Riding vendor economies of scale and gaining access to expert skills are the usual rationales for outsourcing. Fair enough, but fuzzy issues remain: Does a significant amount of outsourcing also enhance or retard an enterprise’s prospects for creative business change? Can outsourcers be induced to deliver appropriate levels of end-toend infrastructure availability and throughput? How well do outsourcing arrangements address new mandatory (SOX) requirements for data security and process integrity? Over the summer, we conducted a series of interviews with CIOSE members on these and other questions. The results follow. But we want to begin by expressing thanks to our friends for their time and mental intensity during these sometimes lengthy conversations. It’s always nice to have smart friends!
One more time, leaving costs aside, what are the advantages of outsourcing?
[REDACTED]: Outsourcing forces employees to think innovatively about business
processes and issues. When their working hours are consumed with mundane
activities, employees assume that’s how they’re supposed to earn their living. Once
these same activities are outsourced, they must open their minds ...concentrate on
thinking out-of-the-box about business issues. What other responsibilities do they
have? "Outsourcing cleanses and clarifies the corporate mind." So employees who
were previously expert about IT Operations can often provide a comprehensive
understanding of how the business actually works. (But if they lack the skills or
temperament to handle transition "then retaining them is a mistake.")
Less controversially, he finds outsourcing useful in fostering and sustaining corporate IT standards across a far-flung decentralized enterprise. Convergence of accounting standards rather than innovation justified outsourcing [REDACTED] back-office bookkeeping activities to Accenture ten years ago. [Of course, standards enforcement must be stipulated by contract; otherwise, outsourcers sometimes discourage or ignore opportunities for commonality. Frivolous diversity provides an excellent opening for increased billings.]
[REDACTED]: Outsourcing forces standards -- and may also save money.
[REDACTED]: Outsourcing frees IT employees to pursue the innovative aspects of [REDACTED] strategic initiatives in marketing and customer satisfaction.
[REDACTED]: Outsourcing IT infrastructure allows the redeployment of valuable employees previously mired in routine operations and unavailable for much else. This really matters because their experience is highly regarded by line managers. "They share the business guys’ lingo," have detailed process knowledge about what actually worked (or didn’t) in the past, and insights on what's practical in the future. In addition, the outsourcing initiative is delivering better quality measurements than were anticipated or previously realized - and at good prices.
[REDACTED]: For [REDACTED], the flexibility inherent in its IBM infrastructure outsourcing agreement is one major benefit. For example,"under our agreement I can experiment with three MIPS of grid computing – with my short term exit already firmly in view." Despite general satisfaction with its outsourced IT infrastructure, the practice hasn’t been extended to network management. That’s because no credible supplier exists. "So rather than anointing an outsourcer to develop the resources to interface successfully with 50 separate network vendors, it’s been more effective to create that capability ourselves."
[REDACTED]: "As a precondition for any outsourcing agreement, IT must retain the architectural and intellectual responsibility over both business process change and technology change." In-house professionals wrestle the business issues and technology opportunities with line and/or corporate managers. But [REDACTED] does no coding in house, thereby avoiding the common inward-facing proclivity for creating large programming projects primarily to occupy the internal staff. Instead, the designated IT team has every incentive to search for appropriate packaged software. "And if no suitable package can be found, the application is architected and designed in house - but still programmed by an outsourcer." No weak signals from the edge.
[REDACTED]: Flexibility is the primary advantage of any type of outsourcing. A recent study of experience with [REDACTED] plant construction engineers found the best results (measured in total cost, schedule commitments, and long-term operating expense) were delivered on projects completely managed internally. That’s the important opener. The second best results occurred where [REDACTED] engineers had responsibility for front-end design and contracted out the remainder of the project; the "third best" outcome occurred when the entire project was outsourced.
Yet variations in project workload and locale dictate a sizeable quotient of outsourcing for construction engineering -- and for IT as well. Three (sometimes subtle) questions determine the in-or-out decision. First, is this project related to a core aspect of the business? Second, are these skills rarified or commoditized, i.e. readily acquired in the marketplace? Finally, is the projected workload variable, with manpower allocations peaking and plummeting from one period to the next?
To illustrate: salt dome engineering is maintained in house as a core resource because there are only fifty skilled practitioners in the world. But construction engineering is largely outsourced because a) skills are generic and broadly available; b) headcount depends on the erratic and fluctuating pace of plant construction; and c) construction engineers typically reside on-site for three years to work with local subcontractors, regulators, and others. So local and temporary talent is preferable to address both quality of life considerations and economic common sense. In sum, this meticulous (and non-ideological) analysis often produces a mixed result.
After a similar analysis to determine the distribution of IT staffing, the breakdown of personnel is now approximately 70 percent from outsourcers and 30 percent from [REDACTED]. Yet within the aggregate 30 percent, the proportion of [REDACTED] employees in any individual job category depends on the importance of that particular skill level. For program managers [e.g. those qualified to lead re-engineering of an overall business process], 100 percent carry [REDACTED] badges; for project managers, it’s 70 percent inhouse skills; but among system developers only 20 percent are [REDACTED] employees. On balance, the internal resources are highly leveraged; this is a $30 billion enterprise with an IT organization of just 600 employees - although another 1500 to 2000 professionals are engaged on an ongoing basis.
And a final thought on optimal staffing: maintaining a robust internal IT skills base, minimizes the risk of switching vendors if ultimately necessary (and increases the credibility of your threat). The immediate benefit of avoiding captivity is how it dampens the supplier’s temptation to pad prices, reflecting his (wisely) unstated judgment about the prospect for contract termination.
[REDACTED] views differ from several of her peers. "For us, outsourcing IT would not enhance innovation, reduce costs, or add flexibility." To start, IT performance and responsiveness at [REDACTED] is enhanced by avoiding the mixed loyalties of having different masters: "Our IT Operations people are tightly integrated with the rest of IT; they act as conscience, watchdog and communications hub if something goes wrong."
On flexibility: "our internal Operations people react incredibly fast. If we decide something really needs to be done, our employees complete the job that day." On costs: "we benchmark way below all outsourcers both in dollars and number of people... our dedicated IT Operations group is amazingly small by any standard."