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In Depth: When Outsourcing Goes Bad

Companies have been burned by outsourcing. That has taught some hard lessons.
General Motors CIO Ralph Szygenda is championing that approach going forward. GM is evaluating how to spend about $15 billion for IT services over the next five years and, when awarding about half that amount earlier this year, spread the work across six vendors, with EDS getting the largest share. It's a move that raises competition but also increases complexity.

The U.K. Ministry of Defense opted for that approach when it set about contracting for the construction of a secure intranet under its $4.3 billion Defense Information Infrastructure project. The ministry has tapped EDS and Fujitsu to act as prime contractors. "This is a lesson that MOD learned from us," Baker says.

Of course, divvying up a major outsourcing contract among a team of vendors isn't a guaranteed recipe for success. In its own version of the Navy-Marine Corps Intranet debacle, the U.K. government's attempt to modernize its flagging National Health Service is bogged down as numerous contractors attempt to install systems that, in some cases, use conflicting technology. Britain's Labor government now warns that the NHS's National Programme for IT will end up costing more than $55 billion--a whopping $26 billion over budget. Accenture has won $3.5 billion in contracts to implement the program in England's eastern and northeastern regions. CSC has a $1.6 billion deal for the northwest and West Midlands, and Fujitsu has a $1.7 billion contract for southern England. Several other vendors, including Agfa, Atos Origin, and Tata Consultancy Services, also have significant pieces of the work.

The project has been plagued by delays caused by everything from software incompatibilities to resistance from physicians. "I fear it will be the largest-ever systems integration disaster," says professor Ross Anderson, who heads the computer security group at Cambridge University. Anderson helped author a report on the project by the United Kingdom's National Audit Office, due out by month's end.

In many cases, systems installed by the various vendors working on the project aren't compatible, Anderson says. "It's different software, it's different standards, it's different everything," he says. "This isn't just a matter of wasting billions, it could cost lives."

The United Kingdom should have taken a more gradual approach to creating electronic health records, Anderson says. "It's too much change, too fast," he says. He notes that a number of countries, including the United States, are rolling out e-health systems incrementally. "There's not as much fanfare, but suddenly you find that you've got something that works."

NHS officials declined to be interviewed but provided a statement that the project isn't significantly over budget. The NHS argues that the government's latest cost estimate includes routine IT maintenance and training expenditures that aren't explicitly connected to the National Programme for IT. "The costs of the core contracts [of $11.65 billion] have not risen," the NHS says.

If there are cost overruns, it's hardly a boon to the vendors--they face big penalties and expenses if deadlines aren't met. In March, Accenture noted in an SEC filing that the setbacks have "significantly increased the risks and uncertainties associated with these [NHS] contracts." The company took a $450 million hit to second-quarter earnings as a result.

Offshoring À La Carte

Time CapsuleOffshore deals carry their own set of challenges. (For more on attitudes about offshoring, see story, "Cost Cutting Is The Main Reason For Outsourcing--Survey".) But increasingly, offshoring is just one more variable to manage, since so many projects have some overseas component. Cost cutting is the overwhelming reason companies look offshore. Companies also need to moderate their expectations when it comes to offshoring, warns Worldspan CIO Sue Powers. "It's like a bell curve," she says. "Some projects will go well and others will be difficult. Most are somewhere in the middle." Worldspan outsources application development work to India's TCS and InterGlobe Technologies.

Companies concerned about offshoring their work need to make that part of the negotiations, since vendors often look to the cost savings of offshore labor to make deals profitable.

Faulty assumptions surrounding offshore outsourcing may have played a part in Sprint Nextel's fallout with IBM. IBM moved some functions to India, the former employee says, but Sprint refused to let a number of key functions leave the country. Understanding where work will be done and making sure all parties are comfortable with that, is key to success. Our survey finds three-quarters of spending on outsourcing is for domestic work, a quarter for offshore. But projects often will have elements of both, and buyers need to be prepared.

Outsourcing keeps growing, so companies must feel the benefits are worth the hassles. And IT and business services vendors keep expanding their staffs and capabilities, hoping to take on more work. The opportunities are there--as long as you know how to avoid the pitfalls.

Illustration by John Sledd