Outsourcing: Tribal Mistrust

Most of you were not surprised by the negative findings of the Deloitte report on outsourcing that I posted recently. But I was surprised by your widespread opinion that the problem isn’t the outsourcers, it’s the business and IT leadership inside the companies that do the outsourcing. Business executives are portrayed as gutless bullies, failing to hire competent IT leaders and using outsourcing as a weapon of intimidation rather than a tool for improving business. A representative comment: “[Outsourcing covers] up the laziness of an organization. These organizations simply do not have the stomach to attract the right team, manage it well and deliver value to their shareholders.” Another: “As punishments go, outsourcing is a threat that has deep implications and can actually be followed through if IT staff ’get out of line’ on any issue … It’s simple, tidy, and doable. ’Don’t make me do it’ becomes the knife at the throat for some IT departments who aren’t (fill in the blank.)”

Left without viable means to measure the underlying worth of their IT departments, businesses adopt a tribal approach, pushing out the internal IT tribe in hopes that the outsourcers, new and friendly, will be better neighbors: “IT is not viewed with respect by the businesses. In other words, it is seen more of a cost function, rather than a value function; hence all decisions associated with IT are seen with a biased cost lens.” Cost becomes the justification, when costs can’t actually be determined–though a 20 percent profit margin is a necessary extra burden for outsourcers: “Margins and overhead should be lower for efficiently internally run IT organizations. When you outsource you’re helping to pay for outsourcer sponsored golf tournaments (think about that the next time you get a “free” lunch).”

The emphasis on cost frees companies from any deeper level thinking–if that is even possible: “No one seems to ask the right ’next level’ questions. What’s the point of diminishing return of scale? Do factor costs really dominate the equation in a services market? We generally don’t ask these questions or we don’t have a way to answer them if we do.” Companies can’t—or won’t—see through the complex layers of their IT services to determine if the outsourcer is more capable: “When true expertise is used, the benefits in quality are obvious. It’s why I hire a mechanic to work on my car, eat out, and go to the doctor. Each of these professionals can do the job they are trained to do BETTER than I can, and with substantially lower risk.”

Though the human and economic dynamics of the outsourcing relationship seem healthy to start—make friends, deliver cost savings—you say that companies don’t put in necessary safeguards to keep the relationship healthy after the honeymoon. Eventually, the outsourcer’s motivation will be to keep things static and cheap, while the customer demands more for less: “Markets change, businesses change, processes change, systems change and so on; it is up to the service provider to continuously evaluate and assess inefficiencies in the processes and or systems for cost reductions and increased quality and satisfaction.”

But unless it is written into the contract (perhaps reducing or eliminating the cost savings?) you say the outsourcer won’t be motivated to improve: “Almost every company I have worked with that has outsourced the management of their infrastructure actually has a fairly un-managed environment – which equates to a high TCO. From the customer’s view, a fixed cost outsourcing agreement caps their TCO number; however, the outsourcer is contracted to do nothing to lower the TCO number. These CIOs decided that the promise of capped IT costs was less risky than investing an IT architecture that lowered the overall TCO and the reliance on manual intervention (which is hard work).”

A pretty ugly indictment of business and IT leadership, overall. What seems clear to me after reading all your comments is that business people lack the tools to make a rational decision about outsourcing—at least in the bigger, more complex deals—and CIOs lack the metrics and information necessary to defend their place in the business. The only hope I can see out there today for providing more transparency to IT costs and capabilities is to begin working with some of the governance and process improvement models out there, like Six Sigma, ITIL, COBIT and CMM. Especially as CEOs begin looking offshore more and more, it’s striking that U.S. CIOs are not instituting the process methodologies that foreign outsourcers are using to demonstrate their quality and productivity and win business from their CEOs. What do you think?