Creative CIOs are getting not only savings but also added flexibility and specialized skills from their IT outsourcers. Just don't expect magic.
How Things Go Wrong
Cost savings, access to skilled labor, more time for core projects: What's not to like about outsourcing? Well, there's no shortage of examples of how things can go wrong.
For example, IBM's eight-year, $55 million deal to develop an Oracle and WebSphere-based billing system for Texas utility Austin Energy, signed in 2009, has been plagued by missed deadlines, cost overruns, and buggy software that generated bills that overcharged residents. Ironically, the system, part of a larger smart grid effort, was supposed to help customers save money. Austin Energy CIO Alan Claypool, who inherited the IBM contract, says outsourcing vendors need to know there will be consequences if they don't perform. "The penalties around specific areas like system availability need to be much stronger," Claypool told InformationWeek in an interview earlier this year.
An intranet upgrade contract the Navy and Marine Corps awarded EDS (before Hewlett-Packard acquired EDS in 2008) became infamous for cost overruns and delays. And the U.K. government has all but scrapped a $17 billion project to build an electronic healthcare network that was supposed to introduce e-health records and let patients manage their care online. Accenture quit the contract in 2006 after losing millions on it, and another prime contractor, Computer Sciences Corp., earlier this year confirmed that it would write off $1.5 billion in costs related to the effort, which was years behind schedule and billions over budget.
Experienced CIOs say IT outsourcing deals often go awry because management on the customer side assumed that its responsibility for the work ended when the ink dried on the contract. "Outsourcing doesn't simply mean lobbing the responsibility to a third party," says Aramark's Piccininno. "Quite frankly, I believe it increases your level of accountability. One of the ways we mitigate risk at its core is that we are heavily invested in and involved with what HP does for us."
Another recipe for disaster is when companies outsource too much. Veteran CIO Jim Ditmore, senior VP for infrastructure services and innovation at insurer Allstate, says too many of his peers are willing to turn over not just routine tasks, but also crucial functions, to outsiders. "For most large companies, their products and services are far more dependent on IT than they were 20 or even 10 years ago," Ditmore says. "One of the ways you differentiate now is by adding new capabilities through technology. If you're heavily outsourced, you're limiting your ability to do that. You're no longer the prime innovator."
Allstate now uses a number of outsourcers worldwide--3,000 to 4,000 contract workers do everything from application development to coding and testing. But the insurer is reining in many of those deals. Much of the work will be moved to company-owned, "captive" tech centers Allstate is establishing in India.
Captive centers, used to some extent by 43% of the respondents to our survey who use offshore IT services, offer the benefits of offshoring without the disadvantages of outsourcing, Ditmore argues. "In this age, every large company really should be driving to leverage a global engineering capability," he says. "You'll get a higher caliber of talent, and local, nearshore, and offshore resources. You'll be able to address global tastes and differences, and take advantage of the clock."
Ditmore notes that Allstate's developers in India will be able to code and test applications overnight and have them ready for stateside workers to deploy in the morning.