key Factors in Value-Added Partnership

Sarkar et a1 2001

Operational Compatibility Mutual Trust

Weeks & Feen~ 2008

Hybrid Governance

CASE STUDY CONTEXT Australia rivals the USA and the UK as one of the longest established and most sophisticated markets for IT outsourcing. As one of Australia's top four banks (with 10 million customers and around US$20 billion annual revenues), Westpac is a very large consumer of IT and telecommunications (IT&T) services. In 2006, it had major contracts in place with five large technology providers. While these contracts were mostly for the delivery of standardised services, Westpac's senior executives recognised that IT systems were often mission critical; thus quality of service was at least as important as cost.

Sarkar et a1 2001

Westpac's interest in moving to value-creation from its partnerships was triggered by a business need. Since 2000, all the major Australian banks had been experiencing increased competition and reducing margins. During the initial stages of the research project, the size of the challenge and the cultural change required was such a significant shift that one of the earlier objectives was to get senior management from Westpac, initially, and later their chosen partner Telstra, to publically commit to the project and its importance. This was seen as essential for such a

Hierarchical Direction Limited Competition Social/Relational dimension

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Kohtamaki 20 10

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I Mobilizing for Value Added Partnerships

significant transformation to gain traction and achieve progress, and confirmed by quotes from senior executives during case interviews. In the words of Westpac's CEO:

"The reality of the modem economy is there can be no drift: just endless innovation, adoption, renovation and reinvention."

Organic growth, investments in new product capability, increased sales and service staff, and productivity improvements were all seen as key success factors for the Bank's future. The Westpac Group CIO believed technology would play a vital role in this:

"In order to enhance Westpac's customer service and generate additional revenue, we will be using new technology. We will need to leverage our technical partners' superior knowledge to achieve this, working on mutually beneficial innovations such as the phone wallet. With the emergence of a number of key technologies, now is the right time for innovation."

However, leveraging technology to create competitive advantage posed many challenges. Although Westpac had a significant level of retained IT resources, selecting best-in-class technologies and applications - globally and in Australia - was never going to be straightforward; and motivating partners to focus on creating value for Westpac would be a new experience for both sides. Westpac management decided that the best way forward would be to take one of their existing technology outsourcing partners and advance that partnership to the higher level. In the language of Poston et al's (2009) article, Westpac had a 'vendor set' of five 'Beta' vendors with well-established relationships. They wanted at least some of these relationships to develop to the strategic 'Alpha' level of value-added partnership; but intuitively recognized that article's advice that 'it is not sensible to move all vendors to the Alpha level simultaneously'.

The case describes the ensuing courtship, the choice and establishment of the business and operational enablers for negotiation and implementation. In particular it deals with the challenges of mobilisation and winning consensus support for the journey.

CHOOSING THE PILOT PARTNERSHIP As analysed by Rai et a1 (2010), the co-creation of ICT innovation is yet another fork in the conceptualisation of how innovation takes place. It has the advantage of building better service delivery to customers (Vargo et a1 2008), and creating value for both parties (Ramaswamy, V. 2009). This latter issue was critical as competitive forces were intensifying in both retail banking and telecommunications. Building additional value for both parties - of a significance that would make the cultural and operational changes required worthwhile - was the challenge for organisations who had not previously been involved in such alliances.

Four criteria were used to identify the most appropriate partner from among Westpac's current providers: demonstrated delivery performance, relative organization size, senior management commitment and trust, value creation potential. Based on the following analysis, Telstra was selected as the preferred pilot partner.

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Demonstrated delivery performance:- Westpac judged that the trust required in an innovation relationship (as in Sarkar et al, 2001)could only be developed with a provider whose existing service performance was well regarded. Telstra - across two contracts - had a track record of meeting commitments and improving identified shortcomings. A good relationship was in place, and overtime, processes and relationships had been developed whereby Telstra demonstrated it was delivering market best prices and achieving the required service levels. A partnership team involving both organisations had worked through some systems to demonstrate that Westpac received best prices for the product mix it purchased; on a yearly basis each volume of product service purchase and price was checked by an external auditor to ensure the commitment was achieved. Considerable time had also been spent on defining current and aspirational service levels, and on having tried and tested procedures for dealing with any issues that had arisen. Whilst price had been the prerogative of the central purchasing agency, the service level work had involved all of Westpac's business units and had generated a successful track record. In addition there had been a number of incremental innovation projects which involved the early delivery of Telstra products and services, such as introducing internet protocol telephony capability, and mobile retail banking services.

Relative organisation size:- Westpac had not previously attempted to build a value-added alliance involving a suppliers total technical capabilities that also attempted to co-create new products and services in retail banking, with the alliance ultimately focused on delivering a competitive advantage. For Telstra, although it had developed individual innovation projects with some customers, a total holistic approach had not been developed. For a partnership to become a strategic alliance producing radical or transformational innovation, the result had to be large enough to justify the extra effort and cost. It was thought that equality of size and relevance would increase the chances of success in mobilising the necessary enterprise-wide involvement.

Ideally, the intended initiative would be of roughly equal importance to each of the two organizations involved, and this was thought to imply corresponding equality of organizational size. Telstra's US$20 billion revenues the previous year almost exactly matched those of Westpac; and Telstra was Westpac's third largest supplier, while Westpac was Telstra's third largest corporate client.

Senior management commitment and trust:- A more ambitious organizational relationship would require strong and confident championship at high level within both companies (Krishnan et al, 2006). A Partnership Board had already been established with Telstra, with quarterly meetings chaired jointly by the CIO of Westpac and Telstra's Group Managing Director. There were also formal arrangements for direct communication between Westpac's CEO and Telstra's CEO, to be used whenever required by either party.

Trust at this level was seen as an important issue, essential in particular to achieving the relationship government structure required for organizational learning (Kohtamaki and Vuorinen, 2008).

Value creation potential:- In the historic logic of outsourcing, the client firm has externalized activity that it chooses not to do, rather than activities it cannot do. But to co-create new products


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and services in pursuit of competitive advantage Westpac reasoned that it needed a provider with its own distinctive capabilities, one with specific strengths in the emerging technologies that were important to the Bank but which it would be very difficult for the Bank to develop internally (hence the 'resource complementarity' of Sarkar et a1 2001). Through its origins as the state- owned monopoly provider of telephony in Australia - a country whose geography made communications of vital importance - Telstra had huge experience of telecommunications technologies over many decades. In addition, they had recently acquired Kaz, one of Australia's leading IT outsourcing and service providing companies, giving them the capabilities to deliver IT and telecommunication solutions. Joint Westpac-Telstra study groups identified a number of potential technologies and applications that might be worth developing, and tested their ideas with Westpac business units for commercial relevance. Several areas of interest for potential development were confirmed. These included mobile banking services, higher value banking and credit cards using RFID technology and new IP-based processes and systems.

THE NEW ORDER OF VALUE ADDED PARTNERSHIPS The concept for the new partnership model was now to move the established Westpac-Telstra relationship from delivery of core telecommunications services and incremental innovation, to a focus on joint delivery of transformational business products, services and processes. Collectively, these should significantly help to distinguish and strengthen Westpac's competitive position amongst Australia's four leading retail banks. But while Telstra welcomed its selection as partner for piloting the value-added model, the first step was to clarify the intent of both parties, and ensure that goals could be aligned.

Westpac's Intent- Westpac's CIO understood that moving to a value added partnership would require additional investment in manpower, systems and related costs from both parties. The long-range vision - within Westpac's overall IT budget - was to increase the percentage spent on strategic change projects from 20% to 35%. Much of the needed investment would need to be achieved through increased efficiencies in base operations. The new emphasis on strategic initiatives would also require higher levels of communication across a diverse range of Westpac business units, some of which had been created via acquisition. The diversity extended to cultural issues, for example in the recently acquired wealth management business, which had its own distinctive heritage and way of doing things. The 'cost' of success would be much more than the tangible investment, but the size of the prize was seen to be very considerable.

Telstra's Intent- Why should Telstra, as Australia's leading telecommunications provider, agree to develop new retail banking products and services for one specific customer? The environment for telecommunications carriers was becoming increasingly competitive, with their legacy products and services moving towards commodity status. In addition, governments in Australia and beyond were proactively changing monopolistic landscapes to more level playing fields that would threaten Telstra's growth and profitability prospects. In this context Telstra saw the Westpac initiative as an opportunity to learn about a new potential approach to large corporate clients in multiple industry sectors (whilst telecommunications providers had a history of building value-added partnerships with their suppliers to develop more cost effective networks and services, such arrangements with their enterprise customers were rare). Finally Telstra was conscious that they already provided the majority of Westpac's communications services through

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their existing contract. Without some forward momentum there was a classic risk (De Rond and Bouchikhi, 2004) of future fragmentation of their business, with Westpac diversifying from a single source to multiple suppliers of telecommunications. The expanded horizons of the proposed value-added partnership were seen by Telstra as a means of protecting their existing revenues as well as a route for generating new ones.

The parties agreed that a value-added partnership could deliver these conflicting objectives and achieve a widwin set of outcomes. Neither Westpac or Telstra underestimated the size of the task ahead. Proving the concept would require a timeline over several years and also involve commissioning a number of projects, with the understanding that not all the projects would be completed or successful in transformational innovation. It was accepted that the current system of relationship governance, its organisational processes, team incentives, business and process tools would all need to be reviewed to ensure their alignment with the new partnership objectives.

DEFINING AND MOBILIZING FOR THE JOURNEY The discussion turned to how the initiative should be now be developed. Neither Westpac nor Telstra had prior experience of the level of partnership that was envisaged. It was decided to bring in external expertise. Two academic experts and a senior partner from a leading global management consulting group were enlisted, joining Westpac's General Manager - Sourcing, and Telstra's Customer Business Director as core members of a Project Control Group.

The academics joined the project on the basis that knowledge and material gained during the project could be used in a research paper for publication in academic journals. The relationship between Sydney's University of Technology, Westpac and Telstra was set-up as a research project with allocated funds to pay out of pocket expenses. Neither the authors of this paper, nor the management consulting partner received any remuneration or consulting fees.

The key challenges at this point were seen to be:

1. Refining the destination: moving from the generic concept of innovation from a value- added partnership to specifying the business innovations that a Westpac~Telstra partnership might be capable of delivering.

2. Scoping the journey: benchmarking against world-class examples of value-added partnership; how far did Westpac/Telstra need to travel, and what were the principle roadblocks to be negotiated?

3. Building informed support: 'educating' the business on the concepts being advanced, the size of the potential prize, and the actions and resources required to achieve it.

The group decided to build a research case study as a vehicle for exploring these challenges. In particular they wanted to explore the pre-requisites and success factors that were involved in implementing the strategic alliance for third party value added solutions and products.

The project control group initially analysed the academic research on successful alliances for innovation. In parallel, a number of best practice global strategic alliance case studies were examined. These were grouped under five factors: shared vision and objectives, united

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governance models, powerful and cohesive teams, aligned incentives, and enabling tools. In addition four established examples of innovation partnerships from across a number of industries were reviewed: telecommunications (BT), IT Solutions Provider (Accenture), Automotive (BMW), and Engineering Services (Transfield).

The findings from these two initiatives were used to structure a framework for interviews with key personnel from Telstra and Westpac, testing their own views on partnership prerequisites and success factors.

A total of 28 such interviews were conducted; 14 from Telstra and 14 from Westpac. On the Westpac side these included the Group CIO, directors of sourcing, business unit heads, and senior strategy architecture and sourcing executives. On the Telstra side the business unit group managing director, executive director integrated accounts, research and development and marketing directors and contract managers were also included.

An implementation model was finalised following analysis of the results of the interviews, reproduced below as Figure 1. The interview process not only gained valuable input to the model, it also provided a strong foundation for comment on and commitment to the change process that would be necessary for success.

Pre-R~qulsites success ~kcrors

potcntrrrl [brpond standbnlucd

~itmmt a d

a c m w a c e

tamam

- - - a -

Figure 1: Implementatio ding Trusted Partnerships


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INTERVIEW FINDINGS 1. Pre-Requisites for higher value partnership

a. Demonstrated delivery performance:- The emphasis here was on the word 'demonstrated'. Was there sufficient transparency to ensure widespread confidence that Telstra was not only 'delivering' but also 'seen to be delivering' on its commitments? There was general satisfaction among the Westpac sourcing and contract executives with the process that monitored delivery against agreed price and service levels. In addition, some progress had been made in dealing with incremental innovation opportunities. All but one of the Westpac Executives believed these processes were demonstrating sound commercial arrangement and satisfactory service levels.

Interviews with Telstra executives also confirmed that the contractual arrangements for cost and service were being delivered and operating successfully from their perspective. If any outstanding issues existed, these were logged and progressively dealt with at the weekly review meetings.

b. Senior Management Commitment and Trust:- The strong relationships between key executives from Westpac and Telstra have already been noted. What the interviews revealed were limitations in depth, with Telstra lacking relationships within the Westpac business units and Westpac lacking relationships in Telstra's areas of technical excellence which were not involved in the current contract. These limitations were not seen as inhibitors to fulfilling the existing contract, but if both organizations were now seeking to leverage knowledge and mutual understanding for new products and services, there was general agreement that it was an issue that needed addressing.

c. Value Creation Potential:- Most of the executives believed there was valuecreation potential beyond standardised services. Innovation ideas were cited by interviewees in both organizations and the discussions served to hrther increase awareness and interest.

Summary: Executives on both sides believed a robust base existed for progressing partnership initiatives

2. Current Position on Success Factors for Trusted partnerships

a. Shared Visions and Objectives:- There was strong support in principle from the senior leaders of both organizations to the vision of a value-added partnership and its objectives of innovation. But the vision and objectives of the relationship would need to be better articulated to guide activities on the ground.

b. United Governance Model:- Effective governance structure:- Not surprisingly, the existing governance structure was focused on compliance and standardised services delivery. Roles and responsibilities for innovation management required more explicit definition.

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Holistic relationship measurement:- Existing measurement systems were similarly focused on standardised services delivery and contract compliance. While there was mutual confidence about existing inter-organisational collaboration, there was a common view that the governance model required upgrading for higher-level collaborative and innovative projects.

"Overall we are working collaboratively" - Westpac IT executive

"There is a strong and developing partnership culture between the two firms" - Telstra project manager

Joint innovation processes:- Both Telstra and Westpac executives thought that formal innovation processes were required. Some executives mentioned that ideas generation tended currently to come from Telstra as the vendor, and there was an expectation that progressing them was a supply-side responsibility and cost. In addition, Westpac's (customer) feedback tended to be ad hoc, providing little clear guidance for the vendor.

c. Powerful and Cohesive Teams:- Shared knowledge base:- There was general agreement that both the contract and technical teams were cohesive and demonstrated a strong willingness to share information as required. However some executives believed that better understanding of intellectual property rights and agreement on incentives was needed before information could be readily shared in the way that higher value partnering would require.

Deep and modular teaming:- The vast majority of current cross-organizational interactions were limited to representatives of the customer/supplier management teams. This required updating to a higher level, where it was envisaged that a dense network of functional experts across both organizations would be required, engaging frequently and directly with each other.

Right Mind Sets, Behaviors and Competencies:- Good progress had been made in developing trust and cohesive teams within the scope of the existing contract; the relationship currently operated within a mutually trusting environment. However, this approach needed to permeate all organizational layers so that an environment conducive to business-to-business interactions would evolve.

Summary:- There was agreement from Telstra and Westpac executives that strong and cohesive teams had been established within the current scope of their transactional sourcing relationship. Indeed this had been expanded to cover new service offerings, as evidenced in the successful implementation of a joint IP telephony solution for Westpac. However, mobilizing resources from within both organizations for the new transformational projects was seen as a whole new challenge.

d. Aligned Incentives:-The current contract, which commenced in 2003, had introduced the potential for bonus payments against stretched targets, in addition to the original penalties


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for failure to meet minimum compliance SLA's. However, there were no incentives in place for funding innovation activities; an early stage innovation funding model was needed to encourage rapid assessment, with an equitable approach to value and risk sharing.

e. Enabling Tools:- Relationship management and measurement:- Relationship management within specific Westpac-Telstra teams was currently being measured, and scored relatively highly on both hard and soit issues. The challenge was to move relationship management and measurement beyond these core executives to an enterprise wide model. This would require new information systems and incentive programs for reward and recognition.

Collaboration:- For a wider model of collaboration, intellectual property (IP) was a key issue that needed to be addressed with competitive advantage to the customer protected for a period.

Overall, the interview process had succeeded in engaging 28 key executives in thoughtful discussion about the benefits of transitioning the Westpac-Telstra relationship towards an innovative business partnership, and the nature and scope of the task of transition.

ONLINE SURVEY RESULTS The achievement of incremental innovation within the existing Westpac-Telstra relationship was a comparatively simple task, with involvement limited to the staff responsible for service delivery. The proposed shiR to creation of transformational solutions would be complex to manage and would require a much wider enterprise involvement. To further strengthen insight and consensus, an on-line survey was developed and sent to a hrther 63 identified executives. The purpose of the survey was to gauge whether employees from both organisations believed that there was sufficient potential and maturity in the relationship to commence the journey to a value- added partnership. The survey design and process was based on prior experience at Shell Australia in the engineering services sector (Burdon et al, 2009)

46 responses were received to questions about the potential for value creation and the relevant partnership development needs, with 23 responses from each of Westpac and Telstra. Respondents (who were overwhelming positive about the potential for further value creation) were presented with four categories of opportunity, and asked where Telstra-Westpac should focus their efforts - with supporting rationale and specific examples.

a. Incremental Improvements- improvements to the efficiency and effectiveness of existing basic telephony and data services

b. Process Change - developing more customised solutions to reduce operating costs and streamline processes

c. Innovation within Today's relationship- roll out new products or services to improve overall competitiveness, within the current contract scope

d. Innovation beyond Today's relationship- combine capabilities of both firms to create entirely new sources of value.


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There was an interesting divergence (Figure 2 below) between the priorities suggested by Westpac and Telstra respondents, with Telstra executives more keen to pursue radically new opportunities.

Westpac Respondents Telstra Respondents

Rank #1

I I Incremental Improvements I Process Change I

Rank #2

Process Change

I

I Figure 2: Suwey Responses

Innovation within Today's Relationship

Innovation within Today's Relationship

Rank #4

Responses to the questions about partnership gaps and development needs were consistent with those provided during interviews, with the most interesting providing hrther elaboration relating to innovation beyond today's relationship. Survey respondents were clear that they were a long way from understanding the extended capabilities that each organization could provide in creating radically new business offerings; and they highlighted the variations in the level of trust and relationship across different units of the two organizations.

Innovation beyond Today's Relationship

Overall, the online survey added a wider empirical base of views on the status of the current relationship. Both Telstra and Westpac executives believed that success factors were in place to meet the current partnership objectives, but additional work would be required before they could leverage this to a higher level. More importantly, this work needed to be undertaken throughout both organisations.

Innovation beyond Today's Relationship

DECIDING ON THE FUTURE OF THE PARTNERSHIP Following the analysis of the survey results, the research team was able to present to the Partnership Board their findings and recommendations. The two key issues were the current state of the relationship and trust between partners, and the establishment of an action plan for advancing and escalating the existing partnership to a higher level.

Incremental Improvements

The general view of the Westpac-Telstra relationship was that it had progressed from an 'average' to a 'superior' one; and was ready to go further. The question was raised of whether a technical partner for innovation should necessarily have a track record of delivering existing standardised services. Could Westpac not choose a new partner, based solely on their innovation credentials? The majority view was that these sorts of partnerships follow a natural growth stages model, with each development in the scope of the sourcing relationship dependent on the

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establishment of satisfactory performance at lower levels. It would not otherwise be possible to achieve the trust and understanding required to leverage capabilities across both organizations.

The second issue compared the status of the two organisations against the identified partnership success factors. The study had confirmed the view of Westpac's CEO and senior executives that technology and telecommunications was, and would continue to be, of significant strategic importance to innovation and business success in retail banking; and there was little doubt in the minds of Westpac executives that the Telstra organization generically had the skills and knowledge within Australia to be their partner for transformational change and innovation beyond the existing relationship. There was also agreement amongst senior executives from both Telstra and Westpac that the management skills and capabilities required to deliver such a partnership would be increasingly important to them in developing relationships with other partners or customers.

The survey results indicated that significant gaps remained to be managed to establish a true partnership arrangement. The key issues from the gap analysis are listed below:

1. Shared vision and objectives: Although the senior management on both sides agreed with and shared the vision and objectives, the online survey revealed that these were not well articulated and transparent and currently did not guide the day to day activities.

2. United Governance Model: The existing governance structure was insufficient and inappropriate for managing transformational innovation.

3. Powerful and cohesive teams: While cohesive teams existed for the current services and incremental innovation, there were doubts about the ability to engage and mobilise resources from both organisations for value addedlinnovative solutions.

4. Aligned incentives: New commercial frameworks needed to be developed to fund radical innovation activities and relationship KPIs needed to be enriched.

5. Enabling tools: New collaboration platforms would need to be developed to cover the enterprise-wide collaboration that would be necessary.

Although the recommendation from the research team was for Westpac and Telstra to move forward, and a substantial budget was agreed upon, it was on the basis that the issues from the gap analysis would be dealt with.

NEXT STEPS FOR WESTPAC-TELSTRA Following the formal decision to launch a value-added partnership, Westpac and Telstra prioritized the need to create a 'United Governance Model'. They reasoned that existing enthusiasm and momentum would be lost if there were no mechanisms in place to evaluate and potentially pursue some of the new ideas that the study had brought to the surface. The key choices made were to introduce:

1. An Innovation Council:- Whilst the existing Partnership Board would retain its overall decision-making authority its dual responsibilities would be recognized by the creation of an Innovation Council, reporting to the Board in parallel with the existing Operational Council that oversaw the execution of currently contracted services. The Innovation


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Mobilizing for Value Added Partnerships ~ Council's responsibilities were to set up and facilitate an innovation management process, and to monitor the progress and quality of all innovation activities through that process.

2. A Structured Process for Innovation Opportunities:- The Innovation Council introduced the structured innovation management process pictured in Fiwre 3 below. It was conceptually straightforward, and included nothing that would surprise those well versed in innovation management. But it signaled major change from the years when responses to new ideas were uncoordinated, ad-hoc, and idiosyncratic. Its introduction was hndamental to building confidence in the serious intent of the partnership initiative.

Joint partnership innovation process map ~ Purpose . Develop and priwitise .Assess the value and

ideas for further feasibility of priority ideas assessment

Generate a long list of .Assign resources from ideas both organisations

-Independently or Assess opportunity and jointly develop concept paper

Describe each Idea In a Make 'GoINo -Go' standardlsed way dectslon Jo~ntly revlew and prlorltlse Ideas -* --

. Prepare opportunity for . Execute sign-& and projW~mplement new implementation service

Asstgn resources to Including contract develop full business case negotiation

Develop business case Other activities as per Secure organisational implementation plan

agreement and funding for implementat~on

Output . Prioritised list of ideas A detailed description of Full business case Agreed conlrad for further assessment the opportunity ( 'Concept including '&/No -Go' Other outputs as per A brief description of Paper ') decision implementation plan priority idea ( 'Idea Brief ') . For 'go' opportunities Detailed implementation

ownership and funding for plan next phase T e r m sheddeal proposal

as preparation for contract

Figure 3: A structured process to progress innovation opportunities from idea stage to implementation

PROGRESS SINCE THE RESEARCH PROJECT After the Board's decision to approve the partnership's plans and budgets, the research phase was formally complete and there has been no systematic external monitoring of progress. Additionally both Westpac and Telstra had new CEOs by early 2009, and Westpac also had a new CIO, so that access for information - and potentially momentum for the initiative - was weakened. Nevertheless we can report that a number of transformational initiatives were in place, the most important one being the world's first example of a new approach to a service-oriented network system. This was developed and implemented by the value-added partnership, with additional capability provided by Cisco under contract to Telstra. It was positioned as a major foundation project for the new Westpac CEO's focus on customer service under the banner of "Branch of the Future". It was reported to have made a major impact in participating business units, through enhanced customer experience, reduced business information costs, and improved network security. Project finances must remain commercial-in-confidence, but are measured in tens of millions of dollars. Target financial returns for the investment were achieved with 20% so far coming from additional growth, and 80% from cost savings.


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From a Westpac perspective therefore, the new partnership was following a successful pathway. From a Telstra perspective there are three measures of success: they have gained new revenues from implementation of the business innovations targeted; they have gained profile which protects their existing base revenues from Westpac; and they have now applied the value-added partnership concept in at least one other corporate client.

CASE DISCUSSION AND FINDINGS The potential contribution of this case can now be assessed from three perspectives: a review of confirmatory findings, using the summary of existing management literature in Table 1; elaboration of and extension to prior findings fiom the rich description of a case study; substantially new suggestions arising from the case.

1 . Confirmatory findings. All of the suggested key factors in Table 1 can be seen to find their place within the case study. - The potential value of inter-firm diversity was a major factor in Westpac's choice of

Telstra as partner; and the challenges of Cultural and Operational compatibility were recognized as important issues.

- Similarly the three elements of Relationship Capital - mutual trust, reciprocal commitment and information exchange - all feature prominently in the account of the case and the reported thinking of the principals.

- Hierarchical direction as the first element of a Hybrid Governance approach is seen to be provided largely by the Westpac CIO; it is effective because that individual is an 'executive IT leader' (Weeks & Feeny 2008) who is aligned with and supported by his CEO. Secondly the concept of Limited Competition is clearly in place, with Telstra recognizing that the new initiative will protect -but not exempt - them from competition for Westpac's business. Thirdly we see high level attention to the sociaVrelationa1 dimension, particularly with the introduction of an Innovation Council in parallel to the existing Operational Council.

2. Elaborations and Extensions. A traditional advantage of case study research is that it can deliver a richness and depth of insight that adds flesh to the bones of headline findings established through wider surveys. We suggest that our own case study provides a number of examples: - Trust. The Westpac/Telstra case elaborates our understanding of both breadth and depth

dimensions in the achievement of mutual trust. Using the Weeks & Feeny (2008) distinctions between 'personal', 'competence-based', and 'motivational' trust, we see (interview findings) that personal trust had been established through the existing customer/supplier relationship in various communities across the two companies; but there are 'limitations' in depth, trusting relationships must now be sought in new areas to support the new ambitions. Competence-based trust had also been achieved, but only in relation to existing service delivery; survey respondents were 'a long way from understanding the extended capabilities that each organization could provide in creating radically new business offerings'. And motivational trust has been established at executive levels at the outset of the initiative, through the alignment of Intents; but new incentives must be put in place to create such trust at working levels.


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- Compatibility. The presence - or absence - of Sarkar et al's (2001) Cultural and Operational Compatibility is not a pre-ordained or immutable given, it is an outcome developed over time. In the case study it is seen to be centred on 'powerful and cohesive teams', which have been established within the existing relationship but will require 'updating to a higher level' to deliver the goals of the new one.

- Bilateral Information Exchange. Information exchange may espoused as a value, andlor required by a contract. But as the case makes clear it is delivered through a significant investment in enabling tools, through measurement and management systems underpinned by protocols which respect intellectual property.

3. New suggestions from the case. It is clear that any initiative aimed at value added partnership will benefit from analysis of prior knowledge, from the identification of key success factors. But, in the view of the authors, the difference between success and failure is more a function of implementation strategy than of analysis. Instead of presenting key players with the equivalent of Table 1, they were involved through interviews and survey in the creation of Figure 1. Across these two prescriptions for the journey the content is largely similar, but the language - and above all the ownership - is different. Figure 1 is participants' own version of what they were setting out to do and what was important. We believe it was one key step in the engagement of those whose involvement was required to deliver the partnership. Other steps followed, within a similar consultative framework of engagement. We suggest the most valuable lesson of this case is the importance of - and one illustration of - the mobilization of resources at the start of a significant journey of change.

SUMMARY OF LEARNINGS FROM THE WESTPAC-TELSTRA INITIATIVE The USA, UK and Australia lead the world in having companies which have developed outsourcing partnerships and strategic alliances. Organisations from manufacturing and services have developed partnerships with much of the academic research focusing on manufacturing, often involving large manufacturing companies and much smaller suppliers, in other words asymmetric commercial relationships. Technology is increasingly becoming a strategic issue for many organisations and the researchers were interested in exploring the growing needs of large companies in the airline, retail banking and telecommunication sectors. These are areas where increased regulation and competition are exerting pressure on both revenue growth and cost reduction. The senior management of Westpac bank had the strategic intent to build the culture and processes capable of delivering competitive advantage using technology through enriched partnerships or strategic alliances.

The degree of difficulty of achieving this is emphasised by recent research (Krishnamurthy et al, 2007) where the majority of partnerships involved in ICT have not achieved significant innovation objectives. Our research confirmed that much of the academic research on strategic alliances - including the concepts of relationship capital and hybrid governance - has identified and defined the key enablers required to be in place. In addition, we wanted to check whether these issues were applicable to symmetrical relationships, in terms of size and power in service organisations and we found generically they were. We also wanted to explore why understanding the underlying issues did not lead to success. We concluded that implementation was very challenging, in particular dealing with the necessary pre-requisites and key success factors for


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achieving strategic alliances. Our views on this issue mirror those found by Sturgess (201 1); basically the key issues of high-value alliances are like a 'toolkit' and the challenge for management is to review each specific situation and tailor an implementation program that will lead to success. In essence the case offers valuable learnings at three levels.

1. The case provides content learning, providing a menu of items and issues of importance in any partnership transition of this sort. For an avid student of the literature, this may be the least of its contributions: Poston et a1 (2006) have already alerted us to portfolio management of vendor sets; Ghosh and Scott (2009) to the importance of social capital, relationship alignment and knowledge gaps; Weeks and Feeny (2008) to enablers of business innovation within IT outsourcing relationships. The case provides illustration and support for the findings of these researchers.

2. The case offers frameworks for thinking about the readiness of any particular partnership to make the transition, and the further development needs that are likely to be important. Importantly, Westpac and Telstra recognized that they were seeking to do something different, something that was not a marginal departure from current practice and not part of their prior experience. They brought in external experts to help them - not to make decisions, but to help them understand what to think about and how to think about it.

3. Less obviously, but perhaps most distinctively, the case suggests a process for mobilizing the transition to value-added partnership. Moving from a partnership focused on service delivery to one which can be relied upon to fuel business innovation is not a simple matter. As the case illustrates, successful transition requires: change in governance mechanisms and processes; change in the supporting systems and infrastructure; change - above all - in the values, mindsets, and relationships of a large population, one that goes well beyond those involved in the scope of a service delivery partnership. While the first two of these areas of change can be analyzed and directed 'top-down', the third is about winning the hearts and minds of all the key players. The case study approach of consultation probably uncovered little if anything that would not have been foreseen by a small high powered team. But it served to stimulate discussion and widen the ownership of the agenda going forward.

Finally, the case prompts some re-visiting of the IT outsourcing logic. Twenty years ago most proponents of IT outsourcing argued that it involved contracting for a non-core commodity activity to be carried out at lower cost. Others suggested that external specialist providers would not only outperform internal IT functions by providing superior service at lower cost; their deep technology skills would enable more innovative business exploitation of technology. We suggest that most researchers and practitioners have so far experienced much more of the former than the latter. Is this because of vendor deficiencies? Our research suggests that it is more of a function of the bounded nature of contracts, governance, relationships that we see in 'partnerships' targeted at service delivery, a finding consistent with the case studies of Weeks and Feeny.

Corporate contexts and needs continue to evolve and change. Even before the current global financial crisis, leading corporations in the Australian telecommunications, aviation and retail


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banking industries have been challenged to grow their revenue base and find innovative ways to reduce costs. All of them view technology as a key strategic issue and they are looking for ways to leverage superior technological solutions for enhanced competitive advantage. To date there is not much evidence that this has been widely achieved. If we learn the right lessons, can we confidently expect value-added partnerships which now deliver on the business innovation agenda? The authors believe a higher level of successfUl innovation can be achieved with this approach, using established processes and models as a performance toolkit and allocating resources and skill to the key issues. But as in any journey of change, the mobilization of management resources is a critical issue.

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of the Australian and New Zealand Academy of Management, Vol(1 l), 37-52 3. Das, T. K., & Teng, B (2002). The dynamics of alliance conditions in the alliance development

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7. Hunter, J.D. & Cooksey, R.W. (2004). The decision to outsource: A case study of the complex interplay between strategic wisdom and behavioural reality, Journal of the Australian and New Zealand Academy of Management, Vol(lO), 26-40

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Mobilizing for Value Added Partnerships I 17. Rai, S, Pederson, M. K. & Kazakeviciute. A (2010). A framework for the co-creation of

ICT innovation: Empirical results from India, Journal of Information Technology Case and Application Research, Vo1(12), 13

18. Ramaswamy, V (2009). Leading the transformation to co-creation of value, Strategy & Leadership, Vo1(37), 32-37.

19. Rottman, J.W. & Lacity, M.C. (2006). Proven practices for effectively offshoring IT work, MIT Sloan Management Review, Vo1(47), 56-63.

20. Sako, M, Suplier (2004). Development at Honda, Nissan and Toyota: Comparative case studies of organisational capability enhancement, Industrial and Corporate Change, V01(13), 28 1-308

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JITCAR, Volume 13, Number 2, 201 1

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ABOUT THE AUTHORS Professor Steve Burdon has held a number of positions at Australian and UK universities, including Associate Professor and Fellow of the Melbourne Business School. He is currently a visiting professor of Management at the University of Technology, Sydney, and Visiting Professor at Cass Business School, London. His current research interests are Corporate Strategy, Innovation, Partnerships, and Convergence. Prior to this he held a number of senior executive positions, including MD Asia Pacific for British Telecom, CEO of OTC and Group MD of Telstra. Steve has held over a dozen private and public directorships. He is currently on the board of Silex Systems Ltd, Campus Living Funds Management, VisAsia Ltd, and chairs the Academic Board at the Australian Institute of Management. He is a fellow of the Australian Institute of Company Directors, Australian Institute of Management, and the Institution of Engineers Australia.

David Feeny is Emeritus Professor and Fellow of the Sald Business School, University of Oxford. His teaching and research interests centre on the connections between strategy, organisation and information technology. He has worked with large organisations in many different sectors and parts of the world, and is a regular contributor to senior executive programmes. His work has been published in leading academic journals as well as general management journals such as Harvard Business Review, MIT Sloan Management Review, California Management Review. Topics in recent years have included the role of the CIO, IT sourcing strategy, core IS capabilities, CEOs for the information age, and e-business opportunity. His latest research has been in Business Process Outsourcing, looking at client needs and supplier capabilities related to Delivery, Transformation, and Relationship competencies. David is a Fellow of the Royal Society of Arts and Commerce. He holds an MA from Oxford University and an MBA from Harvard Business School. He was Vice President of Templeton College from 1995-1999. Before returning to Oxford in 1984 he was for many years a senior marketing manager with IBM.

JITCAR, Voltime 13, Number 2, 201 1

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Documents

Mobilizing For Value Added Partnerships