Outsourcing, adieu: Companies retake the reins on IT services

After giving away the farm, some IT departments are bringing select outsourced services back in-house. Here's how they're doing it.

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The problem(s) with outsourcing

As the saying goes, when you're up to your butt in alligators, it's hard to remember that your original objective was to drain the swamp. Business executives who followed the admonition to "stick to your core competency" determined that IT was not their companies' core competency and so waded into the outsourcing swamp unawares.

Problems that are roiling those waters include:

Lopsided decision-making. Kevin Chase, CIO of Energy Future Holdings (EFH), is in the process of what he calls "rightsourcing" (details below) one of the biggest outsourcing deals ever dating back to 2004 when Chase's company was known as TXU Corp. The goal of such outsourcing agreements at the time, Chase explains, "was to hold a single outsourcer accountable for delivering all IT services -- as well as many business functions -- while achieving cost reductions through operating efficiencies and economies of scale."

The problem with this approach was "the amount of control and decision-making power that was put in the hands of the outsourcer," Chase says. "That makes it difficult to effectively manage risk and strategic opportunities over the long term."

Poor service quality. Steve Martin, founder and partner of Pace Harmon, a McLean, Va.-based outsourcing consultancy, has certainly heard the stories IT executives like Currier and others tell. While he prefaces his comments by saying he "hates to bash outsourcers," Martin frankly admits that some outsourcers are "not doing a great job. If you talk to enterprises about their outsourcing providers, there's a high level of dissatisfaction."

Pace Harmon recently released a report on insourcing that echoes that observation: "Many outsourcing deals are failing to meet expectations from an overall service delivery value perspective," the report says, specifically citing "escalating cost-of-quality issues" and "inconsistent quality during service transition and delivery" as concerns.

A lag in technology. Shouldn't companies that set themselves up as technology experts be able to deliver that technology? Sure, in theory. But as every CIO knows, it's hard to keep up with the pace of technology. Outsourcing firms have been ensnared by changes in technology just as other firms have.

Just one example: "Some managed service agreements have a pricing structure based on the number of physical servers," says Scott Stewart, research director for ITNewcom, a Brisbane, Australia-based consulting firm. "That means that outsourcing provider has no incentive to deploy virtualization and consolidate infrastructure. That's a problem." The increasing capabilities and multiplying permutations of cloud computing confuse the outsourcing issue even further.

These technology changes have driven some companies to insource and others to compress outsourcing deals from covering seven to ten years to covering three to five years, with one-year renewal options. Technology simply moves too fast for ten-year contracts, sources agree.

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