Strategic CIO // IT Strategy
Commentary
7/13/2012
09:48 AM
Jim Ditmore
Jim Ditmore
Commentary
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Why IT Outsourcing Often Fails

IT doesn't compare to a security guard force or a legal staff. It's part of your core intellectual property.

While the general trend of more IT outsourcing (via smaller, more focused deals) continues, these engagements remain difficult to navigate. Every large IT shop that I have turned around had significant problems caused or made worse by the outsourcing arrangement, particularly large deals. While those shops performed poorly for other reasons (ineffectual leadership, process failures, talent issues), improving performance required a substantial revamp or reversal of the outsourcing arrangements.

Failed outsourcing deals, involving reputable vendors and customers, litter various industries. While formal statistics are hard to come by, in part because companies are loathe to report their failures publicly, my estimate is that at least 25% and possibly more than half of these deals fail or perform very poorly. Why do these failures occur? And what should you do to improve the probability of success?

Much depends on what you choose to outsource and how you manage the vendor and service. A common misconception is that any activity that's not "core" to a company can and should be outsourced. In The Discipline of Market Leaders, authors Michael Treacy and Fred Wiersema argued that market leaders must recognize their competency in one of three areas: product and innovation leadership, customer service and intimacy, or operational excellence. They shouldn't try to excel at all three areas.

However, IT is critical to all three areas. And because of this intrinsic linkage, IT isn't like a security guard force or a legal staff, two areas companies commonly outsource successfully. And by outsourcing intrinsic capabilities, companies put their core competency at risk.

A recent University of Utah business school article found significantly higher rates of failure at companies that had outsourced IT and other operations. The authors concluded that "companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail to survive."

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My IT best practice: Companies must control their critical intellectual property. If your company uses outsourcing vendors to develop and deliver key features or services that differentiate its products and define its success, then those vendors can typically turn around and sell those advances to your competitors. Or you are putting your success in the hands of someone with very different goals. Be wary of those who say IT isn't a core competency. With every year that passes, there's more IT content in products in nearly every industry.

Choose instead to outsource those activities where you don't have scale or cost advantages, or capacity or competence. But ensure that you either retain or build the key design, integration, and management capabilities in-house.

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Certifiable
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Certifiable,
User Rank: Apprentice
7/19/2012 | 6:08:30 PM
re: Why IT Outsourcing Often Fails
As for having in-house staff do critical work, Dimon said it best: "Who do you want doing your key work? Patriots or mercenaries?"

To me, this comment offers the best summary.
JimC
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JimC,
User Rank: Apprentice
7/19/2012 | 1:21:47 PM
re: Why IT Outsourcing Often Fails
Would it be correct for me to guess that a non-technical CIO and other ignorant CXOs made the decision to outsource? Were the screams of protest by knowledgeable "IT people" (a.k.a. the drones) ignored because they were supposedly interested only in saving their own jobs? Can the sales process for the outsourcing deal be described as "people who don't know what they're selling telling lies to people who don't know what they're buying?"
Sam Iam
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Sam Iam,
User Rank: Apprentice
7/16/2012 | 4:20:49 AM
re: Why IT Outsourcing Often Fails
"A recent University of Utah business school article found significantly higher rates of failure at companies that had outsourced IT and other operations. The authors concluded that "companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail to survive.""

A flawed methodology. Companies which are struggling to begin with often turn to outsourcing to drastically reduce costs in an attempt to save the business. There is a huge skew towards companies which are already in trouble who outsource everything, completely apart from anything IT related.
moarsauce123
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moarsauce123,
User Rank: Ninja
7/14/2012 | 6:47:05 PM
re: Why IT Outsourcing Often Fails
Core competencies cannot be outsourced without the business failing. So any software shop or company using a lot of IT should not outsource IT, because it IS a core competency. That is what I learned in business 101 ten years ago. Seems that plenty of C-level morons missed that class.
JOutsourcer
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JOutsourcer,
User Rank: Apprentice
7/14/2012 | 3:53:36 PM
re: Why IT Outsourcing Often Fails
Keeping it simple:
1) The contract must be well-written and not leave many grey areas left open to interpretation. I have seen companies keep a more loosely-defined contract hoping to 'get more' over time but this has led to commercial disputes and takes away from delivery.
2) Governance. The outsourcing company must have a strong governance model with competent individuals leading the governance who are not power-hungry egomaniacs but individuals who are practical, pragmatic and reasonable.
3) Strong service levels that properly measure what is required. Service levels drive behaviour.

One can blame the suppliers for trying to make a buck on a shoe string but the outsourcing company shares in the failures as well.

I am not convinced that the consultants helping to put the outsourcing contracts together have the best interest of the deal in mind but work to squeeze the most out of every element leaving the outsourcers with small margins and with little room to work.

Remember the "Your Less for Mess" period in EDS? Companies may outsource because they cannot gain control on their own. I will hold the landscaping company more accountable to cutting my lawn to service levels of quality (no mohawks) than I will myself or my sons.
MyW0r1d
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MyW0r1d,
User Rank: Strategist
7/13/2012 | 5:20:20 PM
re: Why IT Outsourcing Often Fails
You concisely summed up the entire article in one sentence, "depends on what you ... outsource and how you manage the vendor". In fact, most of your examples seemed to point toward failures of oversight or vague SLA development. Human nature is to get away with the minimum investment for maximum return and most will try everything with that objective in mind. The responsibility however rests with the staff in the company doing the outsourcing in the development and enforcement of specific, goal oriented SLAs and process selection.
SouthRoad
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SouthRoad,
User Rank: Apprentice
7/13/2012 | 3:09:29 PM
re: Why IT Outsourcing Often Fails
Outsourcing has not worked for us. It usually starts with some qualified people doing a dog an pony show just to get the deal and then the work is handed off to a bunch of "freshers" in India who are right out of school and handed a programming book with their first assignment. Next we had 30 programmers in India working on a project where we originally had 6. Our cost kept going up and the quality of the work kept going down.

The quality of the code delivered was so bad that we struggled for 6 months to try to salvage it while we continued to run our old system. We finally gave up and rewrote the entire system that we outsourced using 5 qualified programmers and two part-timers and we finished it in half the time that the outsources took.

This outsourced project was a total loss and set up back almost 3 years. Never again.
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