Job Loss Is Real, So Don't Dodge the Issue

By Allan Alter  |  Posted 03-25-2005

Businesspeople are driven not just by money and achievement, but by fear—fear of failure, of losing power, of appearing incompetent. But the greatest fear of all is probably fear of losing one's livelihood. That's why the specter of outsourcing can still evoke a bell-in-the-night dread: No one wants to get fired, or be the bogeyman whofires others.

Yet in this day and age, CIOs risk losing their own credibility if they don't pursue every sourcing option. And now the rise of offshore outsourcing has taken these fears to new heights. In 1989, Eastman Kodak Co.'s $250 million data center outsourcing deal made Katherine Hudson, the company's vice president of IS, the most controversial CIO of the time. Yet the hostility she encountered was mild compared to the anger offshore outsourcing generated during the 2004 presidential campaign.

To download the survey results, click here.

But outsourcing wouldn't elicit such strong reactions if it weren't so attractive. Many CIOs look to outsourcing and offshoring as a way to reduce labor and operating costs. Consultants and academic experts say outsourcing can do much more: It can provide better performance than in-house IT organizations, and free up executives to focus on strategy and business strengths rather than IT operations. Some outsourcing advocates, including Accenture's Jane Linder, author of Outsourcing for Radical Change (Amacom, 2004), even argue that outsourcers can transform companies by making them more innovative.

49% of companies that offshore IT have cut full- time IT jobs as a result

43% are willing to outsource strategic IT functions and applications

74% say outsourcing is overrated as a cost- cutting strategy

63% of outsourcing customers report no significant problems

25% of outsourcing IT executives say they have insourced in the past year

In this, our fourth outsourcing survey (earlier surveys appeared in the May 2001, May 2002 and November 2003 issues), we wanted to shed light—not just heat—on the state of this important and controversial practice.

So we asked 388 IT executives whether their spending on outsourcing is growing, what outsourcing services their companies are actually using, and whether they are taking a strategic approach to outsourcing. We investigated whether the widespread dissatisfaction with the largest outsourcing vendors that we found in our December 2004 Vendor Value survey extends to outsourcing vendors as a whole. And we wanted

to see whether the use of offshore outsourcing is actually growing, and whether it is causing the loss of permanent, full-time IT jobs, as its critics claim.

Our study found that spending on IT outsourcing is growing at a steady pace as the economy rebounds, and is likely to increase further in 2005. Outsourcing represents a larger segment of total IT spending in 2004—19.4 percent—than it did in 2003. However, most companies still aren't fully committed to outsourcing for strategic gains. Only 20 percent say the main reason they outsource is to gain capabilities that will provide their company a competitive advantage, while 68 percent do so to save money. Still, many CIOs are beginning to get the message that cost-cutting isn't the best reason to outsource: Nearly half are now willing to outsource strategic IT functions and applications, and most IT executives feel outsourcing is overrated as a cost-cutting strategy.

We also found that CIOs are very selective about what they outsource. Outsourcing has become a common way to staff technical projects and back-office IT functions, especially among large companies. Yet few companies use outsourcers to run applications or IT activities where leadership or security is involved, such as project management, designing the IT infrastructure, and maintaining security. Most CIOs appear unwilling to cede responsibility for their company's technology direction, or the security of their data, to outsourcing vendors.

We found IT executives are happier with their outsourcing vendors than our Vendor Value survey suggests. In that survey, no more than 54 percent rated EDS, Deloitte, Accenture and BearingPoint as good or excellent in providing value. While we did not ask CIOs to rate specific vendors in this survey, we found that at least 80 percent of IT executives were satisfied with their vendors in every outsourcing category we investigated, and that between 31 and 57 percent were very satisfied with their vendors. This positive experience helps explain why spending on outsourcing will increase by 4.9 percent in 2005.

Finally, our research confirms IT professionals' worst fears about offshoring: Half the IT executives who use offshore IT outsourcers say their company has cut permanent, full-time IT jobs as a result. And since the use of offshore IT outsourcers is growing—from 25 percent in our November 2003 survey, to 32 percent in our current study—that means more jobs are at risk. Researchers at McKinsey & Co. may be right when they argue that 78 percent of the business value created by offshore outsourcing is reaped by the U.S. economy, rather than by countries such as India. But in the short term, CIOs have a problem: In half the companies that offshore, fear of losing jobs is disrupting their IT organization.

According to a report by Gartner Inc. analyst Diane Morello, entitled The Organizational Implications of Offshore Outsourcing, the stresses offshoring creates can weaken organizational productivity and performance, and IT managers are sometimes "poorly equipped . . . to deal with the organizational backlash and its effect on performance." Yet only 30 percent of the offshoring IT executives we surveyed consider employee worries about offshoring a top concern. CIOs may not wish to dwell on the fear outsourcing creates, but avoiding the issue puts the effectiveness of their IT organizations at risk.

To download the survey results, click here.