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|In: Industry Commentary|Last Updated:

Who wins when one company acquires another?

The shareholders do, of course. The point isn’t to impoverish the owners.

The acquiring company ought to win too, as measured by profitability and marketplace success. That, in fact, ought to be the reason for any acquisition. Whether the goal is increased economies of scale, elimination of a competitor, acquisition of customers, acquisition of skills or technology, or product line extension, the acquiring company ought to be stronger following an acquisition than it was before.

Guess who doesn’t normally win. The acquired company is one answer. It might benefit, but there’s no a priori reason to expect it to. Individual employees aren’t usually beneficiaries either, whichever company they started with.

Corporate acquisitions and large IT outsourcing deals are similar in many respects, with the outsourcer playing the role of acquiring company. That means it’s the only entity certain to benefit from the transaction.

How about the company that decides to outsource its IT? That’s a more complicated and uncertain question. The proponents of IT outsourcing rarely promote direct financial benefit anymore. As explained in last week’s column, an outsourcer can only reduce its client’s IT costs by reducing the amount of service provided, unless the IT organization being outsourced just wasn’t very good at the job.

So instead outsourcers talk about letting a company “focus on its core competencies.” This logic is something short of compelling. After all, from the CEO’s perspective the only differences between managing a CIO and managing an outsourcing contract are (1) unlike internal IT, outsourcers need to make a profit; (2) outsourcing contracts are likely to have loopholes beneficial to the outsourcer, and the outsourcer has much more experience negotiating outsourcing contracts than the CEO does; and (3) it’s a lot easier to replace a CIO than an outsourcing company.

So why do CEOs sign major outsourcing deals? The most likely answer is far simpler than the textbook ones: They’ve given up on internal IT. They buy outsourcing because in their eyes in-house IT botched the job and can’t be fixed. Their eyes are the only ones that matter.

Since an outsourcing decision on the part of your company is unlikely to advance your career, what steps can you take to prevent it?

Here’s one: Don’t botch the job. Let’s start with IT operations, since in most companies this absorbs more than half the total IT budget, making it the biggest outsourcing target.

Do you adhere to or improve upon industry best-practices? (Of course, if you don’t know what they are, the chance of improving on them is slim.) For an excellent source of information on this subject, check out the Information Technology Infrastructure Library (ITIL — http://www.itil.co.uk/). It’s the industry standard reference point, and friends who are experts in the field tell me it’s the right starting point for IT operations processes.

IT operations is where formal measurements work best, because it’s where you do the same things repeatedly. If you haven’t established formal service level measures, do that immediately. Implement a continuous improvement program for the most important of them, usually the stability and performance of specific, critical applications. You might be tempted to measure only platform performance and stability “because that’s all we have control over” but that would be a huge mistake. If a major application is down, nobody cares except your troubleshooters that the servers are up and running, after all.

Track service levels, but don’t negotiate them. The process of negotiating service levels provides no benefit and carries plenty of risk. There’s no benefit because no service level worth your time to negotiate will truly satisfy anyone. Regardless of what you negotiate, anything short of the telephone, where you always get dial-tone and always get it right away, will fall short of what’s wanted.

Here’s the downside: Negotiating service levels means you’re negotiating with the rest of the business. That separates you from everyone else, makes you look and sound like a service provider, and establishes precisely the gap between what you provide and what they want. It’s another way to make them customers and yourself into just another outside supplier. As mentioned last week, that eases the transition to an outsourcer.

So remember: Tracking service levels makes you professional. Negotiating them simply makes you vulnerable.

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|In: Industry Commentary|Last Updated:

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?

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