How to Bring Outsourced Services Back In-House

When CVS signed a multi-year infrastructure outsourcing deal with Perot Systems in 2004, then-CIO Karl Taylor said the relationship would serve the pharmaceutical giant’s IT needs more cheaply and efficiently than keeping the work in-house.

Perot took over CVS’s Woonsocket, R.I., data center, then expanded and rebranded it the Northeast Technology Center to serve multiple New England healthcare companies. It was an IT services win-win. But times changed, and so did the two outsourcing partners.

In 2007, CVS acquired pharmacy benefits management company Caremark for $26.5 billion and, along with the deal, a whole new business-to-business customer base and a host of IT assets, including another data center in Scottsdale, Ariz. The merger created “a very, very different company,” says Stuart McGuigan, who joined CVS Caremark as SVP and CIO during the integration in 2008. “After [that merger], the market strategy of the company and the role of IT was different.” (As of April, the Federal Trade Commission and 24 state attorneys general were investigating whether CVS Caremark had engaged in anti-competitive behavior.)

IT needed to be more agile to serve the needs of new customers demanding quick integration, such as GE, ATaannddT and Blue Cross Blue Shield. “We had to think about technology interoperations,” McGuigan says. “The whole premise of our sourcing strategy changed.”

From a scale perspective, outsourcing still made sense. But McGuigan had other considerations to weigh. He explored having Perot work in tandem with the insourced Caremark data center, but it wasn’t ideal. “Even with the best of processes and intentions, you don’t have the same agility when things are outsourced,” he says.

Multimillion-dollar outsourcing deals aren’t easily scrapped, but opportunity knocked in the form of Dell’s purchase of Perot in 2009. CVS’s contract stated that in the event of a change in vendor control, the agreement could be ended with reduced termination fees. CVS and Perot struck a deal allowing Perot to pay to keep one client on premise while moving all its other customers out. McGuigan’s leadership team spent six months on the transition. “The first two months were heads-down detailed planning,” says McGuigan, who went over everything from process requirements to HR issues. The switch over was complete last June 1.

Most of the IT team working in the Perot data center had been employed by CVS before being outsourced. “We rebadged them as CVS Caremark employees. It was a morale boost for them to be part of the team again,” says McGuigan. The company expanded the Scottsdale data center, and the two facilities back each other up for critical applications. The insourcing has enabled IT to be faster and more flexible, and it also brought the technical teams supporting the retail and pharmacy benefits business closer, adds Steve Zoltick, CVS Caremark’s vice president of infrastructure and operations.

McGuigan says he wouldn’t rule out outsourcing the data center again “if it gets to a point where the services are so standardized and predictable that it makes sense.” But the stresses of backsourcing previously outsourced work mean it isn’t a decision to be made lightly.

“Once you control it, you have to show how you reduced costs, increased speed or improved agility,” McGuigan says. “If you can, your [business] partners will welcome the insourcing. If you can’t, they’re going to wonder why you’re not outsourcing.”