Outsourcing – Page 17 – IS Survivor Publishing

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?

A self-inflicted wound (first appeared in InfoWorld)

What I love about management trends is their predictability. Some consultant or analyst will work with a successful company and latch onto some practice of theirs or other. This, the consultant will solemnly claim, drives their success. And if you would only adopt the same practice, you’d enjoy that success, too.

Fame, riches, and book contracts follow, along with schools of remora-like copy-cat consultants. Always eager for new trends to report, packs of business journalists join the feeding frenzy, and a full-fledged management trend ensues.

A few years, Chapter 11s, migraines and management turnovers later, people sort it all out and discover that once again they’ve found, not a panacea, but a useful idea for some select, carefully chosen circumstances. That’s okay though, because by then another management trend will be brewing.

We’re about ready to turn the corner on the outsourcing trend, and after quite a bit of cogitation and soul-searching, I think I have it figured out.

But first, a word from the Full, Unadulterated Disclosure Department (FUDD): my employer, Perot Systems Corporation, is in the outsourcing business. I’m not exactly a disinterested party.

Okay, on with the show. Let’s start with three outsourcing myths:

Myth #1: Outsourcing is a manifestation of corporate greed. Corporations, of course, feel no emotions – they’re organizations, not people. Corporations try to maximize profits, execute strategy and tactics to succeed in the marketplace, and increase shareholder value. Good management requires obtaining the optimal balance between quality and price in the acquisition of all goods and services. That includes decisions about whether to have employees or contractors provide various corporate functions.

Myth #2: Outsourcing leads to massive layoffs. I’m sure it’s happened. More commonly, workers don’t even change desks – they just change employers and keep on doing what they’d been doing before, although they may lose some of the perks of seniority along with the change. Outsourcing companies can’t afford to keep hundreds of employees on the bench, waiting for the next contract to come along. Big outsourcing contracts lead to massive hiring binges, and it’s a whole lot easier to hire pre-trained employees who already know the systems.

The truth behind Myth #2: quite a few employees wash out the first year. Look around you. Are all of your co-workers really worth keeping around, or are some of them decent people who aren’t bad enough at their jobs to fire? Companies hold outsourcers to a higher standard than employees, and when non-performance can lead to execution of penalty clauses, substandard workers don’t last.

Myth #3: Outsourcing is for non-strategic functions only, or non-core competencies. Companies routinely outsource the strategic function of marketing to advertising agencies, and nobody thinks twice. Core competencies? Misplacement of cause and effect: Why, and for that matter how, could a company outsource what it’s best at and not lose both money and quality?

So when should you outsource?

For the past several weeks I’ve been writing about the difference between internal and external customers, and I think that discussion holds the key. Outsource when you want workers to think of your company and its employees as their customers. Insource when you want workers to make your company’s customers their customers.

When you use a contractor, you are their customer, and they’ll treat you that way. Tell them what to do and they’ll do it. That’s the nature of the relationship. Your employees, on the other hand, should focus on creating value for paying customers, not each other – that’s the quick summary of our long-running critique of the “internal customer” concept.

That leads to an astounding irony – managers who adopt the “internal customer” philosophy lay the groundwork for outsourcing their function. They’re acting like outsourcers, not employees, and that invites a comparison with external service providers.

And you thought somebody else was doing it to you. If I’m right, outsourcing is often a self-inflicted wound.