End of the Affair

Taking outsourced IT functions back inside is tricky, but planning ahead can minimize the risk.

Ellen Barry, CIO of the Metropolitan Pier and Exposition Authority, the organization that runs Chicago's giant McCormick Place convention center, faced a problem when she came aboard in 2000. Networking and technical support services were being handled on an event-by-event basis by an outsourcer under a contract dating from the mid-1990s. As a result, every time a show came into the 2.2 million-square-foot facility, a new network had to be put in place from scratch, adding expense, complexity and risk for McCormick and its customers.

Barry, who had previously helped outsource a number of IT functions when she worked for the city of Chicago, decided to insource. She viewed the ability to meet the needs of exhibitors as a critical function for her organization, not something that should be passed to an outside vendor. Building capacity in-house would let her create a flexible infrastructure that could be adapted to each show's needs.

Although Barry says she didn't reckon on the tenacity of the outsourcer, which pulled every political string in the state to hang on to the job, she did prepare a thorough plan of action. Thanks to that planning, she managed the transition on schedule and without problems.

Barry isn't alone. Many IT organizations decide for a variety of reasons that an outsourcing arrangement just isn't working, and they pull those functions back inside. It's not a trivial undertaking. There are a host of challenges, not the least of which is the likelihood that your organization's knowledge base has probably eroded during the time the function has been outsourced. However, IT managers who have insourced say it can be done, with planning and resourcefulness.

Outsourcing Realities

Outsourcing is a tricky business, and the engagements don't always end well. A recent study by DiamondCluster International Inc. titled "2004 Global IT Outsourcing" reveals that more than a fifth of outsourcings by the survey's 182 participants in the previous calendar year ended prematurely. However, only a quarter of those dissatisfied with outsourcing bring the work back in-house, says Tom Weakland, managing partner at Chicago-based DiamondCluster.

"The odds are that if you outsourced it to begin with, it probably wasn't a strength," he explains. "Furthermore, it takes time to re-establish the organization and transition the outsourcer's best practices."

If you're considering pulling an outsourced IT function back in-house, be sure you fully understand your situation and have looked at all the issues. For starters, there's plenty of disagreement about what should validly trigger an end to an outsourcing deal.

A Last Resort

"Termination clauses should be invoked only in cases of egregious nonperformance," says Alex Kozlov, director of marketing at Compass America Inc., a consulting firm in Oak Brook, Ill. "The termination penalty should be stiff if the client walks away without cause."

But Paul Roy disagrees. "Reserve the right to terminate for convenience: mergers, acquisitions, changes in market," says Roy, a partner at Chicago-based law firm Mayer, Brown, Rowe & Maw LLP. "Usually there is a cost, but that can be anticipated and mitigated by taking over contracts, buying assets and hiring people so the supplier ends up less stranded by costs."

There is no right or wrong answer to the trigger question. Everything depends on what is spelled out in the outsourcing contract, so address these issues in detail, Roy says.

Before pulling the plug, make sure your strategy is sound. When Michael Palmer, CIO at Allied Office Products Inc. in Clifton, N.J., made a wholesale shift from outsourcing to insourcing in 2002, he used the transition as a chance to review his IT strategy.

"We had initially outsourced the entire Web development and maintenance piece, from soup to nuts, for about $2.5 million a year," he says. But the Web was becoming a crucial customer interface, and with a goal of generating at least a quarter of all company revenue through that channel, it was too strategic to outsource. In contrast, Allied chose to outsource billing of its 16,000 customers to a vendor with strong expertise and potential economies of scale in that area.

In Barry's case, insourcing led to a new networking strategy. "We totally redesigned the approach to networking and decided to add connections to the Hyatt hotel, which is also owned by [the Metropolitan Pier and Exposition Authority], and also the Navy Pier facility, three miles away," she says.

Insourcing veterans recommend considering the following issues:

Understand your existing outsourcing relationships, not only on a contractual level but also, if possible, on a day-to-day level. Know what work is being done and how.

Compare your operations with others to help determine the pros and cons of insourcing.

Understand your internal costs so that you can make a reasonable choice between insourcing and outsourcing.

Realize the true costs of taking something back. Many outsourcing arrangements involve off-balance-sheet transactions for things like hardware that you will need to replace.

Look inward. It's critical to know what additional resources you'll need internally and what kind of management support you'll get. Will you need to hire more people? Will you get full support from above, or will you meet strong internal resistance? Barry's outsourcer appealed to the state legislature and other politicians in an attempt to halt the insourcing. But she had built an airtight case and got support from key people in her organization.

Convince employees that the insourcing will work, and give them the right tools and training to succeed.

Build some wiggle room into the transition plan. Don't commit to a specific deadline for shifting the work; make it a window of 60 to 90 days.

"You must find your own philosophy," says Palmer. "Ours is that if it touches the customer, it needs to be flexible." When dealing with an outsourcer, he says, that requirement for flexibility translates into a carefully crafted service-level agreement and "a well-defined exit lane" from the contract if it no longer fits Allied's needs. For example, low transaction volumes or changes in business strategy would pave the way for Allied to bring its outsourced functions back home.

Earls is a freelance writer in Franklin, Mass. You can contact him at alan@alanearls.com.

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TERMINATION MATRIX

Reason the customer terminates:
Conve-

nience

Cause A Cause B Vendor acquired Customer acquired Force majeure
Vendor will provide transition services. x x x x x x
Vendor will pay customer's transition costs.
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x
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x
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Customer will pay vendor's demobilization costs. x
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x
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Customer will pay a termination charge. x
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x
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Vendor will sell the transferred assets to customer at a specified value. x x x x x x

Gregg Kirchhoefer, a senior partner at Kirkland & Ellis LLP in Chicago, says the details of how an outsourcing arrangement terminates are as crucial as any part of the agreement. During contracting talks, he uses a comprehensive termination matrix to summarize and clarify the rights and responsibilities of both parties under various termination scenarios. The simplified and abridged adaptation above illustrates the concept.

Copyright © 2004 IDG Communications, Inc.

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