Strategic CIO // IT Strategy
05:00 PM

Outsourcing's New Reality: Choice Beats Cost

Creative CIOs are getting not only savings but also added flexibility and specialized skills from their IT outsourcers. Just don't expect magic.

Use On The Rise

The worldwide IT outsourcing market grew 7.8% last year, to $246.6 billion in total revenue, according to Gartner. Among respondents to our survey who use outsourcers for customer application development, 72% said their use of outsourcers will either increase or stay the same in the next 12 months, while only 13% planned to cut back (and 15% were undecided).

Ready access to tech talent is just one reason companies are turning to tech outsourcers in greater numbers. Another reason is to get help modernizing their IT infrastructures. Most companies maintain proprietary applications that still need to be updated for the Web and the cloud.

One such company is Aramark Uniform Services, a Burbank, Calif., division of food services company Aramark Corp., which counts among its core applications an aging billing and invoicing system. That system was developed almost 30 years ago in Cobol and runs on the VAX operating system, a relic from the days when Digital Equipment Corp. ruled corporate computing.

The company is moving to an off-the-shelf, Java-based accounting system, but that transition will take two to three years. The 15 or so Aramark software engineers who maintain it know that the move will cost most of them their jobs. CIO Patrick Piccininno was concerned that some of them would leave before the switch is completed, as Cobol programmers are a vanishing breed in high demand.

So Piccininno looked for an outsourcer that could take over system maintenance and upgrades until the new package goes live. Hewlett-Packard was already physically hosting the system at a facility in Colorado Springs, so he opted for an HP software team based out of Bangalore, India. "We turned to HP, not because we wanted to save money, but because we needed an organization we could count on, who could manage and run this legacy application until we were successfully transitioned," Piccininno says. "HP has a very deep bench of experienced Cobol and VAX expertise." (VAX developer DEC was acquired by Compaq, which was acquired by HP.)

Some of Aramark's Cobol programmers are moving to HP; others will be laid off. "These folks have a very good niche skill, and I know they have marketability," Piccininno says. "That's based on the fact that we've had a very difficult time finding good, competent people who can work in this environment."

Aramark also plans to outsource its IT help desk operations. "It's inherently difficult for internal organizations to be really good at running a help desk," Piccininno says. "Help desks typically experience a high level of turnover. We're trying to focus our organization on those areas where we can competitively differentiate ourselves."

In Transition

Aramark isn't alone in using outsourcing as a way to get through a technology transition. Some 52% of respondents to our survey rated smoother project delivery a 3 or higher. Some, however, have caveats. "The only time I would ever use outsourcers or vendors is to fill in gaps with our IT plans," says survey respondent Robert Miller, CIO at customs brokerage The American Cos.

So which functions are CIOs most comfortable turning over to outsourcers? The most outsourced area is application development, cited by 80% of our survey respondents, followed by application maintenance (74%), hardware maintenance and support (61%), data center operations (60%), network monitoring and support (57%), and end user support (53%)

chart: How much of your company's outsourced work is done in these regions?

As shown, labor flexibility and access to a wider talent pool are among the key benefits of outsourcing. Others identified in our survey include the ability to deliver projects more quickly, produce a better quality product, and access industry-specific expertise. Some 13% of respondents even said outsourcing's most important benefit for them is for accounting--letting them move certain IT spending from a capital expense to an operating expense.

No question, cutting costs is still a major motivator. Take Mexico-based concrete and construction supplies company Cemex. Deeply in the red following the housing market collapse and an ill-timed, $16 billion acquisition of Australia's Rinker, Cemex is trying to slash its debt load, which sat at $17.2 billion as of June. The plan calls for Cemex to turn over most of its IT operations, including infrastructure management and application development and maintenance, to IBM, a move that Cemex VP Roberto Chaverri says will save the company more than $100 million a year over the life of the 10-year contract.

Under a business process outsourcing component of the deal, IBM will take over and run Cemex's finance, accounting, and human resources systems. The deal is so extensive that Chaverri will take on a new title, moving from VP of corporate IT to VP for vendor management.

Some of Cemex's IT employees will move to IBM, which beat out 16 other outsourcers for the contract. Others will stay with Cemex, while still others will be laid off. "We don't have the final numbers yet," Chaverri says.

Cemex's main goal is to cut costs, but Chaverri says the handoff to IBM will provide other benefits. "This will allow us to focus more on our core business," he says. "With IBM's economies of scale and breadth of services, they can better serve transactional activities to our external and internal customers."

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User Rank: Apprentice
9/9/2012 | 1:52:48 PM
re: Outsourcing's New Reality: Choice Beats Cost
The article's example of CIO Mamatha Chamarthi is very amusing to say the least. On one hand, Mamatha Chamarthi complains that she can't find talented IT workers in Jackson, MI to staff her higer value add projects due to competition from the newly re-surgent GM (Auto Industry). On the other hand, we are expected to believe that HCL Technologies (low cost Indian outsourcer) will be able to staff close to 400 in Andrew, MI in their new Michigan Tech Dev Center nothwithstanding the afore-mentioned compettion from the likes of GM. The only way I see this work for HCL (given their own margin/business pressures) is the classic outsourcing model - HCL hires project co-ordinators and a few staff in Andrew, MI and ships the remainder jobs to low cost centers in India or the other parts of the world. I would expect Info Week to do some more detailed analytical analyses before presenting such info to their readers.
The example of Mamatha Chamarthi and Consumers Energy is simply to put a new spin on the decade old outsourcing trend t make it more to its palatable to US constituents.
User Rank: Apprentice
8/30/2012 | 1:25:27 AM
re: Outsourcing's New Reality: Choice Beats Cost
Perhaps IW can tap their offshore innovation partner for some excellent, cost effective work..barf.
Leo Regulus
Leo Regulus,
User Rank: Apprentice
8/29/2012 | 7:11:49 PM
re: Outsourcing's New Reality: Choice Beats Cost
Somebody's gone to a lot of work and written an excellent article. However,
You have made some client-unfriendly changes.
When we hit the 'Print' Icon, we expect to see the entire article as one page and relatively 'free' of garbage.
On this article, it was necessary to go to page 2 etc., etc. to get the whole article.
The result was also littered with garbage.
Couldn't you have at least given us the courtesy of a .pdf option?
Thank You.
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