January 05, 2004
(Computerworld)
John Golden doesn't have to look very far to see just what can happen when an outsourcing project goes awry.
As CIO and executive vice president at $13 billion CNA Financial Corp. in Chicago, he had to pull the plug last March on a $20 million application upgrade project that an Indian firm was working on, because it wasn't delivering the expected cost or performance benefits.
"We weren't getting any value at all for the amount of money we were spending," Golden says. "I was going to end up with a system that had no additional functionality from the one we'd had since 1994."
His decision to kill the massive project is emblematic of the tough choices IT leaders face when farming out technology work. Yet the substantial cost benefits and flexibility that outsourcing promises have resulted in a sharp rise in the number of jobs being handed over to third parties. In fact, 31% of this year's Premier 100 IT Leaders reported an increase in their contract-labor budgets (by 19%, on average).
The trend toward outsourcing requires IT executives to apply their leadership smarts in a variety of sticky situations. Here are some of their tips on everything from how to cope with choosing vendors and negotiating contracts to laying off employees and dealing with shattered morale.
Choose the Right Vendor
Outsourcing is a long-term relationship, and choosing the right vendor is crucial to meeting your technology, business and financial objectives, says Martin Cole, global managing partner of outsourcing and infrastructure delivery at Accenture Ltd. and a 2003 Premier 100 IT Leader honoree. As both a provider and customer of outsourced services, Cole says you should base your decision on a vendor's industry knowledge, technical competency, financial solvency and service-delivery infrastructure.
"The biggest success factor is picking the right vendor," agrees Robert W. Reeg, senior vice president of systems development at MasterCard International Inc. "You've got to have a partner that you feel you can trust."
And justifying outsourcing involves more than just looking at the cost benefits, says Timothy C. O'Rourke, vice president for computer and information services at Philadelphia's Temple University. The university recently hired a consulting firm to help it decide whether to outsource its telecommunications and data network operations, which are now handled by a 40-person staff. Outsourcing would probably result in lower overall service quality and would be unlikely to deliver much cost savings, says O'Rourke. But the move would let the school more quickly access and absorb new telecommunications technologies, he says.
For some companies, the outsourcing decision might hinge on lowering the cost of maintaining legacy code or quickly gaining expertise in specific areas through partnering, Cole says.
But simply ensuring that an outsourced project delivers on the promised benefits can be a huge task without proper oversight, Reeg says.
According to Golden, CNA's upgrade project failed because there wasn't anyone in a "position with clout" in charge of the relationship who understood the technology and the business process. The vendor "was never positioned to be successful," he says.
The key, Reeg says, is to assign clear ownership and accountability for a project and ensure that appropriate processes exist to measure results regularly. When it comes to outsourcing, "you get what you inspect, not what you expect," says Reeg, whose philosophy has taken him to MasterCard's India development center at least 14 times in the past four years.
The loss of jobs that sometimes results from outsourcing decisions can be a particularly sensitive issue, O'Rourke says. Temple hasn't yet decided whether it will outsource its telecommunications operations, but because the university is heavily unionized, O'Rourke says he will pay special attention to minimizing any job losses that may occur.
"It's a huge and very significant factor," O'Rourke says. "It's just something that I will always have to consider throughout this process." Outsourcing can evoke "pure fear" among employees, he says, and wreak havoc with their morale. So the rule in all cases is to be as candid and communicative as possible about what's going on.
If outsourcing makes business sense, adds Golden, job losses are inevitable. But CNA takes steps to help staffers make the transition. Long before any outsourcing decision is made, for instance, the details are communicated in a series of meetings for the IT organization, he says. When applications are being outsourced, employees are informed about new skills and technologies that are important to CNA. They are encouraged to acquire those skills under a company initiative known as "Know IT Now or No IT."
At Temple, part of the assessment effort involves looking at the possibility of getting the outsourcing vendor to absorb the affected employees.
In any case, communication is key to coping with the array of issues that outsourcing can raise.