Outsourcing: The 'O' Word Reconsidered

Outsourcing is finally being seen as just another tool in the CIO's toolbox

Seven hundred ninety-one. That's the number of companies that, according to CNN commentator Lou Dobbs' Web page, are either "sending American jobs overseas or choosing to employ cheap overseas labor." Since 2003, Dobbs has kept a running tally of companies that, in his view, are "exporting America." In that same time frame, it has become increasingly difficult to find a CIO who doesn't clam up at the mention of outsourcing or offshoring for fear of becoming yet another name on that list.

Today, with the presidential election a distant memory and the press frenzy subsiding, the subject has cooled off a degree or two. While outsourcing is still controversial, we've reached the point where most IT executives -- whether they believe it's a good thing, a necessary evil or an act of treason -- agree on this: It's time to take a realistic look at outsourcing.

CIOs say it's only by talking openly about outsourcing and offshoring plans that they can help allay uncertainty about the topic. Moreover, they reason that it's far better to concentrate on what they can control, not on what they fear. And what they can control is the value they provide.

Jerry Bartlett of Ameritrade
Jerry Bartlett of Ameritrade
"This may be the year it becomes less of a dirty word," says Jerry Bartlett, the Columbia, Md.-based vice president of application development and quality assurance at Ameritrade Holding Corp. "Cooler heads are beginning to prevail, and IT leaders are recognizing they need to move beyond the rhetoric and step up to their leadership roles."

"The shock has passed, and people are beginning to say, 'This is reality,'" agrees Michael Corbett, president of Michael F. Corbett & Associates Ltd., an outsourcing consulting firm in Lagrangeville, N.Y. "They've realized that companies are going to make certain decisions along these lines, and they're starting to think about how to position themselves."

Moreover, managers have had enough experience with offshoring to understand that it's not likely to send their companies over the rainbow. "The idea that you're going to save 70% to 80% in development costs is a myth," says John Wade, CIO at Saint Luke's Health System in Kansas City, Mo. "You have to help guide [offshore providers] through the process, and with the additional overhead, savings are more like 20% to 30%."

Just Another Option

Whatever view you take of outsourcing, it's pretty clear that the entire spectrum of sourcing - outsourcing, in-sourcing, offshoring, near-shoring and rural sourcing -- has gained a place as a bona fide tool in the CIO's tool belt. "Outsourcing was previously viewed as an end, but now it's viewed as one of various means to an end, with the end being more efficient development, lower costs or higher quality," Bartlett says.

Many CIOs see it as their responsibility -- and even an economic necessity -- to at least consider some type of sourcing. "Every service company today has to have an offshoring component," Wade says. "You can't afford to say, 'We'll use only U.S. labor,' and that's creating a problem for our country."

Saint Luke's doesn't use offshore outsourcers today, but every three years, Wade conducts a formal review to see whether outsourcing would reduce his IT costs. "You have a responsibility as CIO to provide the most cost-effective service you can," he says. "If you aren't, you have to look at your options."

The right question for CIOs, then, is not, "Should we outsource?" but, "Are we the best at what we do?"

In fact, the exercise of analyzing outsourcing opportunities can turn into a positive for IT. Mark Gottfredson, a partner at Bain & Co., a management consulting firm in Boston, recalls being asked to examine whether an IT department should be outsourced.

The review process revealed ways to make the department more competitive, and that saved it from an outsourced fate. "If you go back 10 years, IT was a function that everyone had to have, but you didn't know if it was competitive or not," Gottfredson says. "Today ... the question is, 'What is our cost per line of code versus the best in the world?'"

But your IT department can't adopt that philosophy if it's cringing in fear of the next memo. "If you're open and honest and candid, that can be a motivator," says John Dick, CIO at Regions Financial Corp. in Birmingham, Ala. Lately, the company has been mulling the idea of moving to a market-driven pricing model for its IT services. "As we do that, we have to strike the right balance between price and the service we offer," Dick says. "If we can't, there are other options for the business. It's a driver for us to measure and demonstrate our value to the business."

Corbett advises organizations to begin educating their workforces about the realities of the business and its competitive needs. "People have a right to understand what the business's future prospects look like, how the market is changing and what it will take for the company to be successful," he says.

Bartlett says it's important to define the particular reason you're outsourcing and to honestly communicate that with your staff. For instance, outsourcing at Ameritrade is primarily viewed as a way not to cut costs but to increase speed of service delivery.

Since Ameritrade emphasizes innovation, Bartlett's staff understands that if a function is outsourced, it's because it's considered nondifferentiating. "Even with our development staff, we have discussions around initiatives that may or may not be good candidates for sending out, because they understand the context within which we're operating," he says.

For David Rice, CIO at Siemens Medical Solutions Inc. in Malvern, Pa., keeping his IT staffers competitive means constantly reminding them to "skill up."

"We have to think and act like we're competing for our business; it's not our entitlement," he says. "The guys who work with me get tired of hearing me say it, but we've always got to skill up to stay on top of whatever discipline is needed."

Rice empathizes with those who find it difficult to constantly upgrade skills. But if they choose not to, "they really shouldn't be later lamenting that someone else who had better skills got the opportunity to do the business," he says.

For people who want to play the skill-up game, Corbett advises moving from "content" to "context" jobs. "If your job is reacting to e-mails requesting change to pieces of code, that's content work that can be done anywhere by skilled people," he points out. Context-oriented jobs are those in which you need to understand how technology connects to the user. "People need to adjust their careers to reality," he says.

Warts and All

More people are seeing outsourcing for what it is, warts and all. "It's really not that different from any other deal," Rice says. "Yeah, labor costs are remarkably less expensive, but what about the network costs to effectively communicate with that site? We've learned through the school of hard knocks to look under the hood."

EquaTerra Inc., a sourcing advisory firm in New York, says managing offshore IT relationships costs about 8% of the contract's value per year. And Bain estimates that businesses need to retain 7% to 12% of their original head count to manage outsourcing relationships. "People are becoming more realistic about the costs and better skilled at assessing the risks," says Stephen Johnson, an outsourcing partner at Kirkland & Ellis LLP, an international law firm in Chicago.

But even as CIOs become more willing to talk about outsourcing, it still remains a difficult topic because of the lives it touches. "You can have all the right business explanations and intellectual underpinnings for why offshoring makes sense, but if you're the guy who isn't going to have a job tomorrow, that doesn't feel so good," Rice says.

"The people who scare me the most are the ones who talk as if they've got it all figured out," he adds. "I've found [outsourcing] very difficult, but in our global economy, to not do it is a mistake." Brandel is a Computerworld contributing writer in Grand Rapids, Mich. Contact her at mary.brandel@comcast.net.

Copyright © 2005 IDG Communications, Inc.

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