Feature

Outsourcing Can Mean Big Deals, Big Savings and Big Problems

Large-scale outsourcing deals promise big savings, but they fail half the time. Here’s how to make them work for you.

February 01, 2006 — CIO — When Campbell Soup CIO Doreen Wright was trying to cut costs to fund a multimillion-dollar global investment in SAP, she found help from what many might view as an unlikely ally—her outsourcing vendor. Without being asked, IBM reexamined the outsourcing contract and identified several million in services it was providing that could be cut with minimal pain to Campbell. Recognizing the financial hurt that move might cause her partner, Wright took the sting out of it by working with IBM to identify new outsourcing services (which, by the way, would also further reduce her IT operating budget) and awarded the vendor several other projects in the following months. "They were very forward-thinking, and there was a tremendous amount of teamwork involved," says Wright. Bottom line: Campbell cut its IT costs and was able to go ahead with the SAP project, while IBM actually saw its revenue increase.

A CISR-CIO Study

This is Part 3 of a three-part series about outsourcing strategies and success models, defined in original research by MIT's Center for Information Systems Research and CIO magazine.
Part 1: Simple Successful Outsourcing
Part 2: Working with Offshore Partners Requires CIO Oversight

The Campbell-IBM relationship is an example of what Jeanne W. Ross, principal research scientist at MIT’s Center for Information Systems Research (CISR), calls "strategic partnership" outsourcing, in which a single outsourcer takes on responsibilities for a big bundle of IT services. These contracts include everything from mainframe operations and network management to application support and help desk services. The success of strategic partnerships depends on mutual benefit. CIOs set up these large, long-term deals to cut costs, access variable capacity and focus on their own core competencies. Vendors sign on not only to make money by taking advantage of their internal best practices and economies of scale but also in the hopes of becoming a first-choice provider for the client and moving up the value chain of IT services.

When strategic relationships are good, they’re very good. Client and vendor work together, and the benefits accrue to both parties’ bottom lines. But when they are bad, they’re awful. Client and vendor can develop an adversarial relationship and become embroiled in bitter contract battles. In fact, half of all strategic partnerships fail, according to a study by CISR and CIO.

The two other outsourcing models identified in the research have higher success rates because they’re simpler for both parties. Transaction relationships, in which an outsourcer performs a well-defined process that has clear business rules, work out for CIOs 90 percent of the time, while co-sourcing alliances, in which client and vendor jointly manage projects, are successful for the client in 63 percent of cases, according to the CISR-CIO research. (See Success and Failure in Outsourcing for a summary of the research findings.)