| Introduction | | | | Chief Information Officer's (CIO's) would need to have |
| In the year, prior to the turn of the millennium, Nissan | | | | completed extensive research and have done a |
| was a company in a serious financial crisis. Debt had | | | | thorough analysis of their business processes. |
| approached $22 billion by 1999. The company had | | | | This is exactly what Nissan's CIO did, or rather what |
| been too complacent, and had taken its prior success, | | | | Ghosn told him to do. The company had invested over |
| for granted [2]. | | | | 80 billion yen (over $US760million) in 1998 on IT |
| Did Nissan's decision to outsource their IT Infrastructure | | | | services, but their processes were still not providing the |
| to IBM in 1999 make good sense? Nissan was a very | | | | management with the infrastructure that would assist |
| troubled auto-manufacturer in the late 1990's. Senior | | | | in building their competitive edge [5]. The final decision |
| executives from the company were known for their | | | | was made to approach various outsourcing service |
| conservative outlook on business, and their 'old boy's | | | | providers for the much needed help. |
| network,' mentality. Profits were dropping dramatically, | | | | II. Does outsourcing the IT infrastructure make sense? |
| eventually forcing the company into the $22 Billion debt | | | | If Information Technology (IT) truly was a commodity, |
| that it then faced. There were no signs indicating a | | | | like gasoline or electricity, then companies only |
| change in the market that would encourage profit | | | | competed on price, with very small profit margins. In |
| growth. The vehicle sales needed invigoration. | | | | that event, the decision to turn over IT to an |
| Mergers were the flavor of the day in the automotive | | | | outsourcer was as simple as it was a century ago to |
| industry during the late 1990's. Nissan executives | | | | turn to motor vehicles instead of using the horse and |
| approached Daimler Chrysler and Ford to discuss a | | | | cart. However, while personal computers and the |
| possible merger, but there was no interest from either | | | | networks they run on may be standardized, the |
| of the companies [2]. There was only one alternative | | | | services provided by IT outsourcers vary in many |
| left, which was to reinvent themselves and reduce | | | | ways. Services such as data analysis, application |
| unnecessary overheads. This was the defining point | | | | development, and IT decision-making allowed |
| that led to the business process outsourcing decision. | | | | companies more competitiveness in the market |
| This paper seeks to answer the question "Does the | | | | therefore, those elements of IT are far from being |
| cost of implementing an in-house solution outweigh the | | | | viewed as commodities [8]. |
| benefits or does Business Process Outsourcing (BPO) | | | | With regards the decision to outsource, many factors |
| make more sense?" We reviewed the example of the | | | | were considered in Nissan's case. Ann Moynihan in her |
| automotive manufacturer, Nissan, when they decided | | | | article in the Albany Business review states |
| to outsource their entire Information Technology | | | | "Outsourcing can help you: [3] |
| department to IBM in late 1999, to answer our question. | | | | • Reduce and control operating costs. |
| Nissan - A brief history and the events leading up to | | | | • Free staff to focus on core business. |
| the BPO decision | | | | • Gain access to specialized skills and |
| I. The Boom years | | | | technologies. |
| Nissan was established in Japan in 1933 as a heavy | | | | • Introduce positive change. |
| industry manufacturer. After the Second World War | | | | • Gain control over a difficult-to-manage function |
| they turned their attention to automotive vehicles. In the | | | | resulting from uneven workloads, insufficient or unskilled |
| 1950's, they finally had an impact on the global market | | | | resources." |
| with the introduction of the Datsun branded sedans | | | | With Nissan, in 1999, this was exactly what they were |
| and small pickup trucks. The company eventually | | | | looking for. Refocused staff efforts, introduction of |
| opened full-time operations in the USA in September | | | | positive change and control gained in all critical areas |
| 1960 [6]. | | | | led to the outsourcing decision. |
| The company experienced dramatic growth with the | | | | The choice of IBM as Nissan's outsourcing partner |
| introduction of the 'Z' series sports sedans in the early | | | | was a strategic one. In the late 1990's there were not |
| 1970's, with the 240Z becoming the fastest selling | | | | many outsourcing companies that had the breadth or |
| sports car of all time. This success led Nissan to the | | | | the global reach that IBM had. Competitors such as |
| top of the U.S. vehicle importers market by 1975. | | | | EDS and CSC were not considered because they |
| Vehicle sales in the USA topped over 250,000 units | | | | were only outsourcers and could not offer the |
| per annum by 1970 [6]. The company was young, its | | | | hardware and software technology that Nissan |
| leaders dynamic and the future looked very bright. | | | | required to update their infrastructure [5]. If either one |
| They were competing for the U.S. market with the | | | | of those competitors were selected over IBM as a |
| likes of Ford, Chrysler, and General Motors, showing | | | | partner Nissan would still have faced the same |
| improved quality and production efficiencies over their | | | | infrastructure issues. IBM was the only logical partner. |
| competitors. | | | | Did the relationship work between Nissan & IBM? |
| The company was growing at a phenomenal rate, | | | | I. A further look at the relationship between IBM and |
| opening new manufacturing plants around the world on | | | | Nissan |
| a regular basis such as Australia (1976), Spain (1980) | | | | In a joint IBM and Nissan press release published in |
| and the United Kingdom (1984) [6]. There was no | | | | Tokyo on June 19, 2000, the two companies |
| respite to the pace of growth and new business | | | | announced that they were "Extending their global |
| generation coming from the company. | | | | partnership for information system (IS) operations |
| In 1983, the company began the worldwide marketing | | | | which Nissan Motor Co., Ltd. and IBM agreed in |
| of vehicles under the Nissan name which was felt to | | | | October 1999, Nissan and IBM today jointly announced |
| have a stronger quality image and started the six year | | | | that Nissan will outsource its IS operations in Japan, to |
| transition from Datsun to Nissan on vehicles, | | | | IBM Japan. |
| dealerships, facilities and marketing materials. Sales | | | | The service includes Nissan's regular maintenance and |
| continued to grow, eventually reaching 830,767 in 1985 | | | | operational activities as well as part of its application |
| [6]. The decade closed out with resounding success | | | | development, but excludes the planning and design of |
| for Nissan with their domination of the North American | | | | new systems. The two companies will start operations |
| market. | | | | from October 1. [7] |
| In 1993, the mid-line Stanza sedan was replaced with | | | | In North America, Nissan has outsourced these same |
| an all-new Altima and non-competitive | | | | operations to IBM Corp. since October 1999. This latest |
| Japanese-designed minivan was replaced with a new | | | | agreement in Japan is expected to further accelerate |
| U.S. created Quest, which was the first minivan with | | | | the standardization, integration and centralization of |
| car-like handling. Sales came roaring back in 1994 to | | | | Nissan's IS on a global level." |
| near-peak levels of 774,405 [6]. | | | | Ghosn further noted, "The Nissan Revival Plan cannot |
| In 1996, sales began to slip once again, fueled by a | | | | be accomplished without effective information |
| change in American vehicle tastes. Trucks and SUVs | | | | systems. Following upon the recent agreement with |
| gained market share at the expense of sedans and | | | | Japan Telecom, this latest partnership with IBM puts in |
| sports cars [2]. Nissan's position as a manufacturing | | | | place the global infrastructure which is key to support |
| driven company, which helped them in the '80's and | | | | Nissan's long term profitable growth." [4] |
| early '90's, then had new problems with the dollar/yen | | | | II. Hypothetical view of the Return-on-Investment model |
| balance which began to hurt their competitiveness | | | | used |
| against market driven companies. | | | | Before they could calculate their Return on Investment |
| Unlike their competitors, Toyota and Honda, which | | | | (ROI), Nissan first had to look at the Total Cost of |
| were focused on key volume segments, Nissan did | | | | Ownership model proposed by IBM. Total Cost of |
| not dominate any individual segment and competed in | | | | Ownership (TCO) is a type of calculation designed to |
| identical segments against Toyota and Honda. | | | | help consumers and enterprise managers assess both |
| Unfortunately for Nissan in the 1990s, the Japanese | | | | direct and indirect costs and benefits related to the |
| "bubble economy" burst, a downturn in Europe | | | | purchase of any IT component. The intention was to |
| coincided, so there was more pressure in the U.S. to | | | | arrive at a final figure that will reflect the effective cost |
| perform. Unfortunately U.S. customers didn't have a | | | | of purchase, overall [8]. |
| genuine brand reason to shop Nissan except for the | | | | The TCO model used, had to calculate the costs that |
| 'best price' deal. | | | | were required, beyond the fees of outsourcing. The |
| Former Nissan president, Mr. Nakamura, announced a | | | | organization had to evaluate specific criteria's that |
| "Back-to-Basics" plan. The key elements of the plan | | | | could have added expense to the outsourcing project. |
| were to reduce inventories, eliminate unrealistic sales | | | | They also had to calculate the ongoing expenses |
| targets, and increase dealer profitability. Unfortunately | | | | throughout the lifetime of the contract [8]. |
| for Nakamura and Nissan, the plan did not work [2]. | | | | Then, after calculating the payback period, Nissan |
| II. Trouble looms for the auto-manufacturer in 1990's | | | | were in a position to calculate their ROI. Once the |
| In the early 1990's, trouble began to brew in the | | | | numbers were crunched, a thorough financial and risk |
| organization. The once revered executives at Nissan | | | | analysis was conducted. The ROI measured the profit |
| were now viewed as arrogant members of the | | | | or cost savings realized. It was calculated by |
| old-boys club and were ignorant to the changing needs | | | | estimating, for a 3-year period, the investment was |
| of their customers and the overall automotive market, | | | | made and the resulting profit created through that |
| in general. | | | | investment. |
| As the company progressed deeper into debt, it met | | | | The results were conclusive. Nissan and IBM entered |
| with more challenges. Nissan's business partners and | | | | into their agreement and operations scheduled to |
| suppliers were charging a premium for their goods and | | | | commence on October 1, 1999. |
| services. Nissan was obliged to meet its financial | | | | Conclusion |
| commitments and by so doing placed itself further into | | | | I. Did Nissan's BPO reach its stated objective? |
| debt. Finally, the company was in debt to the tune of | | | | Nissan's stated objective for the outsourcing of the IT |
| $22 billion. Even the company's financers were | | | | infrastructure was to control expenditure, improve |
| tightening the noose around them. Nissan felt the | | | | efficiencies, and update the infrastructure. By |
| situation was hopeless. | | | | outsourcing to IBM, Nissan achieved all of its goals. |
| III. Steps taken to address issues | | | | In controlling expenditure, outsourcing gave companies |
| Nissan executives were looking for a way out, a way | | | | the opportunity to have a predictable monthly budget |
| to rescue the company from entering into bankruptcy. | | | | for expenditure. That amount may or may not have |
| The first approach was to find a partner. Both the | | | | been lower than current expenditures but the |
| newly established DaimlerChrysler and the Ford Motor | | | | component that was crucial to a large organization |
| company were approached, but both organizations | | | | such as Nissan was that the amount is predictable. |
| rejected the idea of a merger [2]. Finally, Renault, the | | | | There was no variable component to the pricing. The |
| French automotive company recovering from a similar | | | | only time the pricing may have fluctuated was when |
| predicament, decided to enter into negotiations with the | | | | additional services, which were out of scope of the |
| flailing Japanese company. A senior executive at | | | | contract, were required. |
| Renault, Carlos Ghosn, was a huge supporter of the | | | | In Nissan's case, that was never a requirement. The |
| merger idea. | | | | company was in the first stage of a major, global, |
| After much negotiation, the Japanese Ministry of | | | | restructuring project and there were no new initiatives |
| Economy, Trade and Industry agreed to allow Renault | | | | taking place. |
| to purchase a substantial stake in Nissan. The | | | | The second objective in the BPO was to improve |
| Nissan-Renault alliance was born and Ghosn was | | | | efficiencies. IBM is the world's largest information |
| appointed Chief Operating Officer. | | | | technology company with revenues close to $100 |
| Nissans Executive decisions and major events | | | | billion [9]. When companies outsource their operations |
| I. Creating a global alliance vision: | | | | to IBM they are gaining best-of-breed technologies, |
| The following is excerpted from the Nissan/Renault | | | | excellent consultants and some of the best systems |
| alliance vision: | | | | architects money can buy. |
| "The Renault-Nissan Alliance is a unique group of two | | | | The way that any global outsourcer makes its money |
| global companies linked by cross-shareholding. They | | | | is by achieving economies of scale. The only way to |
| are united for performance though a coherent | | | | achieve these economies of scale is to ensure that |
| strategy, common goals, and principles, results-driven | | | | they deploy the best hardware, software, and |
| synergies, shared best practices. They respect and | | | | infrastructure possible and make that equipment work |
| reinforce their respective identities and brands."[2] | | | | to maximum efficiencies. By taking full advantage of |
| The Alliance set itself three objectives, with the goal of | | | | this best-of-breed technology, Nissan met its second |
| being amongst the best three automotive groups in the | | | | and third stated objectives. |
| following areas: | | | | II. What if the IT Infrastructure had been retained |
| 1. Quality. | | | | in-house? |
| Achieve customer recognition as being a quality and | | | | If Nissan had decided to retain its IT infrastructure |
| value added product. | | | | in-house and attempted to implement an updated and |
| 2. Technology. | | | | modernized system, it would have lead to a significant |
| Lead in key technology development and | | | | increase in their expenditure. Ghosn's prime objective, |
| implementation with a focus on excellence in specific | | | | when he took over the company in 1999, was to |
| areas of the automotive business. | | | | reduce expenditure by 700 billion Yen [2]. He was not |
| 3. Operating Profit. | | | | interested in spending any additional money to |
| Consistently generate a high operating profit margin | | | | modernize existing equipment. |
| and vigorously pursue growth. | | | | To support the intended improvement in |
| II. Appointing a new leader | | | | competitiveness, Nissan had to ensure that their |
| Ghosn, given his enthusiasm for the merger, his | | | | infrastructure supported the additional workload. There |
| demonstrated tenacity, and his experience of the | | | | was no way they could do the intended improvement |
| automotive industry, was a natural choice for a senior | | | | in efficiencies without external support. Nissan did not |
| position at Nissan. His initial appointment as Chief | | | | have the expertise and the additional work force to |
| Operating Officer (COO) was just a temporary | | | | handle the required upgrades and the reengineering of |
| assignment. In 2000, he was named President and in | | | | business processes. |
| 2001, he was appointed Chief Executive Officer | | | | III. Final assessment and summation of the relationship |
| (CEO). | | | | Robert Greenberg, Nissan's CIO of North America |
| As CEO, Ghosn was very aware that the 'buck' | | | | was on record as saying in 2006 that, "We were |
| stopped with him. He was the final decision maker. | | | | happy with the services from IBM but the world had |
| Some important and very serious decisions were | | | | changed." This comment sums up the relationship as it |
| made to save the ailing company. Ghosn had to use all | | | | stands now, almost 8 years later [5]. When Nissan |
| of his valuable experience gained from rescuing other | | | | announced its Revival Plan, in 1999, the company had |
| organizations, such as Michelin and Renault, to save | | | | very clear objectives; cut costs, and return to |
| Nissan. | | | | profitability. |
| III. Decision making to save a troubled | | | | Nissan was looking for help in 1999 and IBM fulfilled this |
| auto-manufacturer | | | | role for their IT Infrastructure. Greenberg also stated in |
| With Ghosn's arrival in Japan in the spring of 1999, he | | | | his Q&A that "One of the things that also took |
| immediately set about researching Nissan's root | | | | place with the original outsourcing to IBM was we |
| problems. The newly appointed COO had a | | | | probably outsourced too much." [5] |
| management philosophy that stated "you must always | | | | Greenberg was not working for Nissan when the |
| start with a clean sheet of paper because the worst | | | | original outsourcing decision was made in 1999; he only |
| thing you can have is prefabricated solutions... you | | | | joined the company in 2005. He is on record though as |
| have to start with a zero base of thinking, cleaning | | | | saying that he thought that they should have either |
| everything out of your mind."[2] | | | | retained some of the infrastructure in-house or |
| For the first few months, Ghosn flew around Japan, | | | | perhaps have multi-sourced, thereby ensuring that they |
| meeting and greeting employees at all levels, absorbing | | | | had the best possible solution and price. |
| information and formulating a plan. He used this | | | | In 2006, when the contract came up for renewal, the |
| information to plot a picture of Nissan from a global | | | | CIO decided to put everything out to bid and compare |
| perspective, identifying issues, and problems that had | | | | what the other vendors were offering with what IBM |
| created the dispersed, unprofitable organization. | | | | had provided for so many years. The decision to look |
| One of the many issues Ghosn identified was the lack | | | | at new vendors was actually excellent timing for the |
| of communication around the organization. Seniors | | | | company as Nissan had decided to relocate their |
| managers around the world were aware of some of | | | | North American corporate headquarters from Los |
| the issues that caused the downturn of fortune in the | | | | Angeles, CA to Nashville, TN and any transition could |
| company. They even had solutions to them, but had | | | | be timed to coincide with the move. |
| lacked the necessary authority to implement or | | | | Ultimately, what Greenberg opted to do was to accept |
| communicate the solutions back to Corporate | | | | IBM's proposal to "manage desktop systems, network |
| Headquarters. | | | | services, help desks, dealer systems, and other key |
| Finally, the major issues were whittled down to five | | | | infrastructure elements for Nissan North America." He |
| key issues: [2] | | | | then outsourced the application and maintenance to an |
| • Lack of clear profit orientation. Nissan was not | | | | Indian firm, Satyam and brought the remainder of the |
| focused on driving profit, but were rather focused on | | | | services back in-house [5]. |
| market share and ended up having to buy their market | | | | When asked about the decision to bring IT back |
| share at the expense of the declining profits. | | | | in-house, Greenberg said, "By bringing it in-house you |
| • Insufficiently focused on customers and too | | | | increase the alignment. It's a matter of building the |
| much focus on competitors. The company was too | | | | knowledge internally [that] can be used to help drive |
| concerned about the competition introducing a new line | | | | the business activity, which is much harder when a |
| which would have dug into the Nissan market share. | | | | business analyst function is sitting within a third party." |
| For example when Volkswagen introduced their new | | | | [5] |
| Jetta sedan Nissan saw a significant decline in their | | | | IV. Does the cost of implementing an in-house solution |
| Maxima sales. | | | | outweigh the benefits or does BPO make more |
| • Lacked cross-functional, cross-border, and | | | | sense? |
| intra-hierarchical lines of work in the company. Nissan | | | | As Stephen Withers stated in his article, BPO decisions |
| seemed to operate as separate islands scattered | | | | should not be made for cost-cutting exercises but |
| throughout the globe. There was no centralized | | | | rather for strategic directions [1]. In other words, |
| purchasing function or in fact any of the other major | | | | companies should not view BPO as a cost saving tool. |
| business activities. The organization was not making | | | | Outsourcing the IT operation makes sense when an |
| maximum use of its global presence or buying power. | | | | organization is looking to improve efficiencies and |
| • Lack of sense of urgency. The executives in | | | | business processes or when they cannot attract, or |
| Nissan were complacent in their activities. Things had | | | | retain, the human capital who have the expertise and |
| gone so well for the company in the preceding 60 | | | | ability to modernize or improve the infrastructure. |
| years that they felt that there was no reason to | | | | Nissan's CIO Robert Greenberg thought that he would |
| embrace change. | | | | actually save money by bringing some of the work |
| • No shared vision or common long-term plan. | | | | back in-house because he was "not paying margin on |
| Senior management within Nissan did not have a joint | | | | the individual [headcount]." [5] |
| plan for the different brands within the company. Each | | | | Some of the individual lessons that Nissan's Greenberg |
| division did their own thing with little or no thought for | | | | has learnt from the outsourcing agreement with IBM |
| the greater good of the company. An example was | | | | has been that certain services developed by the IT |
| the Z series that had achieved phenomenal success | | | | organization can indeed be outsourced or developed |
| throughout the 1970's and '80's but was suddenly | | | | externally. However, he felt strongly about retaining |
| dropped from production when sales dropped. The | | | | in-house IT skills in such value generation areas as |
| obvious thing to have been done was to test the | | | | business analysts who have a strong understanding of |
| market with a modernized design. Instead Nissan | | | | the business, sometimes even better than the business |
| chose to ignore the market and drop the brand. | | | | customer does. Insourcing these skills could result in |
| To address the issues, Ghosn announced the Nissan | | | | ideas and dialog with the business, with the end result |
| Revival Plan on October 18, 1999. This seven-point plan | | | | being a service delivery or product development than |
| was aimed at reducing costs and debt as well as | | | | can then be outsourced. |
| creating and launching new automotive brands to raise | | | | In summary, the answer to the question, 'Does the |
| sales and market awareness. The goals announced in | | | | cost of implementing an in-house solution outweigh the |
| the plan were far-reaching and encompassed: [2] | | | | benefits or does Business Process Outsourcing make |
| • The reduction of operating costs, net debt, | | | | more sense?' is that it depends. It depends on the |
| global head count, and vehicle assembly plants and | | | | available skills; it depends on the overall objectives |
| manufacturing platforms (the latter in Japan). | | | | (cost saving vs. process improvement) and it depends |
| • The generation of new product investment | | | | on the organization. For the most part the majority of |
| through the launch of twenty-two new models. | | | | major corporations world wide that have been through |
| The cost-cutting plan called for centralization of | | | | an outsourcing contract or are in an outsourcing |
| purchasing, procurement, human resources and | | | | contract will agree that there are substantial benefits |
| information technology. By centralizing these essential | | | | to implementing an outsourcing contract and there |
| functions, the plan aimed to assist the company in | | | | substantial benefits in retaining those skills in-house. |
| achieving its aggressive cost reductions. | | | | What each organization needs to do is ascertain |
| Expenditure, particularly in the information technology | | | | which of those benefits outweigh the other and base |
| function, was perceived as being out of control. | | | | their decision on that analysis. |
| Ghosn's message to senior level executives was | | | | Works Cited |
| clear, "cut costs in every possible area." If that meant | | | | [1] Withers, Stephen. "BPO: Save money or fix your |
| outsourcing non-core activities because somebody | | | | processes?" [ 17 August 2004. Downloaded October |
| else could do it cheaper, then that had to be fully | | | | 22, 2007 |
| investigated and determined. The management was | | | | [2] Magee, David. Turn Around: How Carlos Ghosn |
| ruthless in their execution of the plan [2]. | | | | rescued Nissan. New York: HarperCollins Publishers Inc, |
| Nissan looks at Business Process Outsourcing as a | | | | 2003. |
| means | | | | [3] Moynihan, Ann. "Outsourcing enables owner to |
| I. Will outsourcing non-core activities save money? | | | | focus on core business." October 11, 2002. |
| There are well-documented records of company's | | | | Downloaded October 22, 2007 |
| saving money and others of outsourcing horror stories. | | | | [4] IBM Press room press releases. "Extending Their |
| Success really depended on the situation and the | | | | Global Partnership, Nissan, and IBM Announce IS |
| provider. | | | | Outsourcing for Japan" June 19, 2000. Downloaded |
| Most experts agreed, though, that you needed to use | | | | October 19, 2007 |
| BPO in strategic decisions, for example refocused | | | | [5] Thibodeau, Patrick. "Q&A: Nissan CIO reshapes |
| efforts on core competencies and not merely for cost | | | | automaker's IT" March 29, 2006. Downloaded October |
| cutting activities [1]. Stephen Withers of ZDNet said in | | | | 23, 2007 |
| his on-line article that you should only "use BPO for | | | | [7] McDougall, Paul. "IBM, Nissan Outsourcing Deal |
| strategic purposes, not to take advantage of a | | | | Spans The Globe" March 10, 2006 10:00 AM. |
| (possibly transient) cost saving." Withers then asked | | | | Downloaded November 02, 2007 |
| the reader, "Does outsourcing the IT Infrastructure | | | | [8] Ikin, Paul. IBM Representative on Nissan Global team. |
| make sense?" To answer that question corporate | | | | 1998 to 2001. |