Outsourcing's Seven-Year Itch

By Julie Craig

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While we laugh about the alcohol-based tonics sold from the backs of wagons in the 1800's, who among us has never placed a bet at a blackjack table? And, while we scratch our heads trying to imagine why anyone would send their retirement savings to a stranger in Nigeria, most of us have been taken in at some point by promises that a stock will rise, a real estate venture will succeed, or a tax cut will really put money in our pocket.

Hope springs eternal, and the promise of getting something for nothing is almost irresistible.

Let's be clear here—I’m not calling outsourcing snake oil. What I am saying is that, in the past, it has been approached by some as a magic potion that will cure all ills. IT executives are as susceptible to the quest for a magic bullet as everyone else. However, the vision of lowering costs, maintaining or improving service quality, and decreasing service management oversight is a myth at best, and one right up there with the likelihood of consistently beating the house at blackjack. (There is a good reason why Las Vegas is crammed with billion-dollar casinos.)

Transfer of Execution, Not Responsibility

According to Wikipedia, outsourcing is "the transfer of the management and/or day-to-day execution of an entire business function to an external service provider." Obviously, this definition covers a broad range of products and services. At one end of the spectrum is software as a service (SaaS), in which an outside company assumes the execution of a given service, such as ERP or CRM. At the other is wholesale outsourcing of an entire IT operation. This is often a case in which an outsourcer "hires" a company's IT employees and, in return, is contractually obligated to deliver IT services at a specified cost.

There are multiple gradations between the two, and these gradations offer a broad menu of options for IT organizations looking for ways to optimize service delivery. The important thing to keep in mind when considering outsourced services is that every company is different. There is no "one-size-fits-all" outsourcing strategy. Picking and choosing from the multiple offerings on the menu requires business knowledge, understanding of the industry vertical in which the business operates, the kinds of IT services needed to stay competitive in that vertical, and the availability of skills and expertise.

This is where today's CIOs have an opportunity to earn their keep, because this "big picture" perspective is one that requires significant experience, knowledge and judgment. Within high-performing IT organizations, strategically selecting outsourcing options, and skillfully combining them with in-house expertise and services, is high art. Such organizations understand what outsourcing is and what it is not: an opportunity to cede responsibility.

While execution can be outsourced, responsibility cannot. And from a management perspective, many can testify that outsourcing creates as many challenges as it solves.

Managing contracts, service levels, and acting as an intermediary between IT and the business are all activities that have to be resolved. These activities fall on IT organizations traditionally focused on technology and geared towards delivering services rather than managing them. This can result in both a skills and an expectation gap.

If IT doesn't have the skills it needs to manage this new delivery model, and, as a result, expectations of the outsourcing's benefits go unmet. Once this happens, the bloom fades from the outsourcing rose, reality sets in, and the company struggles with a whole new set of challenges that bring with them multiple unfamiliar roles.

Where Outsourcing is Successful

General Motors (GM) is the poster child for outsourcing, and has been since the 1980's. At that time, GM outsourced virtually its entire IT organization to Electronic Data Systems (EDS). Over time, as GM's outsourcing model has evolved and diversified to multiple providers, one thing has stayed the same, GM's internal IT team.

Currently consisting of almost 2,000 people, it is responsible for managing outsourced services. Within GM, the role of IT hasn't diminished—IT is still responsible for delivering business services—but it has changed.

There are a few areas where such an outsourcing model tends to be particularly successful. One is when IT organizations utilize it to address those areas of the business that are outside their key competency. For GM, that core competency is automobile manufacturing, not IT. Kudos to GM for realizing this early and moving towards an outsourcing model ahead of much of the market.

What is appropriate for GM, however, is not necessarily the best solution for Google. Google's core competency is technology, and companies like Google excel at delivering IT services. The likelihood that an outsourcer can provide the same combination of leading edge technology, expertise, and innovation that Google has in-house is pretty small.

Targeted outsourcing—particularly of non-differentiating business services—is another sweet spot. In many cases, it makes sense for commodity functions like email management and help desk to be outsourced to a provider that focuses on that service for their daily bread. Does this mean these services are unimportant? Not by any stretch of the imagination. They are critical, but, as long as email is available, it provides little or no strategic advantage over business competitors.

Companies are starting to look at utility services in the same way as they see electricity. Just as most of us rely on the electric company to generate our power and the Post Office to deliver our mail, relying on an outside vendor to deliver utility services makes good sense, especially if the vendor can do it cost-effectively.


SaaS is another option that can become a valuable piece of the service delivery mix. SaaS is a subset of outsourcing in which one or more services described in an IT organization's service catalog are delivered and supported by an outside provider. SaaS has some real advantages, especially for organizations with limited resources and expertise supporting multiple departments and a variety of applications. For a small to medium sized company, for example, the cost of supporting the customer relationship management (CRM) systems used by the sales team, the enterprise resource planning (ERP) software utilized by finance, and the computer aided design (CAD) systems used by engineering can be exorbitant. Delivering ERP and CRM via SaaS could be a viable option, and one that reduces the services supported by internal staff from three to one.

Not to Be Confused

In addition to underestimating the management requirements of outsourcing, there are other “gotchas” as well. One is when outsourcing is combined with off shoring. There is a difference between the two.

Software companies of all sizes are offshoring programming to geographically distributed teams, with varying results. For example, IBM has opened dozens of development and competency centers across the globe. By and large, the people at these locations are IBM employees who just happen to work outside the U.S., offshore employees rather than outsourced services.

In contrast, outsourced programmers aren't employees, they are contracted providers. On the surface, it looks like outsourcing work to such programmers is cost-effective—wages can be as much as 80% less than those of their U.S. counterparts. However, multiple companies are reporting that, in fact, the "real" cost of offshore outsourcing approximates that of using in-country resources in the first place.

Recently, I spoke with an executive from a software company best known for its database management products. His company has been outsourcing programming work to Eastern Europe, but he indicated that, if he had it to do over, he would have kept the work within the Western Hemisphere.

He cited multiple problems. The time difference made it difficult for U.S. staff to collaborate with offshore resources. They ended up putting in long hours during the day, then putting in additional hours at night to meet with Eastern European personnel. Travel was a problem, both in terms of time and expenses, since there was typically a U.S. manager on-site. The trip required multiple plane changes and executives lost a full business day to travel. This particular company was happy with software quality, but multiple companies have reported quality problems that had to be fixed down the line.

A Scientific Approach

Vital Roy and Benoit Aubert wrote an excellent analysis of the pros and cons of outsourcing in their paper entitled, A Resource-Based Analysis of IT Sourcing .  In the paper, they cited some of the less tangible outsourcing costs that, nevertheless, impact a company's short- and long-term revenues.

One is loss of competitive advantage. Especially in today's very competitive business climate, IT is increasingly a business differentiator. Far from Nicholas Carr's "IT is dead" philosophy, there are multiple companies in which IT is breathing life back into the business. We are especially seeing this in companies that have leveraged service oriented architecture (SOA) to enable a level of flexibility previously unknown in the business world.

SOA has helped banks respond more flexibly to ever-changing regulatory and customer demands. It has helped telecommunications companies to dramatically cut the effort required to bring new customers online. And it has enabled healthcare companies to develop new products, such as medical portals that connect pharmacies, medical records, and doctor's offices.

The competitive advantage SOA brings with it is so marked that the world of business is increasingly being divided into technology "haves" and "have nots." The "haves" are well-positioned as industry leaders with a solid foundation for future growth. The "have nots" find themselves left behind and facing a gap that grows wider with time.

Loss of the ability to innovate, loss of confidence by high quality employees who have their choice of jobs elsewhere, and loss of brand equity can all be fallout from outsourcing critical business services. CIOs considering outsourcing would benefit from reading Roy and Aubert’s paper, as it is well thought out and features a matrix that is useful for determining appropriate sourcing strategies for specific IT services.


Like any development in the IT industry, outsourcing has evolved to the point where, in many cases, it can provide significant business value. Like in any relationship, it appears the early excitement is giving way and IT is developing a more realistic perspective. They are seeing outsourcing as what it is: one of a variety of offerings that can be leveraged to provide high quality IT services to the business.

Developing a strategic mix of internally- and externally-supported business services is as much an art as a science. In the end, there is no substitute for good management, business-focused technology expertise, and keeping high quality personnel and strategic assets in-house.

Julie Craig is a senior analyst with Boulder, Colo.-based Enterprise Management Associates, an industry research firm focused on IT management. Julie can reached at jcraig@enterprisemanagement.com.