The dreaded O-word (first appeared in InfoWorld)

Some words inspire terror. Their mere mention causes blood pressure to rise, mouths to dry, and beads of sweat to burst out, cold. Words like “vampire”. “Final exam.” “Orthodontist.”

Orthodontist isn’t the most terrifying word to start with “O” either. Far worse is the dreaded IT O-word — the one that’s spoken only in whispers, when the fluorescent lighting is bright enough to drive away the shadows so they cannot hear.

Outsourcing.

Its mere mention is enough to strike terror in the hearts of IT staff, conjuring images of layoffs for many and sweatshops for those who remain.

The reality, of course, isn’t usually that bad. Most employees don’t even change desks after their employers outsource IT. They may get a bit more money and a bit less vacation. More unsettling is the change in their relationship with their formerly fellow employees, who often treat their just-outsourced brethren with the same mixture of pity and disgust usually reserved for those with a particularly urgent need to consult a dermatologist — pity because they’ve been victimized, disgust because they are, after all, outside contractors.

Outsourcing is badly misunderstood at all levels. Executives outsource IT for the wrong reasons, IT employees dread it for the wrong reasons, and most significantly for you, IT management takes exactly the wrong steps to prevent it.

The usual reasons given for outsourcing a corporate function are that it’s either (a) not strategic and consequently not a “core competency”; or (b) less expensive to contract out than to handle in-house. Neither of these stands up to scrutiny.

The old saw about handling strategic functions internally and outsourcing the rest is easily debunked through a quick look at what should be the most strategic functions in any company — those that directly affect customer relationships. We’re talking here about sales, marketing, and customer service, the functions that have direct customer contact. Companies routinely outsource any or all of these — independent distributors frequently handle sales, more companies use ad agencies than handle all marketing functions internally, and there are plenty of call centers for hire that handle everything from outbound telemarketing to software technical support.

On the other hand, very few companies of any size outsource accounting, which rarely has any strategic importance (unlike finance, which does). Clearly, strategic-ness and outsourcing have no correlation, either positive or negative.

As for saving money, that’s also questionable. In favor of outsourcing is the reality than a large outsourcer enjoys economies of scale not available to relatively smaller clients, and can move employees with expensive skills that aren’t needed on a daily basis among multiple clients. But outsourcers need to turn a profit. They need to cover both corporate overhead and taxes and still have 15% or so left over besides. That’s a big hill to climb.

Further complicating the picture is that compared to the formal standards of operation adhered to by most outsourcers, many of the companies that find it attractive under-invest in IT quite badly. It’s hard to save money when you aren’t spending enough now, and even harder to explain the value of outsourcing when the first thing you need to do is to increase IT spending to make it work.

So unless corporate IT is managed quite badly, there’s only one way to save money by outsourcing, and that’s to reduce service.

No, not the overt services that are easy to identify and keep track of. They can’t be reduced because they’ll be spelled out in the formal contract. What’s lost are the minor services and untracked favors that lubricate the relationship between internal IT and the rest of the business. So where an end-user might have called a buddy in internal IT for advice or help with some troubleshooting, that same end-user will just have to do without once IT is outsourced, as all requests for service are funneled through the formal prioritization process specified in the outsourcing agreement.

Here’s an irony: Many CIOs, having read about the importance of well-defined processes and formal metrics, work hard to prevent exactly these kinds of favors. Here’s another: By implementing charge-backs and adopting the notion of “internal customers,” many CIOs work hard to make their organizations look just like an outside service provider, making outsourcing a very easy transition.

Why would they want to do that?