How to Outsource-Proof Your IT Department—A New Game Plan

Coordination and communication expenses erase much of the savings derived from offshoring work.

CEOs increasingly believe that sending IT work offshore will magically reduce costs and increase productivity. To combat this outsourcery, CIOs need a little white magic of their own.

Kevin Sparks is being chased by ghosts. They're the ghosts of outsourcing past, and they're telling him to change his 200-person IT department at Blue Cross Blue Shield (BCBS) of Kansas City before his past becomes his future.

Sparks's history includes a stint at Yellow Freight where, he says, a large outsourcing deal with Arthur Andersen fell apart. Much of the outsourced IT had to be brought back in-house, causing an upheaval in his staff and operations. He also worked at a small managed health-care provider. Because he was short-staffed there, he used offshore developers to help fill in some of the holes in a packaged application he was installing to meet the Y2K deadline and to retire the company's legacy system. The code the outsourcers produced, Sparks says, was fine, but the coordination and communication expenses erased much of the savings derived from offshoring the work.

The common theme in these experiences was that the business thought that Sparks's IT group was neither flexible enough, nor cost-efficient enough nor productive enough to compete with the outsourcer—impressions that were often revealed to be wrong after the fact.

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"There's always the perception among businesspeople that 'I'm paying too much and not getting enough return'," Sparks says. Especially in large companies, "a lot of the decision to outsource has to do with the fact that they're not in touch with what's going on in IT". CIOs haven't helped, Sparks believes, because they've failed to provide clear-cut proof that they can compete with outsourcers. Sparks wants to make his group competitive in every area that the companies he's worked for have used to justify outsourcing: cost, efficiency, responsiveness, productivity and quality. Here's how he's doing it:

  • He has consultants helping him prepare for a Capability Maturity Model Integration (CMMI) assessment of his IT processes—just as the Indian offshore outsourcing companies do. This will give the business a clear picture of the efficiency, productivity and quality of Sparks's department to compare with what outsourcers have to offer.
  • He's started a project management office to coordinate all midsize and large development projects to improve on-time performance.
  • He's created an architecture group to standardize systems and apps wherever possible to reduce costs and increase productivity.
  • He's developed performance metrics. Sparks's budget is now "transparent", he says, so the auditors can see exactly where he's spending and how much his people cost. At Kansas City prices, that's not a bad idea.

Oddly enough, Sparks doesn't have to do all this. BCBS is a non-profit, and doesn't face the competitive pressures of a public company. And with concerns about privacy and security running high in health-care, health-care companies assume a huge risk by sending anything out of house.

But Sparks is doing it anyway. Why? Getting better today means he'll be more competitive tomorrow, when economics and industry fluctuations begin to make a more compelling case for outsourcing.

And they will.

Reprogramming programmers

There are areas of IT where internal groups have a distinct competitive advantage over outsourcers, and there are areas of IT that are destined to move to lower-cost providers. CIOs who invest where they have advantages today stand a better chance of retaining a healthy IT department tomorrow, one that provides strategic value to the business even after IT's traditional currency of value - software code - moves to lower-cost providers.

"[CIOs] need to understand where outsourcing makes sense, rather than be reactive and have it thrust upon them by under-educated business executives," says Stan Lepeak, vice president of Meta Group.

Coming to this understanding—and acting on it—will be painful, and it will require a break from what made people fall in love with IT in the first place: writing code. The new emphasis will be on doing all the things that come before coding: business process design, requirements analysis, and envisioning architectures of data, software applications and user screens that make businesses run more efficiently. This is as much art as science and will require collaboration every bit as much as coding requires solitude. Many programmers will not have the skills—the communication skills, the understanding of business processes—to make the transition. The other areas of emphasis—project management and vendor management—may not interest them. CIOs will need to make heavy investments in retraining to keep the people they have and to support those who are unable to make the transition; if they don't, there will be much less reason to keep the IT department—and the CIO—around after coding and maintenance and support are gone.

What will move offshore

A single point of clarity has emerged from the furore over offshore outsourcing: Certain types of knowledge work will migrate to areas with lower labour costs as inexorably as certain types of manufacturing moved overseas in the 70s and 80s. The economics are inarguable. With the Internet, cheap telecomms, well-educated workforces that speak English and costs of living as little as one-tenth compared to those in the West, many countries are equipped to do knowledge work for much less money and, arguably, the same level of quality as the West. Over 104,000 US IT jobs moved offshore between 2000 and 2003, according to the Information Technology Association of America, and nothing suggests that the trend is going to change or even slow.

But there are a few catches. The outsourcer's economic advantage is fragile and liable to fracture if the knowledge work being sent offshore doesn't have the same character as the manufacturing work that went before it—that is, clearly defined, repeatable jobs that do not require collaboration or transcontinental oversight, and are easily measured and verified for productivity and quality. "The majority of successful offshore work is still the airtight project that doesn't require collaboration," says Meta's Lepeak.

That excludes "follow the sun" collaborative application development (in which one group of programmers hands off code to an overseas group at the end of each working day), says Rick Davidson, senior vice president and Global CIO for Manpower, an employment services company. Davidson says that in his experience, "any time you require a great deal of collaboration, the mechanics become burdensome".

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