Outsourcing: Bringing IT Back Home

Faced with a tight economy, CIOs are scrutinizing everything -- including outsourcing. A number of them have taken back the keys to their shops, saving lots of cash. Here's how you can do it too.

By Stephanie Overby
Sat, March 01, 2003

CIO — Cecilia Claudio is an IT outsourcing veteran. With 31 years of IT experience, she was one of the architects behind the 1994 landmark $3.2 billion outsourcing deal between Xerox and EDS. As one of the first megadeals in the world of IT outsourcing, it infected countless CIOs with outsourcing fever. Back then, Claudio says, there were "real reasons why Xerox needed to do that" -- the most important being the need to control IT costs on a global scale.

Nine years later, having watched numerous peers sign mega-outsourcing deals that have turned into major disappointments, she is wary about farming out IT. "I’ve never been a major proponent of outsourcing," says Claudio. "Sometimes people jump into it without really understanding what it means and why they’re doing it. Then two, three years into it, they’re very disappointed and they don’t know how to get out of it."

It’s no secret that IT outsourcing has a high failure rate. A whopping 78 percent of executives who have outsourced an IT function have had to terminate that agreement early, according to a November 2002 study from DiamondCluster International, a Chicago management consultancy. The top reasons for CIO dissatisfaction: poor service, a change in strategic direction and costs.

"IT outsourcing has been around long enough now that we are starting to see the second phase of it -- CIOs are renegotiating terms, contracts are expiring. Some deals just aren’t working out at all," says Michael Murphy, who has been doing and undoing outsourcing deals for the past decade as a partner in the technology group at the Los Angeles offices of law firm Shaw Pittman.

But rather than renegotiate disappointing deals or contract with other vendors, CIOs are finding that if they want something done right -- or at a lower cost or in a more strategic fashion -- they’ve got to do it themselves. "Reinsourcing is becoming more common," says Rudolf Hirschheim, the Tenneco/Chase International professor of information systems at the University of Houston, who is conducting a study of the trend. "Many companies are finding that outsourcing simply doesn’t provide the cost savings they had hoped for. Or they find themselves burdened by the contract, which doesn’t allow them the flexibility they need."

The profiles below show how three CIOs brought outsourced work back into the fold -- and how reinsourcing saved money.

Walk Like An Outsourcer

A few years after leaving Xerox, Cecilia Claudio got burned by a big-name outsourcer. When she took over as CIO of Anthem Blue Cross and Blue Shield in 1996, she inherited a five-year, $30 million data center deal with Unisys. Claudio was dissatisfied with service levels and increasing costs, so she got out of the contract and rebid the work, ultimately going with Affiliated Computer Services.

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