by CIO Staff

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

Jun 15, 200716 mins
IT Leadership

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”.

Similarly, programming that requires a high degree of creativity and speed is less vulnerable to outside competition. Vijay Manwani, CTO of Bladelogic, a maker of data centre automation software, tried sending some of his most complex new application development work to an Indian provider but wound up bringing it all back. “When you’re a start-up trying to innovate, you don’t have the benefits of scale or time,” says Manwani. “We sent some development offshore in 2001, and the team failed to deliver the quality we needed. We learned that when you outsource product development, the outside people just don’t have the same sense of ownership as your own people.”

But when it comes to pure construction programming (no collaboration required), the outsourcers have the advantage—especially when it comes to legacy systems. “I have about 150 developers working offshore [700 onshore], and it’s all for simple stuff or systems I plan to sunset,” says John Golden, CIO for CNA, an insurance company.

This doesn’t mean that offshored work must be rote, claims Ravi Aron, assistant professor of operations and information management at the Wharton School of the University of Pennsylvania. “It’s possible to decouple highly complex work and move it, but you have to be able to specify it,” he says. Nor is work that requires frequent changes immune to outsourcing, as long as the changes can be clearly specified. That’s why companies have had good luck offshoring maintenance and support for well-documented legacy systems where higher-level performance—say, instant response time or deep business knowledge—is not required. “Work that changes frequently can be outsourced, as long as the changes are in the logic of the programming rather than in the users’ heads,” says Aron. “The closer the changes are to the businessperson and the less expressible they are, the harder it becomes to outsource.”

What will stay home

The future of the IT department lies in finding ways to improve work and to translate those improvements into technology. A vague idea floating around inside a businessperson’s head – say, for adding value to claims processing – can become an automated workflow system expressed in a series of well-designed computer screens.

Mike Hugos, CIO at Network Services, a distributor of housekeeping supplies and printing paper, says there are three specific skills that in-house IT business analysts should have:

  • Process mapping: expressing work as a series of linked boxes on a diagram.
  • Data modeling: creating a logical data model for these new processes and designing applications (or linking together existing applications) around them.
  • Design: devising a sequence of simple, intuitive user interface screens that reflect the new processes and data, thereby improving the productivity of the people using them.

All these tasks need to be done with the cooperation of the businesspeople who will be using the new system—meaning the IT person will need to be good at communication, collaboration and project management.

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This new breed of IT developers will be “people who re-architect work to achieve better proximity to customers,” says Wharton’s Aron. “You need IT people who can troubleshoot information-related inefficiencies and allow senior managers to substitute automated monitoring for direct control. IT people who can do this cannot be outsourced.”

Even if this type of work could be outsourced (and many IT consultants will argue that it can), IT departments have competitive advantages over outsourcers on many fronts:

  • Cost: an internal salaried employee is generally half as expensive (outsiders who do this kind of work must be local—for now).
  • Knowledge of the business: consultants generally have broad industry knowledge but can rarely match your own people when it comes to knowing how things work internally.
  • Motivation: the desire among consultants to go the extra mile is usually limited contractually and by the fact that, ultimately, you don’t sign their paycheque.

But there’s one problem with shifting programmers over to analysis, design and project management: It’s not why they got into IT. “People get a degree in computer science because they love the tools,” says Manpower’s Davidson. From university onward, the emphasis and the fun for most IT employees has been the coding. “The icon in the industry is the genius programmer-hacker, someone who works in isolation and creates great code,” says Hugos. “Those days are over.

“We need to get over our perception of technology as mystery and magic and learn how to apply IT in a pragmatic way to business problems.”

Reprogramming the business

For IT employees raised on the legend of heroic coding, drawing workflow boxes or managing projects may seem mundane. “I point out to my people that project management is the next step in their career,” says Jamie Riis, CIO of Bayview Financial Trading Group. “I say you can be the best in technology X, but you’ll only make so much money. If you want to make more, you have to get into management.”

“In India you’re expected to move from developer to project manager within a certain time or you’re out,” says Meta’s Lepeak. “But there’s a perception in the US and other countries that it’s better to specialize in a particular technology, do it well and not move up to middle management.”

Even more problematic than the programmer’s self-image is the fact that businesspeople accustomed to judging IT departments by programming output may question what value project managers and analysts provide. “The perception can become that IT people run the things that aren’t that important,” says Davidson. Riis agrees, adding that it’s up to CIOs to educate businesspeople about the new kind of value IT can provide: “It’s about helping them understand that you’re not just a group of programmers writing code; you’re an information service solving business problems.”

Building this information service means breaking decades of habit and encouraging developers to broaden their horizons. Development at CNA, like at many insurance companies, traditionally has been highly specialized. Workers focused on a particular technology and then gravitated to an area of the business that needed it. There they’d stay, sometimes for their entire careers. When he became CIO in 2002, Golden tried to build a transfer program so that developers could learn different areas of the business and move between projects. But he found that years of specialization frustrated his plan. “Each area had its own set of development methodologies and tools,” he recalls. “The life cycle they followed in billing was completely different than the one in claims. When someone moved to a new area, they didn’t just have to learn the new business, they had to relearn the technologies and the development life cycle.”

Golden realized that his developers couldn’t become more versatile simply by moving around. The technology architecture at CNA prevented it and demoralized employees who tried it. Golden began to see that enterprise architecture is not simply about standardizing servers and applications to save money; it has productivity implications for developers too. So Golden is working on an enterprise architecture with standardized computing platforms, development tools and life cycle management processes that will allow his developers to focus on learning the business, rather than new technologies and methodologies, when they hop from one business area to another. Thanks to the new standards, Golden says, 20 percent of his developers can now move between at least three different areas. When new developers are hired, they are assigned a buddy—typically a businessperson who has long specialized in the area—to bring them up to speed. Golden also has a formal project management training program in conjunction with outside consultants; his people take one week of training per year. CNA also provides up to $US10,000 annually in college tuition reimbursement per employee—as long as the employee promises to stay with the company for a year and a half after the courses are completed.

To make your department unoutsourceable, this shift from programming to analysis and collaboration need not be formalized, or even long-term, says Nancy Markle, president of the Society for Information Management and a former CIO at Home Savings of America, Fannie Mae and Georgia Power. At all three of those companies, she assigned IT employees to temporary stints within different business areas to learn the business processes and brainstorm improvements. “When the IT people came in and learned the process, they would say: ‘I could write a quick program to automate that for you’,” she recalls. “They did quick and dirty things that the businesspeople hadn’t even thought of. That helped the business streamline workflows—and made them appreciate the IT people. And the IT people made connections in different areas of the business that they could call on if they needed help.”

With this emphasis on analysis, design and collaboration, outsourcing can help your IT department rather than simply replace it. With some of the programming work outsourced, IT can take on more projects, says Riis. “If your internal people have done the business knowledge work and put together detailed specifications, then you can outsource the construction. You’re getting to leverage your employees’ knowledge and increase their capacity.” Golden adds that outsourcing gives him more flexibility for projects where resources may need to scale up or down quickly. “Having those 150 people offshore means I can flex the overall staff size more easily by varying the offshore component,” he says.

What the outsourcers can teach you

If IT is going to emphasize the higher-level work that has traditionally been the province of outside consultants, IT departments are going to have to start looking more like their consulting and outsourcing competitors. Primarily, this means creating a set of standard methodologies across the organization to increase productivity, improve delivery times and, potentially, improve quality. “Cost is usually the first criteria that businesses use when they consider outsourcing,” says Lance Travis, vice president of research at AMR Research. “But then they tend to look at things they’re not doing well.”

This is why BCBS’s Sparks began taking his organization through a CMMI assessment earlier this year. The CMMI model, which describes processes necessary for good software development, has five levels of sophistication, from one (chaos) to five (continuously improving). Sparks is planning to attain Level 3 by the end of 2006. As part of that effort, he’s set up a central project management office.

If these process improvements pan out, Sparks believes it will make the inevitable comparisons between his group and the outsourcers more apples-to-apples. “When [an offshore provider] says we’re CMM 5, that’s impressive to businesspeople because they don’t [normally] have any way to gauge the productivity and quality levels of their internal groups,” says Sparks. “All they see is cost.”

CMMI allows businesspeople to make comparisons that go beyond cost. Once cost is de-emphasized, Sparks believes that most businesspeople will be willing to pay a premium for retaining direct, local control over IT.

But they’ll only pay if they know exactly what that premium is. Clear performance metrics and absolute cost transparency can help—especially in areas considered prime candidates for outsourcing, such as help desk support. If the help desk is providing performance and quality that outsourcers can’t match, cost becomes (nearly) a nonissue.

Preparing for the inevitable

As CIOs improve service levels and performance, the cost gap between their people and the outsourcers will narrow. Indeed, the average salaries of offshore IT workers are already beginning to rise (see “Outsourcing World Tour 2004”, CIO August). “I don’t know how long the labor arbitrage factor will be around,” says AMR’s Travis. “Salaries will be frozen [locally], and they’ll go up in India as demand increases there.”

But there’s also every reason to believe that offshore providers will improve their collaborative capabilities. Some of the largest Indian companies are opening divisions in the United States, Europe and Australia to do project management locally. Conversely, outsourcing and consulting giants such as IBM and Accenture are building up their presence offshore to offer clients global coordination. And companies that can afford to build subsidiaries offshore (GE, for example, has long had centers in India) can bridge the coordination gaps themselves.

But Sparks isn’t waiting to find out who will win the service and cost race. He wants to outrun the ghosts. “We know we’re getting projects done faster,” he says. “Our total number of closed projects is higher than last year.”

So when (and if) he hits CMMI Level 3 in 2006, he expects to be surrounded by a fully staffed, highly valued, productive IT department, one with a viable future.

And then, he hopes, his ghosts will be gone for good.