FedEx is moving a larger percentage of its IT work to service providers as it looks to cut costs and shift to more "variable capacity" amid a strategic modernization of its applications and tech infrastructure.

FedEx CIO Rob Carter, as part of a broader discussion with InformationWeek editors and his senior executive team at the company's Memphis headquarters, estimated that IT service providers will handle 25% to 30% of the company's IT needs, compared with less than 10% today. As part of the shift, FedEx offered voluntary buyouts to its entire IT team and those taking the buyout will spend a month to as much as a year transitioning work to outsourcers. FedEx offered buyouts to select employees in other departments as well.

FedEx has long used IT services vendors such as Wipro, Infosys and IBM for project work, but "we were going from zero to 60 to zero with these providers," Carter said. By giving a group of service providers more steady work (he didn't disclose which specific vendors FedEx will now be working with), including ongoing operations of some IT systems, those outsourcers will have the incentive to invest in staff with expertise in the systems used by FedEx and the broader transportation industry, he said.

FedEx gave managers the choice to let people leave in one of three waves. The first wave will end on May 31, the close of FedEx's fiscal year. The second will end on Nov. 30 and the third on May 31, 2014. "It's more costly to do it this way," Carter said of the staged departure and voluntary buyout, but it's more "people-friendly," it's non-discriminatory and it protects the business from disruption by allowing for an orderly knowledge transfer.

The buyouts are structured to be more lucrative based on how long a person has been with the company. FedEx had hoped that IT pros who have managed IT systems the company is sunsetting would take the buyout option. CIO peers warned Carter against offering the buyout to everyone, he said, since the risk is that the best people will leave. But Carter maintains that the buyout couldn't have gone better. "We just aren't very mercenary around here," he said. "People weren't just taking the money and running."

FedEx is facing cost pressures from weak international air freight markets and tough price competition, and its executives have told Wall Street analysts that the company plans to increase profit $1.6 billion over the next three years in large part by cutting costs from its Express business, including cutting air capacity and retiring older, less efficient aircraft. FedEx posted $361 million profit in its most recent quarter on $10.95 billion in revenue. FedEx's core businesses are Express, Ground and Freight, along with its FedEx Office chain of stores.

Big Shift To Private Clouds

FedEx is several years into an overhaul of its IT applications and infrastructure. Two major elements stand out: a move to a service-oriented architecture that allows for more sharing of software code across business units; and a shift to a private cloud data center architecture.

Technology has been core to FedEx's operations for its entire 40-year existence, based on founder and CEO Fred Smith's philosophy that the information about a package is as important as the package itself. But four decades as an early tech adopter have left FedEx with lots of legacy systems, which the company's IT leadership has been looking to modernize and simplify for the past four years. For example, FedEx is replacing the airline operation system (it operates about 660 aircraft) that it has used for 24 years.

"We're looking at every single thing we've ever done," said Kevin Humphries, the senior VP in charge of FedEx's IT infrastructure. "You have to think 'clean sheet' without doing a clean sheet."

FedEx has created what it calls its "purple core" of IT services. These are software-driven tasks such as looking up a package recipient's address that dozens of its applications must do. In the past, those functions were coded for every application that needed them. Today, they're shared software services that an application calls on to do a common task.

This "purple core" is meant to make development and support easier and cheaper because the code is written once and used by many applications. It should let FedEx retire legacy systems and move faster as it expands and develops new services. When reusing software services, the big change for developers isn't "the thing they do differently, it's the things they don't have to do at all," said Eric Keane, FedEx senior VP for operations IT. FedEx needed that development speed when its main rival, UPS, launched a new service, called My Choice, in October 2011 to let package recipients redirect their packages en route. Creating such a service is a big challenge for package-delivery companies because most of the information they have and the services they provide focus on the shipper, not the receiver. FedEx launched a competing service this quarter called Delivery Manager. "We had to step on the gas, no doubt," Carter said. Delivery Manager would've been almost impossible to do without a single address look-up service, he said.

Another fundamental change at FedEx IT is its move to a private cloud architecture for its data centers. A private cloud in FedEx terms means that all its servers, storage and networking configurations are designed for what Carter calls "general-purpose computing," so that they can run any application workload rather than be dedicated to one function.

FedEx began this private cloud effort after the IT organization mapped out the company's future data center needs several years ago, and the board of directors balked at the capital cost. Using a private cloud architecture instead, FedEx built a data center in Colorado Springs, Colo., that consumes about one-third the power as was originally planned, in about one-fifth the physical size.

Before moving an application into the Colorado data center, which opened in early 2011, the applications were rewritten to run on a common software stack to allow for workload shifting. While some of the software used to run FedEx's data center continues to be proprietary, "we will be OpenStack compliant in a short period of time," Humphries said, referring to the open-source private cloud platform.

The Colorado data center is located at an elevation of 6,000 feet, letting FedEx cool the building using the outside air instead of costly air conditioning. The design is modeled on the ultra-efficient, standards-based data centers that Internet giants such as Amazon.com, Facebook and Google have built. And that infrastructure will let FedEx move some computing capacity to public cloud services from the likes of Amazon, Rackspace and Verizon in the not-too-distant future. FedEx is set to convert a data center based on the same private cloud architecture near its Memphis headquarters.

FedEx faces significant risks from the scale of its change. Carter knows he's losing important technology expertise by cutting staff, but he said he's convinced that the voluntary, staged buyout will help transfer that expertise gracefully to third-party service providers.

While Carter downplays any negative impact from the transition, he doesn't downplay the scale of the change the FedEx IT leadership team is trying to pull off. Said Carter: "People, organization, processes, technology, platforms -- everything that we were doing is being reset."

Editor's Note: After further discussions with FedEx CIO Rob Carter, the editors made a few minor changes to the headline and story.