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4/7/2006
05:05 PM
Rob Preston
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Down To Business: The Outsourcing Chronicles, Part II

Companies can save a quick buck by handing over certain IT operations to third parties. But take a good look before you leap.

"Just when I thought I was out, they pull me back in!" —Michael Corleone, The Godfather, Part III

Amid the desperate cost cutting of the last four years, many companies went too far, outsourcing network infrastructure, desktop management, call centers, application development, and sometimes entire IT operations without thinking through the ripple effects. One exec I spoke with last week says his entire company almost "melted down" after it handed core logistics functions to disengaged third parties. Another exec's data center outsourcer underestimated the magnitude of the undertaking and then scrimped on the necessary resources to make money on the deal. A third manager was shipped off to an outsourcer under a wide-ranging contract, only to be rehired a year later when the relationship unraveled. All three companies brought much of what had been outsourced back in-house.

When Sprint outsourced app dev, maintenance, and related IT work to IBM in 2004 under a five-year, $400 million deal, the carrier's CIO at the time said the agreement would let Sprint "focus on areas of growth and innovation." New CIO Richard LeFave, who came in with Sprint's acquisition of Nextel, evidently thinks differently, as Sprint Nextel is now reclaiming "full application ownership, including full life cycle management, architecture, system analysis, and design." Sprint Nextel also is rehiring call center workers outsourced under a separate contract with IBM.

Such outsourcing disillusionment isn't a new phenomenon. In a Sept. 27, 1997, story titled "Outsourcing Backlash", InformationWeek chronicled why MONY, LSI Logic, Southern New England Telecommunications, and others were terminating or restructuring their long-term outsourcing contracts, mostly to regain control and put themselves in a position to react more quickly to fast-changing business conditions. Then, as now, customers complained that their outsourcers didn't understand their businesses well enough, more a structural shortcoming than a vendor-specific one. They also noted that their executive management teams lunged into outsourcing without adequately measuring costs and service levels.

Adding to the disarray now is the fact that outsourcing is an industry in rapid transition (see story, "Deals Hint At Consolidation Of IT Services Industry"). Capgemini, EDS, IBM, and other major vendors are shifting their workforces to India, where they're hiring or acquiring tens of thousands of people. Computer Sciences Corp., which put itself up for sale last week, plans to add thousands of workers in India while cutting thousands in Europe and elsewhere. Meantime, the biggest Indian outsourcers are growing so fast that they're scrambling to find people with just basic technical and business chops.

Regardless of how solid the vendors are and how good a job you do at crafting these contracts and managing these relationships, stop thinking of outsourcing as a wholesale unburdening, a way to offload big IT problems while saving big bucks. Guess what: These problems don't go away--and often are magnified--in the hands of a third party that can't possibly know or care about your business quite like you do.

FedEx CIO Rob Carter, InformationWeek's Chief of the Year, looks at outsourcing as "variable capacity." Sure, FedEx outsources some legacy systems en masse, but it relies on IT service vendors, both here and abroad, mostly for supplementary work--app dev and other projects that must be done quickly but aren't large or sensitive enough to warrant hiring people. This philosophy also is less threatening to the rank and file, Carter says, cultivating loyalty by sending the message: "Your job is in good hands here."

Of course, when you have a billion-dollar IT budget and a tech visionary like Fred Smith as your CEO, you can handpick your outsourcing work while aiming your top-notch IT talent at the choicest projects. But even smaller, less sophisticated shops must be more calculating and selective when it comes to outsourcing. The alternative is substandard service and years of frustration--and quite possibly a business meltdown.

Rob Preston,
VP/Editor In Chief
rpreston@cmp.com


To find out more about Rob Preston, please visit his page.

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