If you wish to maintain any morale at all, be totally honest with your staff. The biggest mistake is to try and break bad news gently, fudge the issues, delay making announcements or justify the decision.
It is a smart move to immediately identify key performers, both new and veteran IT talent, and attempt to ring-fence them from any cuts. But bear in mind no matter what you do, the reality is some of your 'A' players will move on. One day soon, a plane load of overseas programmers could arrive to be trained by those they are to replace. In such a situation, you can't expect everyone to willingly give their skills away.
But while job loss is inevitable, there are steps you can take to lessen the damage. Negotiating with management about what functions should and shouldn't be outsourced is a good place to start. Strongly recommend that management outsource only in non-core areas and retain a dedicated in-house team to focus on business-critical systems.
Another possible tactic to reduce job attrition is to adopt the role of devil's advocate during meetings with top management. There is so much hype surrounding outsourcing that solid business issues may not have been examined in enough detail. Without being unduly negative, utilize your expertise to factor in all relevant costs to ensure a realistic estimate of savings is arrived at.
"It is all too easy to underestimate the costs," said Pelz-Sharpe. "Soft costs such as loss of morale and productivity, increased turnover in non-affected departments, can be very costly."