InformationWeek

March 17, 1998

Your letters to my print column and this E-mail forum ask some serious questions about managing information technology in today's world. Since today's world is essentially absurd, my serious responses may sometimes sound a little whimsical, and my occasional whimsical ones, serious. In any case, if you want to participate, write to me at lovelace@home.com . I'll respond to those letters that I can. I reserve the right to edit for size and content. Just sign your E-mail the way you want it to appear online.

Dear Herbert:
First off, let me say that I thoroughly enjoy your column. I like the fact that this is real life--where everyone I know lives (OK, there is our company president who's a bit "out there," but let's leave that one alone). I also like your writing style and underlying humor (hopefully I'm not insulting you by not recognizing that you're trying to be overtly funny). If you haven't already, I'd say a book would be a good idea.

Anyway, I wanted to comment on your series (" The Politics of Outsourcing ") on consultant and outsourcing relationships. Let me state that I work for the nation's largest health-care-specific information management and consulting organization. At 500+ folks, though, we're nowhere near the Big Six (or however many they are these days). In our industry, for way too many years, IT has meant just producing a patient bill. Now with managed care and capitated payments (from ins urers and the government), health systems are in a very tight financial squeeze. As is true in most other industries, improved information management is key to the viability of almost every organization--and this information is increasingly complex--there are literally thousands of data elements in a typical patient record and they're of every imaginable data type, e.g., text, numbers, voice, images, hand-written (read: scribbled) notes, analog wave forms, bar codes, even video. Application systems are becoming highly specialized and therefore there are many more systems, architectures, platforms, and protocols to deal with, plus the integration challenges to tie it all together. To top it all off, health systems simply don't have the money to attract or retain workers with these skills.

I realize this is not necessarily the case in other industries, but outsourcing offers these health systems a virtual staff many times larger than their own, with years of experience that is up on the latest technolo gies, where they can pick and choose as needs arise. This allows them to tackle the tough projects and address the information challenges of their organization. As consultants, we provide many individual services--and let me say we are also quick to point out the value of a committee such as you mentioned to develop a set of criteria with which to judge the value provided by the outsourcing company and the performance milestones to be met. We recommend that it be led by the CIO--after all, if the CIO could, he or she would hire and manage the staff needed to meet the objectives so typically dumped on them from above.

I look forward to hearing how this turns out in your organization, and to your future columns.

Vincent V.

Dear Vincent:
There are many sound reasons for an organization to outsource portions or even all of its IT activities. The key is for the management of the company to know exactly what results it expects and to develop a measurable way to get there. In my estimation, achieving the desired objectives and maintaining a satisfactory relationship with an outsourcer requires a great deal of work. In fact, I think it is fair to say that more senior management time, not less, will be expended.

I'm glad that you agree that a company should develop criteria and performance milestones through a comprehensive committee. If the CIO is part of that process--and does not view outsourcing as a threat--the outcome can be the right decision for all parties.

Dear Herbert:
Your articles on outsourcing struck a chord with me. As one who has been involved in outsourcing since the days it was called "facilities management," I have strong opinions and maybe not a few prejudices about the topic.

First, many decisions to go the outsourcing route are based less on rational discussion than perception, incom plete information, and internal politics. An additional "rationale" which I have never understood is the argument that IT and the enterprise can "concentrate on its core business." If information is the heart and soul of a business, why would one want to give it up to an outsider? You were fortunate if your "prospects were good for a fair evaluation."

Secondly, the decision to outsource, as I have often seen, should not be based on the enterprise's dissatisfaction with the CIO. Wrong reason, wrong decision. He or she should be replaced.

The cost of outsourcing is often underestimated. The outsourcer must find cost reductions of about 25% to bid even at the current level of internal IT expense. Ordinarily there is not that much slack in the IT budget. Parenthetically, at one time outsourcers could count on providing fewer benefits to the personnel transferred from the IT shop to the outsourcer--but today, workers can demand competitive packages.

The solution for many outsourcers is t o bid low on a very restricted set of offerings and make it up in contract changes. On the enterprise's side, there is a continuing cost for one or several contract managers, as well as the purchasing and legal departments.

By now, you must be wondering how I prevailed in the outsourcing business. Still, there are very good reasons to outsource. Highly regulated industries are a great target for outsourcing.

Regards,
Joe D.

Dear Joe:
I thought that your letter would be very instructive to people considering the benefits and pitfalls of outsourcing. You mention one of the major mysteries to me given for outsourcing: concentrating on our core business. I do not know of an industry today that can operate without depending on their computer systems, and computer services is not quite at the commodity level of electrical power generation, another "must have" for many businesses. Given that providing compu ter services is a major task, it's beyond me how some organizations will outsource the company's information systems with the same level of confidence that they'd use to outsource the company cafeteria.

In the context in which it is frequently used, I have never understood what a core competency is, and I suspect I never will--unless it's a neat term coined by consultants to explain away management responsibility for everything not so designated. It seems to me that the only valid core competency in a business is the ability to decide what is important and to make good decisions in a timely fashion.

Your point about not outsourcing simply because there is dissatisfaction with the CIO is very important. I cannot tell you the number of situations where I know that a company has trashed its entire IT organization because they're unhappy with the person leading it. Seems to me like that's throwing the baby out with the bath water and I am surprised that the executive managers who make that type of decision do not recognize it as such.

Frequently, the cost of the outsourcer is, indeed, underestimated. While the outsourcer will look for savings that could probably have been done by a competent CIO, there is another dimension. The company that outsourcers its IT function should recognize that an outsourcer (unlike an internal IT staff) will normally be working hard to increase its business. Increasing business means finding innovative reasons why the client should spend money. This approach is not necessarily bad for the client--there may well be new projects the client would benefit by doing--but it certainly puts the goals of the outsourcer at variance with those of the client.

Dear Herbert:
During the course of your career, I'm sure you have completed several successful projects. I'm also sure you've had some real tough "incompletes".

In the implementation phase of the various projects, did you have to provide constant, detailed updates to management? What kind of general updates were they (e.g., current project budget status, percentage toward completion, etc.)? How often were these updates required?

I realize that a lot of your answers may be in the "that depends" category, but any input would be welcome.

Thanks!
Sushil

Dear Sushil:

The reporting required for major projects varied almost as much as the projects themselves and included every metric you've mentioned. Different bosses asked for updates in every way that I could have imagined, and some I would never consider as appropriate for tracking expenditures that reached into the tens of millions of dollars. The less-intense ones, if they bothered to ask, wanted to know "how are we doing and how much are we spending."

The really control-minded ones wanted every detail of the project reviewed with them, down to eac h technical decision, even if they had no understanding of the technology involved. I learned to work with that group once I got over the hang-up of dealing with people who could not admit that someone could actually accomplish something without their direct involvement in the smallest detail. What I would do is schedule review sessions for obvious technical decisions, brief them beforehand on what made sense, and let them strut their new-found stuff in front of the team. They loved the ability to look like technical wizards and the teams, who were not in on my little ploy, thought the big boss was wonderful. No harm was done, and everyone was happy. The team felt a lot of attention showered on it and the maximum leader's ego was enhanced.

The really good bosses established with me a set of milestones that were easily measured: design approved, customer data converted, test cases completed, etc. They also never asked for the one measurement that I thought was totally useless--percentage completed. I can't tell you the number of projects that I have seen over my career that were 90% completed at 50% of what turned out to be the real final cost.

Herbert W. Lovelace is CIO at a multibillion-dollar international company. Herb practices his day job under an alias and has changed the names of colleagues to protect the guilty.

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