Outsourcing, or In?

Many of this year’s CIO 100 honorees cited sourcing choices as part of their overall portfolio of resourceful practices. Some employ traditional infrastructure outsourcing while others send application development work as far away as China. Some are bringing IT work back in-house, while others are turning to ASPs. Most are utilizing a combination of in-house and outside sourcing options to successfully meet business demands.

Our resourceful CIOs have developed deliberate and unique strategies for sourcing that benefit their organizations not only in terms of total costs but also in terms of service levels and skill sets. Two CIO 100 honorees share the steps they took—one, in deciding what to selectively outsource and another in determining what pieces to bring back in-house.

Smurfit-Stone Container Corp.

When Jim Burdiss took over as vice president and CIO of Smurfit-Stone Container in January 2002, he was close-minded when it came to sourcing. A former CSC consultant, he thought the 250-person IT shop was overstaffed and he could cut costs by outsourcing much of what was done at the $7.5 billion packaging manufacturer. “I was absolutely convinced of it,” recalls Burdiss.

Still, Burdiss knew the issue deserved some study, and the prospect of outsourcing took “seven months out of my life,” he says. The main lesson he learned? Don’t believe the outsourcers when they say that you can save money by outsourcing everything. In Smurfit’s case, selectively outsourcing PC and some legacy application maintenance proved to be the most cost-effective choices.

Burdiss first examined what his staffing levels should be. If Smurfit’s IT department was understaffed and still supporting service-level requirements, sending work to an outsourcer would be insane. He brought in EDS, which did nothing more than gather information for its eventual pitch. But being a former outsourcing guy, he gave it another go. In addition to having EDS back in, he invited CSC and IBM Global Services in, opened his books and asked them to tear them apart. “I said, I want you guys to come back and be very, very honest with me about what you can help us with,” Burdiss remembers. “Can you imagine what their answer was? Everything.”

Burdiss developed his own process to determine what to outsource. Most surprising to Burdiss: Smurfit was already providing six of the eight IT services he examined at below market price and above average service levels. Thus, he kept them in-house. Here’s the basis for an outsourcing strategy.

1 Find out what your staffing levels should be. Conduct an IT operational analysis, comparing yourself to your peers (in terms of IT complexity, not industry). This will help you figure out how many full-time employees, or FTEs, you need. Burdiss found that he was actually 112 FTEs shy of the average for his peer group.

2 Baseline your costs. You’ll be able to compare prices not just among outsourcing providers but between you and them. After going through this process, Burdiss outsourced the maintenance of some legacy applications, one of the areas where Smurfit couldn’t beat the going rate.

3 Determine what your service-level requirements are. “This is the hidden factor,” says Burdiss. IBM may be giving you costs based on a 95 percent service level when you’ve been providing something closer to 100 percent (which will cost much more from IBM). If you don’t have internal service-level agreements, take this opportunity to put them in place.

4 Calculate the risk. Once you outsource something, it can be very difficult to bring it back in. So consider all the potential pitfalls, not just the predicted cost savings. While Burdiss outsourced some legacy system maintenance for cost reasons, he knew that arrangement would improve morale by allowing his employees to work on the new SAP system.

5 Revisit outsourcing decisions often. Prices, skill requirements and service needs change over time. Burdiss uses metrics to track outsourced and insourced costs, and service levels, checking them on a quarterly basis.

Allied Office Products

Michael Palmer faced an extreme situation last year, not unlike many CIO 100 honorees. The COO (and former CIO) of Allied Office Products had to slash his IT budget by 39 percent. But his solution was as radical as the circumstances he was in; he decided to bring in-house nearly all of what the $280 million office products supplier had been outsourcing. It seemed like a crazy move. Palmer didn’t have much of an IT staff to begin with—32 staffers to support 780 employees—and he had to lay off six of them last year. In addition, his remaining employees didn’t have the skills necessary to support bringing both hardware monitoring and maintenance and application development and maintenance in-house.

Nevertheless, Palmer calculated that he could cut the $24,000-a-month hardware monitoring and maintenance costs by two-thirds and save several hundred thousand dollars on development by bringing them in. To do that, though, he knew he either had to introduce new skills and mind-sets to his staff or bring in new employees who already had them. The former failed in the case of two senior IT executives who were unwilling to adapt to new business processes. Palmer had to let them go, he says, but “the economy made available a lot of good, talented people at reasonable prices.” Palmer actually added three positions on the development side.

Today, Palmer still does some outsourcing—a legacy system upgrade and support for a CRM application. But thanks to insourcing 85 percent of the IT work, he’s now saving nearly $500,000 a year. Here’s a guide for making insourcing decisions.

1 Take a good look at your existing outsourcing relationship. If your organization remained involved in the day-to-day outsourced activities (as Palmer’s did), it will be much easier to re-insource. If not, you may want to get more intimately engaged before deciding to pull the plug.

2 Baseline your costs. Palmer looked at his internal costs and projections before deciding what to bring in-house. He determined what development and maintenance would cost in an insourced environment, but he also considered the value of time. In-house development is completed more quickly because employees have a better understanding of the company.

3 Figure out additional resource needs. Palmer sat down with the senior vice president of IT and determined that he would have to hire a database analyst and two senior programmers or analysts for the website. Even with additional staff, Allied now saves nearly $200,000 a year on hardware maintenance and monitoring, and $275,000 a year on new development.

4 Communicate with employees. Some may not be on board with the requirements of a new insourced environment. Palmer reviewed each employee individually, told him what skills he would need and gave him the choice of retraining or having several months to find a new position. Most embraced the new opportunities, but two IT executives departed.

5 Give yourself a cushion of outsourcing/insourcing overlap. No matter how prepared your staff is, it will take time to get up to speed. Palmer had parallel teams working for three months before bringing everything in-house.