Strategic CIO // IT Strategy
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9/1/2005
04:40 PM
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What Outsourcing Backlash?

Sure, there are savings--but they often come with a cost of decreased service levels, increased communication problems, customer dissatisfaction, increased complexity, and other issues. Travel and infrastructure costs--including, say, a dedicated telecommunications link from the outsourcer to the client's main office--can easily add up to equal or even surpass any savings in the wage rate. There are often resentments over being expected to work late or come in early on a regular basis, to do thi

ABN Amro, a huge Dutch bank, has announced the largest offshore outsourcing agreements ever. I just hope it all works out, given the outsourcing backlash I thought was going on.Earlier this week I got all riled up about a study that talked about the changing nature of application-development outsourcing and how it's mostly about saving money. (In the old days, which is to say the last time the survey was run in 2000, companies mostly used app-dev outsiders only when they needed expertise in a specific technical or business area.)

But now there's something even bigger going on. Since that study came out, ABN Amro, a huge Dutch bank, has announced the largest offshore outsourcing agreements ever. The total is $2 billion with five separate vendors and, yes, app dev is said to be a large part of the mix being outsourced.

To be clear: I have no beef with Indian outsourcers; everything I've read suggests they're thorough and careful in their hiring practices, and becoming even more security-minded all the time. As a group, these vendors spend a great deal on training and other personnel-related costs, and their employees are certainly professional as far as I know.

Indeed, I'm guessing that these are likely all reasons why ABN Amro is trusting its IT infrastructure to these establishments. (Well, in addition to saving over $250 million annually, that is.)

I just hope it all works out.

This past year has seen what I believed to be a backlash regarding outsourcing. Trade publications have been filled with stories about how offshoring in particular and outsourcing in general often aren't all they're cracked up to be.

Sure, there are savings--but they often come with a cost of decreased service levels, increased communication problems, customer dissatisfaction, increased complexity, and other issues. Travel and infrastructure costs--including, say, a dedicated telecommunications link from the outsourcer to the client's main office--can easily add up to equal or even surpass any savings in the wage rate. There are often resentments over being expected to work late or come in early on a regular basis, to do things like teleconferences with the team on the other side of the world. Customers say managing in that distributed an environment can take its toll over time.

A study released in April 2005 by Deloitte Consulting said that many large organizations are bringing business and IT operations back in-house after becoming disillusioned with outsourcing. "Instead of simplifying operations, many companies have found that outsourcing activities can introduce unexpected complexity," the study concluded.

Overall, 70% of participants have had "significant negative experiences" with outsourcing projects and are now exercising greater caution in approaching outsourcing. One in four participants has brought functions back in-house after realizing that they could be addressed more successfully and/or at a lower cost internally, while 44% did not see cost savings materializing as a result of outsourcing.

Another recent study, this from DiamondCluster International Inc., said that about half of the 210 IT executives surveyed have canceled outsourcing contracts, up from 21% who reported doing so a year ago.

Most buyers like what they get, the study says: 78% are satisfied with their outsourcing deals, up from 74% last year. But dissatisfaction also is up: 15% of buyers are unhappy with their contracts, up from 10% last year.

In perhaps this year's highest-profile example of an unhappy outsourcing customer, Sears, Roebuck and Co. in May ended its 10-year, $1.6 billion IT outsourcing deal with Computer Sciences Corp. less than a year into the agreement.

In a Securities and Exchange Commission filing, Sears said it ended the engagement "for cause, due to CSC's failure to perform certain of its obligations in accordance with the terms of the agreement."

Admittedly, as the ABN Amro deals prove, the outsourcing phenomenon isn't going away anytime soon. The DiamondCluster study said that nearly 75% of buyers expect to increase their use of IT outsourcing this year, up from 64% last year. Just 7% say they'll decrease use of onshore outsourcers, and 5% plan to reduce use of offshore outsourcers.

And so my question: Why? Is the financial piece of the equation so compelling that companies will give up pretty much total control over their critical IT infrastructure? Does it matter if IT's not handled well, as long as it's handled somewhat?

At one shop I know that's outsourced its data center infrastructure, even the IT people don't know who to contact for routine maintenance, outage, and other problems or questions. (And yes, they're working with a well-known American company; this isn't a problem unique to offshore operations by any means.) The IT staffers get trouble tickets and have to wait for long periods on the phone, just like the rest of us do when we call Microsoft or pretty much any other vendor for tech support. Meanwhile, the in-house ITers have to face the wrath of the business users who have no answers and nowhere to turn for help.

If you're an ITer who's been dealing with an outsourcing situation--either offshore or here at home--I'm hoping you'll share your experiences and any advice about what you've done to make it work for you and your company.Sure, there are savings--but they often come with a cost of decreased service levels, increased communication problems, customer dissatisfaction, increased complexity, and other issues. Travel and infrastructure costs--including, say, a dedicated telecommunications link from the outsourcer to the client's main office--can easily add up to equal or even surpass any savings in the wage rate. There are often resentments over being expected to work late or come in early on a regular basis, to do things like teleconferences with the team on the other side of the world. Customers say managing in that distributed an environment can take its toll over time.

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