How to Say No to Outsourcing

The boss may assume that outsourcing is the answer to everything. But CIOs can't afford to assume anything. They have to know.

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When it comes to outsourcing, Dowds would never say never, though. Ten years ago, Vanguard outsourced its LAN administration in order to cut costs. Four years ago, Dowds brought that work back in-house for the same reason. In both cases, the sourcing decision achieved the desired effect. "If we discovered that our competitors were substantially lowering their costs by outsourcing and closing the gap in a material way, we’d have to reexamine our decision," he says.

Meanwhile, Dowds displays fiscal responsibility by employing cheaper contract labor (which usually amounts to 8 percent of IT’s total labor pool) that he can shed when times get tougher. "That way, [the business] is not asking, ’When is IT going to wake up and outsource like everyone else?’" Dowds says. Thus far, there hasn’t been a case where insourcing development was so expensive or counterproductive that Dowds couldn’t build a business case for it.

"You don’t ever want to get yourself into a position where you have to outsource because you’re not good at what you do," says Dowds. "You do it because there are other reasons in the business that drive you there."

$100,000 Well Spent

At Henry Schein, economics weighs heavily in outsourcing decisions. "We put a ton of time into benchmarking," says CTO and Senior VP Jim Harding, who spends between $50,000 and $100,000 annually on consulting services to compare internal costs and service levels to those of major competitors and third-party providers.

Harding has done limited outsourcing as IT’s internal costs and quality have mostly held their own, even in areas that might not seem core to the $4.6 billion distributor of dental supplies. In fact, Harding chose not to outsource the help desk (which consists of a staff of six, supplemented with interns) because no outsourcer could touch his actual costs, which were 20 percent to 30 percent lower than third-party providers charged for the same service.

He did look seriously at outsourcing his data center and went through the bidding process just to find out what the actual offers were from vendors. Their proposals were too pricey. "We weren’t going to save any money doing it," says Harding. "And in the worst case, you could end up in a situation where you want an extra extension cord, and according to the contract, it’ll cost an extra $40,000."

That happened when he outsourced support of the Henry Schein business unit that sells computer and networking equipment to doctors and dentists. "They wanted to take over the facilities and the people but still keep it here at our site," says Harding. "And it ended up costing us more because they nickled and dimed us to death. We cut our costs significantly by bringing it back in-house."

Money’s not the only factor driving Harding’s decision not to outsource. Less tangible issues are factored in. "Just because [the vendors] do it for a living doesn’t mean they do it any better. Nobody cares about our people like we do," says Harding. "To give that over to IBM, we’d have to pay their higher rates and risk losing those service levels."

It’s a lesson he learned the hard way. At a previous company, Harding hired an outsourcer to provide data recovery services. One day, the power went out. "Their uninterruptible power supply didn’t work and our machines went down," says Harding. "And they were the so-called experts."

Why Money Isn’t Everything

Incorporating unpredictable or less quantifiable—but equally expensive—costs or benefits into a case against outsourcing is critical. "Once you have the numbers, you have to address a series of risks. The transition to the outsourcer could take longer, supplier productivity may not be as good as advertised and you may see less savings," says Jones of Source Renaissance. "There could be all kinds of changes or unknowns downstream."

Getting a handle on costs and quality is a good first step. But there are other less tangible risks that should be factored into any sourcing case. At Vanguard, data security has become a huge consideration in the decision not to outsource. Dowds is considering whether to proceed with a managed service deal for that very reason. At Henry Schein, there’s not much outsourcing going on anywhere because the company has been able to leverage its centralized shared service model to great financial advantage, so a sudden move to outsource major portions of IT could have a negative effect on the corporate culture or employee morale.

"There are things like impact on employees, public opinion, intellectual property protection, compliance—[things] you may not be able to apply an accurate numeric value to—that should be factored into the business case," says Hatch of Ventoro. (See "Risky Business," Page 56.)

Bring the Business In

Twenty years ago at the dawn of the outsourcing age, decisions about handing tech functions over to a third party were made solely by the IT department, with no input from the business. During the megadeal days of the 1990s, the pendulum swung in the opposite direction, with the business foisting outsourcing deals on IT. Today, we’re somewhere in the middle. "The ideal situation would be to make the sourcing decision process a collaborative one involving relevant stakeholders," says Gartner’s Anderson.

At Henry Schein, Harding engages the business in the process to protect himself from sending more work offshore than he’s comfortable with. For instance, when it’s time for auditing internal IT costs and working with external consultants on benchmarking, Harding involves the finance department. "I bring them in and have them look at it and add their own analysis as to whether it’s a fair benchmark," he says. "It provides a good check and balance for IT, and it lends some credibility to the numbers."

He also publicizes internal costs and service levels monthly, explaining what the results mean in business terms, both in one-on-one meetings with the C-level suite and in IT steering committee conferences. "As long as your costs are competitive and you’re delivering well, there’s no pressure," says Harding. "If those start to fail, they’ll start to say, ’Why don’t we bring in some outside experts?’"

If there’s a problem with internally delivered IT services, Harding is quick to communicate. "It can be as insignificant as an issue with e-mail or as bad as an AS/400 core processor going down. We issue a code red and report on it at the end of the month," says Harding. "If it’s something really critical, I’ll call the chairman myself."

Harding believes the best defense is a good offense. He learned this at Mobil Oil in 1985 during the first outsourcing gold rush. "We made all the classic mistakes," he says. "The business was making the decision, IT didn’t understand our own costs, and we outsourced every single thing that was not ’core.’" The result? "We ended up taking it all back in-house."

The lesson for Harding was to involve the business early and often not only in sourcing decisions but in monitoring how well IT is delivering so the business leaders don’t have the impetus to seek other sourcing options on their own. When Steve Brown was CIO of Carlson Companies, the $8.4 billion travel, hospitality and marketing conglomerate, he was selective about outsourcing. Hired in 2000, he knew that Carlson’s margins were slim, and anything he could do to ease the margin pressures would help.

After close examination, Brown decided the best way to provide low-cost and high-availability IT services to the business was to keep most of IT in-house as he transformed the decentralized IT function into a shared services organization. But he made certain the businesses within Carlson understood not only why he did not outsource more but also how that decision benefited them. He created a catalog of 85 services IT provided, each benchmarked against "best in class" providers.

"That allowed me to make sure I was provisioning services that were best in class from a quality and cost point of view," says Brown, who left Carlson in 2005. The one area where he couldn’t compete was printing and document management, which he handed off to Xerox.

Brown knew how important every dollar was to each of the company’s businesses. So he took his services catalog and benchmarking and drilled down. He compared the IT for the hotel businesses to best in class hotels. He compared the marketing business’s IT costs to best in class marketers. "It’s important not just to benchmark but to be able to talk to the business in the terms that are meaningful to them," Brown says.

He also tailored presentations to the CEO, CFO and COO, making it a habit to point out where service or costs were less than stellar and explaining how that might be solved either internally or through a third-party provider. "You have to own all the facts and that allowed me to have a very meaningful conversation with the business about IT and enabled them to be an informed part of the decision-making process," says Brown. "It transformed it from the typical conversation you have, which is, ’We need to cut some costs. Let’s cut it out of IT.’"

When executives asked about the possibility of sourcing some application development offshore, he could tell them, "’I’m already looking more deeply into that and here’s what I’ve found so far.’ They knew I was looking at every aspect of IT all the time. That created trust."

The Best Laid Plans

A CIO can be proactive about creating a sourcing strategy that’s closely aligned with the business strategy, diligent in assessing the costs, service levels and other factors necessary to make informed comparisons between sourcing options, and politically savvy about involving the business every step of the way, yet the decision may still be made to outsource an IT function.

That happened at Carlson, where last year the company signed a major outsourcing deal with IBM to handle selected IT and finance functions. Brown lobbied against the decision and ultimately resigned.

"These [outsourcing] decisions are still going to be made," says Gartner’s Anderson. "But you can at least force the business to take a breath. When these mandates come down, you’ll at least have some initial argumentation. Worst-case scenario, if the decision proceeds, you have all the data to do a baseline comparison to what the provider is pitching you."

Sometimes investing time and money in a detailed examination of sourcing options can bias executives toward signing a deal. "There’s a certain momentum to the process and some may feel the obligation to follow through and set up an outsourcing relationship," says Kaplan of ThinkStrategies. "But it’s a healthy exercise and can be successful even if you don’t end up outsourcing anything. It’s best seen as an opportunity to evaluate internal requirements and external opportunities."

And one that shouldn’t be done once and tossed in a drawer. A good sourcing strategy should be revisited at least once a year, experts say. "You need to keep an eye out on a continuous basis," says Kaplan. "Your own business and the IT services market is changing so rapidly."

The continued effort will pay off one way or another, not only preventing against bad outsourcing decisions but also uncovering outsourcing opportunities you might not have considered. "Even if outsourcing is not on the table, start building your case," says Gartner’s Anderson. "Not to defend against it necessarily but to be prepared to have that discussion based on a business case."

Copyright © 2006 IDG Communications, Inc.

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