Premier 100: Insourcing/outsourcing debate driven by cost, agility

Computerworld - SCOTTSDALE, Ariz. -- Cost pressures and the need for increased business agility are leading a growing number of companies to shift more of their IT work offshore, according to panelists who discussed sourcing issues at the Computerworld Premier 100 conference here yesterday.
On average, 60% of IT spending now goes to external companies, while 40% goes to staff, said Bart Perkins, the panel moderator and the managing partner at Leverage Partners Inc., a Louisville, Ky.-based CIO consulting firm. Those ratios are going to change, he said, as a growing number of companies turn to offshore outsourcing.
That's the trend at Agilent Technologies Inc., a Palo Alto, Calif.-based spin-off of Hewlett-Packard Co., which outsources about 35% of its IT work today. Two years from now, the company expects to outsource about 60% of its IT functions, particularly in areas such as application development and maintenance. The reason: Seven consecutive quarterly losses are driving the company to reduce costs and become ever more agile in the market, said Marty Chuck, CIO at the instrumentation device maker.
The cost of labor in places such as India is "too compelling," said Chuck, referring to a figure cited by Merrill Lynch & Co. Chief Technology Officer John McKinley in an earlier conference session. (McKinley estimated the savings from offshore outsourcing of IT at 40% to 50%.)
Currently, 90% of Agilent's IT workforce is based in the U.S. and Europe.By 2005, Chuck sees that ratio "flipping," with just 30% of the IT workforce remaining in the U.S. and Europe.
Agilent isn't alone. A few years ago, Northbrook, Ill.-based Allstate Insurance Co. created a wholly owned IT subsidiary in Northern Ireland to help cut IT costs and allow faster response to competitive pressures. Even with a group of 900 highly skilled IT employees there, Senior Vice President and CTO Cathy Brune finds herself struggling with whether to shift operations elsewhere.
"Any time you go outside your four walls, there's risk associated with it," said Brune. "But if you have a very smart team, you can figure things out and learn from others."
"We'll be doing more outsourcing in the next two years," said George Lin, vice president and CIO at Documentum, a Pleasanton, Calif.-based enterprise content software vendor. Both near-shore and offshore vendors "are becoming more savvy about understanding my unique business," said Lin. That's one reason he expects his company to move a growing portion of its software quality assurance and maintenance offshore.
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