All or Nothing

GM and Bank One take opposite approaches to outsourcing.

Insourcing vs. outsourcing. It's the great debate these days for many IT executives who are struggling to cost-justify the most effective way to run their IT operations.

But experts say it's not a question of right or wrong, but of which strategy best fits a company's business model.

General Motors Corp. and Bank One Corp. answered the question by taking divergent paths. Along with the business rationales behind their strategic choices, the CIOs at the two companies offer up some of the tough lessons they have learned along their separate ways.

GM's Third Wave

For many people in the IT industry, GM has become synonymous with outsourcing. The $186.6 billion auto giant purchased Electronic Data Systems Corp. in 1984 from Ross Perot and outsourced virtually all of its IT operations to the Plano, Texas-based IT services provider under a precedent-setting 10-year, $40 billion agreement.

In 1996, GM spun off EDS to operate as a stand-alone company and began redistributing some of GM's IT work to other services firms such as IBM, Cap Gemini Ernst & Young and Accenture Ltd. During its 12-year exclusive arrangement with EDS, GM encountered its share of problems in the relationship, but the automaker's commitment to an outsourced model remains fervent.

"If you don't put a model in that works, it makes it look like outsourcing doesn't work," says Ralph Szygenda, GM's CIO since June 1996. He insists that most companies that switch from an outsourced to an in-house approach "typically don't have the right model in place to manage outsourcing." As a result, they mistakenly end up blaming outsourcing as a discipline.

Szygenda acknowledges that "GM had done things wrong in outsourcing its work, but we changed the model; we didn't go back and insource." Early outsourcing mistakes that GM later corrected include contracting a single source for services and farming out management and IT architecture responsibilities to a third party.

Today, in what he calls the company's third wave of outsourcing, Szygenda and his team of 1,700 IT employees manage GM's outsourcing relationships with a multitude of vendors, including all of the major outsourcing companies. The GM IT group also oversees the various vendors' relationships and alignment with GM's eight global operating groups and major subsidiaries, including GMAC Financial Services, Hughes Electronics Corp. and GM Locomotive Group.

During the first wave of outsourcing, by contrast, GM handed all of its IT activities over to EDS. "Pricing was too high because there wasn't any competition," says Szygenda.

Even if a single outsourcer has the best intentions to get the job done, there's no incentive for it to complete tasks within budget and scope, because there's no threat of it being replaced, he notes.

GM has also learned that it's a mistake to outsource strategic management of its IT environment and architecture to a third party, which is what it did under the original agreement with EDS. After Szygenda was brought in and launched the second wave in 1996, he brought strategic IT management and information systems architecture in-house to be driven by GM. Szygenda put in place two layers of IT management at the start of the third wave. These managers report to him and oversee GM's relationships with outsourcers and the business units that they support.

"Every CIO who reports to me has a budget that they're measured against," says Szygenda. The outsourcers all have to work within the framework that GM has devised, and while they're required to understand the GM businesses that they support, "they don't direct the business," Szygenda says.

Szygenda and his lieutenants believe that GM's existing outsourced model works well for a company its size because it brings the auto giant improved speed and agility for IT decision-making and execution. For example, before GM brought Kirk Gutmann over from Navistar International Corp. in 1997 to be global product development information officer, GM's global operations were bloated, the quality of its vehicles was sagging, and it was taking nearly four years for the company to bring a new vehicle to market.

By tapping into a group of specialty IT service providers, including Microsoft Corp. and Hewlett-Packard Co., and automating many of GM's operations, Gutmann has been able to help remove more than $1 billion from GM's costs and reduce the time to market for GM vehicles to 18 months.

GM's revised outsourcing approach of deploying a wide variety of IT vendors instead of a single vendor such as EDS "has allowed us to shift resources more quickly," says Gutmann. Syzgenda says it has also helped bring about double-digit gains in GM's engineering productivity, in part through GM's savvy use of technology.

GM has driven other hefty bottom-line benefits from its outsourcing model. In 2001 and 2002, GM achieved its first consecutive years of market-share gains in 25 years. The company has also cut $800 million annually from its IT costs for the past seven years. Still, Szygenda is the first to acknowledge that GM's outsourcing model wouldn't work for all companies. "There is no one answer for any company. You have to go in and decide what is best for that company," he says.

Depositing IT at Bank One

Chicago-based Bank One has taken a considerably different approach to managing its IT operations. In 1998, it signed a six-year, $1.4 billion contract with AT&T Solutions to manage the bank's voice and data networks and build an IP-based networking platform.

As part of that agreement, the bank also inked a seven-year, $420 million pact with IBM to manage most of its data center operations, including help desk support. At the time, Bank One, then called Banc One, was in the process of merging with First Chicago NBD Corp.

Since then, a lot more than the name has changed. The bank brought in a new CEO, Jamie Dimon, a tech-savvy veteran of Citigroup Inc., and CIO Austin Adams, the former CIO at First Union Corp. in Charlotte, N.C. The bank also negotiated to end its original contracts with AT&T Solutions and IBM before they were due to expire.

Today, Bank One is intent on maintaining a ratio of 90% in-house IT staff and 10% contractors, most of whom are application developers. Compare that with a 70%-to-30% ratio just two years ago. The key driver behind the change is the dramatic shift in the IT labor market since the go-go days of the dot-com craze, when Bank One was having trouble recruiting skilled IT workers.

"If we would have approached [IT and telecom workers] about working for a bank four years ago, they would have laughed at us," says Adams, who in March 2001 joined the bank, which has $277 billion in assets. "The world has changed a lot in the last three or four years. We've been able to attract a lot of technology talent from firms that have been challenged over the last couple of years."

One of the key accomplishments under the insourced IT model was a $500 million system conversion project that put all of the bank's transaction-related systems, including deposit, loan and treasury systems, on a single platform. The project started in 2001 and was completed in four stages, wrapping up in November 2002. The bank expects the conversions to help it cut $200 million in annual operating costs, improve customer service and give it the ability to more quickly implement new products and services.

Adams insists the decision to rescind the outsourcing agreements with IBM and AT&T Solutions last year wasn't a result of dissatisfaction with either vendor. In fact, the bank still does business with both, he says.

"It's not an issue with an entity; it's philosophical about how we want to do business," says Adams. "We feel strongly that technology is a key part of our company, and our ability to drive that is key and something that we want to more directly control."

It also has to do with containing costs. Adams says the business case for outsourcing those IT and networking functions no longer exists for Bank One. For instance, he notes that the incremental cost for a company its size to buy hardware, software and services directly from manufacturers and service vendors "is significantly lower" than the premiums it would have to pay an outsourcer to provide those resources.

Adams acknowledges that there's a lot of divergence among CIOs over outsourcing. In Bank One's case, he says, "we have a CEO who's very technology-literate and very supportive of us and our ability to manage this space." That helps explain why Bank One has recruited 1,800 IT professionals during the past 17 months, bringing its IT staff to 4,000 people.

Although Adams and Bank One remain committed to insourcing, he wouldn't rule out outsourcing some of its IT functions under the right circumstances. "I wouldn't bury my head in the sand if there was a better value proposition," he says. "It isn't a philosophy embedded in stubbornness but more about the environment and the business case and the economic conditions."

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Ralph Szygenda, CIO at General Motors Corp.
Austin Adams, CIO at Bank One
General Motors

CIO: Ralph Szygenda

IT Challenge: Successful management of GM’s global outsourcing model.

The Payoff: Improves speed and agility for IT decision-making and execution, and increases engineering productivity.

Lessons Learned: Don’t rely on a single outsourcer for services; don’t farm out management and IT architecture duties to a third party—keep them in-house.

Bank One

CIO: Austin Adams

IT Challenge: A $500 million system conversion that put all transaction-related systems on a single platform. Recruited 1,800 IT professionals, bumping up in-house IT staff to 4,000.

The Payoff: Saved about $200 million in annual operating costs, improved customer service and gained the ability to implement new products and services more quickly.

Lessons Learned: Use available talent to your advantage—four years ago it would have been nearly impossible to recruit the people who worked on the conversion.

Copyright © 2003 IDG Communications, Inc.

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