Outsourcing continued

[yesthattom]

This LJ entry sure got a lot of replies from various people on the issue of IT outsourcing.

For those that say “outsourcing can work”, sure, so can cutting off fingers in an effort to reduce a kid’s masturbation habit. However, I think there are better ways. Yes, I agree that outsourcing works for a specific, well-defined task such as “helpdesk” or managing a large “WAN”, anti-spam processing, and so on.

Someone said, “If you aren’t in the business of processing information, why outsource?” to which I replied:

Would you classify a cement company as being not a “information processing” company?

I ask that because Cemex (the big Mexican cement company) changed the industry by innovating in IT to better schedule their deliveries. The found they could increase their price if they could provide delivery practically “on demand”. Construction sites often find week-long delays because the cement delivery was scheduled months ago and plans have since changed.

It rocked the construction industry. Soon everyone wanted to pay more money for cement because of the net savings of having the site working without a pause. It took years for the rest of the industry to catch up.

The truth is that all (non-trivial) companies are information processing companies. The ones that don’t think they are go out of business once they grow to any useful size.

The most telling story on the topic of outsourcing is mixed into two articles by Cringley. First this and then this one. At the conclusion he happens upon the opinion from mega-turbo-capitalist-engine Wal-Mart:

[The article is about a botched outsource contract that the Navy did. The author wonders...] Would Wal-Mart, the world’s largest company and one of the world’s largest consumers of Information Technology even consider a deal like NMCI, which ostensibly would make all IT costs and performance predictable on a multi-year basis?

The comparison is an apt one, though Wal-Mart is actually about three times the size of the U.S. Navy. Obviously the Navy has more firepower, though in a protracted conflict I think I’d put my money on Wal-Mart’s supply lines. But what about this IT question? To find my answer I began calling people in Bentonville, Arkansas, where Wal-Mart has its intergalactic HQ and where my Mom lives next door to the former CEO and head of Wal-Mart’s Executive Committee. I have my sources you see.

And those sources were clear: there is no way Wal-Mart would entrust its IT services to an outside contractor or even to several outside contractors. Doing so would threaten the entire organization. If costs are out of control and services are inconsistent, that’s something to be dealt with internally, not by hoping some outside organization is smarter or more disciplined. “We have suppliers, sure, but the ultimate responsibility always remains here in Bentonville,” said my Ozark IT guy. “We centralize it, we control it, we know what we are buying and what we are doing with it. Anything less is just too much of a risk.”

Maybe part of the Wal-Mart strategy is to get their competition to make the mistake of outsourcing IT. Maybe Wal-Mart and Cisco and Microsoft all conspire to get authors to write “business advice” books that encourage outsourcing IT and then secretly seed copies of the books all over their competitor’s offices. Wouldn’t that just be delicious?

Comments

[awfief.livejournal.com]

Outsourcing HAS worked, which means it CAN work, by definition.

However, it's the Mythical Man Month all over again. Just as adding more people doesn't INHERENTLY (but CAN) make a project go faster, changing all the people involved by outsourcing does not INHERENTLY make a project go better/faster, but CAN.

If a company is considering outsourcing, what they're really saying is, "We're not smart enough to do this." Why is the reaction to that, "so we'll hand it off to another company that is."? The reaction to that should be "so we should train our staff, or hire new staff, and make sure we ARE smart enough to do this."

[sweh.livejournal.com]

Outsourcing at large companies can work, if it's treated as a partnership and the work is properly done.

eg CSC and JPmorgan headed a 7 year outsourcing contract (one of, if not the, first multi-year megabuck contracts) under the "Pinnacle Alliance" flag and it included secondary contractors (AT&T Global Networks, Anderson Consulting and... a fifth company I've forgotton). CSC were the lead contractors. Under this contract CSC took responsibility for most BAU work; JPM were still the owners of the technology direction and requirements and CSC were preferred contractors for special project work. For the first 2 years of this contract, JPM weren't very happy but by year 4 they were loving it and were basically (in the unix world, anyway) giving us a large chunk of money each year and saying "this will cover the project work we may come up with", and they got the work done.

The important part here was that JPM kept strategic direction and goal setting responsibilities to themselves. That should never be outsourced. CSC were implementors and partners (since we knew their technology as well as, if not better, than they knew it, we could advise them and help tune the goals). Both sides won. A good example of this; after 9/11, JPM was the first Wall St bank back up and trading again (or so JPM management claimed at the time :-)). This was a successful outsourcing.

Then JPM merged with Chase and the merged bank decided that CSC didn't have enough Comercial Bank experience, and so signed a new outsourcing agreement with IBM. The Investment Bank wanted to keep CSC, so they became a subcontractor under IBM. Unfortunately the concept of "partnership" got lost and both sides treated it as a vendor/customer relationship, with both trying to get more for their buck. Productivity and morale fell. IBM failed to meet performance guarantees and so on.

Finally, JPMC merged with Bank One. Jamie Dimon (head of Bank One) is very anti-outsourcing and anti-contractor. He believed that the new merged bank had enough inhouse technology people that most of the outsourcing benefits (eg economies of scale) could be achieved inhouse with employees. IBM employees then CSC employees were insourced. Contractors are being offered permanent positions, or having their job terminated.

So in 3 years we've gone from JPM being a happily outsourced company to JPMC being solidly inhouse.

[kimuchi.livejournal.com]

I have more substansive things to say, but at the moment: thanks for the link to how NMCI worked out! It made me some money (it's why $employer acquired us), but I've always wondered if it, uh, did the Navy any good.

[barking-iguana.livejournal.com]

You reasonably (given my unclear writing) but wrongly interpreted what I was saying as "if you're not in the business of processing information, why not outsource?" But you left out the "not" in this post, which makes no sense to me.

In any case, you can say all businesses are "in the business of" running a business, of which processing information is a very important part. But that is only a means toward the end of doing somethign well enough so that people will pay you for it. I think it's usefule to maintain that distinction.

[mangosteen]

The litmus test is whether IT creates a competitive advantage for the company in question. Not just "is required for operations in today's world", but "is an integral part to the execution of the service we provide, and can provide an advantage over our competitors."

[pyffe.livejournal.com]

Well, I don't believe Walmart would outsource one of the primary reasons for its supremacy... it's Datawarehouse! The amount of information they glean outta that sucker is amazing and helps with their bottom line. It's also highly guarded, so I doubt they'd ever consider outsourcing it!

[kimuchi.livejournal.com]

One of the things that's most poignant to me about the story of NMCI is the negative impact this contract has had on EDS. We too saw a great deal of expense in trying to land our little corner of that deal (it was very "bid first, ask questions later" even at our level); I suspect another deal or two like that would've been the death of us if we hadn't been acquired.

[tim1965.livejournal.com]

And let's not forget the "agency" problems that accompany outsourcing. Any company which outsources anything -- be it I.T. or laundry services -- has to institute new, expensive, manpower-heavy mechanisms for monitoring the quality of incoming goods and services; conducting negotiations with the outsourcer to improve quality; conduct negotiations and expend resources to ensure that the outsourcing contract itself is tight enough to cover most eventualities; and monitor the outsourcer so that it conducts its business in ways that will not impair its performance.

These are not neglible costs! One study this year found that these costs are so high, it would be better if most companies had never outsourced in the first place.