It was not one of the better days of David Reid's professional life. He was then the CIO of a fast-food restaurant company that had outsourced its help-desk function before his arrival, and Reid was trying to manage the constant friction between the two firms. His company wanted excellent service, the outsourcer wanted to control costs.

And then on this particular day, it happened—one restaurant's point-of-sale system went down, and stayed down for 24 hours. The restaurant was in turmoil. Employees trained to enter orders on an electronic screen scrambled to write them down on slips of paper. Mistakes were made, and customers stalked out angry. "There are very few places where IT interfaces directly with the customer, and this is one," Reid recalls with a sigh.

Behind the scenes, the point-of-sale data was no longer feeding a database that the store manager used to track inventory, analyze customer traffic, estimate raw material orders and project staffing needs.

Phones rang "all the way to the top of the food chain," as Reid puts it, meaning the CEO of the small company—and the message came back down to him: "(Expletive deleted) put someone in a car and drive to the store and fix it if you have to." After this problem happened several times, Reid brought the help desk inside.

Today, Reid is CIO at The Krystal Co., in Chattanooga, Tenn., which has 415 fast-food restaurants around the Southeast. He's outsourced the installation of its POS systems because it makes sense for a geographically dispersed firm. But otherwise, he keeps support for his POS systems inside, unless an unusual problem arises that requires outside help to fix. For what does go out, he's older and wiser about service-level agreements and other controls.

Reid's story illustrates several key results in our survey. CIOs are focused on the customer and are more likely this year to do their own customer relationship management in-house. They distinguish between strategic and commodity functions when making outsourcing decisions. And they recognize the value of SLAs and other controls.

John Hill, CIO of Praxair, Inc., a Danbury, Conn.-based supplier of industrial gases, decided to keep CRM inside. "CRM is a critical corporate asset, and the impact of not doing that well has such a big liability," Hill says. "You're better off having that done by people who are really part of the company." At the peak of the hype about CRM, CIOs were challenged by management to implement it quickly, and outsourcing was the only way to do that. "But CRM has become demystified, dehyped," he says, "and companies are becoming a little more rational."

Hill did decide, however, that he could get a higher level of quality and service by turning some of his South American data center operations over to outsourcers. "Our strategy is selective outsourcing," he says. "We look at the project, what we're good at, and where we can take advantage of improved skills, as well as scale and efficiencies, from the outsource provider. Very rarely do we do outsourcing deals just to save money. At the end of the day, the fundamental measure is the quality of service and the speed of delivery."

Stephen Lane, research director of IT services at the Aberdeen Group Inc. in Boston, points out that CRM is an opportunity to increase revenue, and therefore becomes strategic. "Those types of applications are business-critical, and they're not going to get outsourced in any economic environment," he says. "Things that are commodities—human resources, accounting, payroll—aren't core to the business."

The largest jump in the use of application outsourcing among our respondents, in fact, was for human resources information systems. "Employees are demanding self-service, and nobody knows how to do it in-house," says Beth Ellyn Rosenthal, editor of the Outsourcing Journal. "Everybody wants to go to an intranet and look up their 401k and how many vacation days they have left. HR doesn't want to do it. Everybody wants it yesterday, and outsourcing is a lot faster than doing it yourself."

Also down is the outsourcing of Web site development and Web hosting. Lane and others see this as a return to more normal levels after a spike of outsourced Web activity during the dot-com boom. "Just about everybody has a Web site now," Lane says, "so the need to go out and have someone develop one and host it has fallen off."

Cost cutting, the traditional raison d'être of outsourcing, was at the top of our participants' list of motivations. They say, however, that finding the right skills is also a big part of the decision. What they are looking for is the flexibility to pick the best, and cheapest, solution. The calculation includes both outsourcing and contract workers.

"I start out with flexibility and drive to cost," says Jerry Hale, CIO of the Eastman Chemical Co. in Kingsport, Tenn. "If I have a large portfolio of projects with a high rate of return, I want to be able to turn up the staffing level. But if my workload should go down or the economy be down as it is now, I want to be able to cut back and still have stable employment in my company."

Our survey data suggests CIOs have become more cautious in making decisions about outsourcing. For one thing, CIOs are giving more business to the big computer companies and Big 5 accounting firms. "You had an awful lot of outsourcing delivery models emerge during the dot-com bubble," Lane says, and a number of the outsourcers born then have gone away. "I think people have just retrenched and are saying, 'If I'm going to outsource, it's going to be with someone I know will be around for the next few years,'" he says.

And the use of service-level agreements is up sharply. "There's always an element of risk when you outsource," says Carrie Lewis, an analyst in technology management strategies with The Yankee Group in Boston. "Even with the best service-level metrics, you can run into problems. The vendor may not understand what the end-user is asking them to do; the end-user may not understand what the outsourcer can do. We don't hear about some of the disaster stories, but they can literally bring a company to its knees."

Rosenthal puts it this way: "If you enter into an outsourcing agreement without an SLA, shame on you. You don't get what you expect, you get what you inspect."

In the end, our survey detected a rather half-hearted satisfaction with outsourcing, and Reid offered an explanation. "Human nature being what it is, the people you're outsourcing to are trying hard but don't understand your business as you do," he says. "They have their agendas, and you have yours. I've learned to deal with the inefficiencies, such as project managers leaving and the like. It's the nature of the business. The general consensus is that it's not going to get any better. That's why most people continue to outsource but are lukewarm about it."—Terry A. Kirkpatrick

Research analysis by Gary A. Bolles

This article was originally published on 05-15-2002
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