A CIOBy Mike Perkowski | Posted 05-01-2001
A recent CIO Insight survey of CIOs and senior IT strategists does more than highlight the continuing popularity of outsourcing IT applications and functions. It also points to an even more significant trend: Companies are becoming increasingly comfortable with outsourcing the "family jewels"critical customer-facing and revenue-producing applications.
From a macro view, the study shows continued support for IT outsourcing, with 76 percent of respondents indicating they had hired outside IT specialists during the past 12 months and had spent more than $1 million, on average, on outsourced IT last year.
While just 57 percent plan to outsource this year, that figure can be attributed to uncertainty about the economy; fully 15 percent were unsure of their plans. Those who had outsourced were very satisfied with their partners; more than 80 percent would use them again.
When Leo Crawford joined the Orange County, Calif., IT department back in 1987, he noticed something unusual: dozens of non-county employees doing IT work for the county. For a red-blooded technical guy like Crawford, it didn't feel right. "I was somewhat dubious when I got there and saw the significant amount of outsourcing we were doing," recalls Crawford, now the assistant county executive officer for IT. "Why couldn't we do this in-house?" But it wasn't long before Crawford saw things differently. "It was apparent that users were getting better support through outsourcing than when we were doing it in-house," he says. Today, he's an enthusiastic supporter of IT outsourcing. And he's not alone.
"We've got a small, but good, in-house staff, but our philosophy is that if we can outsource it, and it makes sense, we'll go ahead and hire an outsourcing partner," says Mark Sklenar, vice president and CIO of Underwriters Laboratories in Northbrook, Ill. "It has just become too difficult to hire not only enough good talent, but to retain them over the long term even if you're fortunate enough to land them."
UL has outsourced applications support for a wide variety of desktop and network applications, as well as significant numbers of Web development projects. Now it has embraced outsourcing for a key strategic initiative: teaming with Arthur Andersen to design and build UL's global technology architecture, which will take four years.
The Need for Speed
"There's always been this argument against outsourcing core functions and applications, but that's changing," says Frank Casale, CEO of The Outsourcing Institute, a Jericho, N.Y.-based industry group that tracks developments in outsourcing. "A lot depends on how you define 'core.' You might consider 'core' to be 'what I do better than anyone else,' in which case you probably wouldn't want to outsource it. But more companies are starting to define 'core' as 'what the customer comes to me for,' in which case you definitely want best-of-breed talent and capability."
What Casale calls "the need for speed" is clearly a two-headed monster. On the one hand, speed means coming up with new products and services to gain and hold a competitive advantage. On the other, the IT industry is moving faster than any in-house department's ability to keep up and still meet the daily needs of its business units and end users.
"Outsourcers are now being brought in early on to plan, develop and implement e-business systemsreal revenue-generation projects," notes Bruce Caldwell, an outsourcing analyst with Gartner/Dataquest. "In the past, you would have done those types of projects internally, but time compression and skills shortages puts you under more pressure than ever to get it done. That inevitably means using outside partners, even for systems with a lot of risk."
Playing to Strengths
Orange County's Crawford sees outsourcing as the inevitable acknowledgment of what a company and its partners do best, and then playing to everyone's strengths, rather than plowing more energy and money into trying to overcome an internal weakness. "It's hard for government, or even for a lot of businesses, to keep up with the pace of change in our industry," says Crawford. "If I decide I need Web programmers instead of COBOL programmers, I go to Lockheed-Martin [Orange County's lead outsourcing partner] and have them redo the contract. Within 30 days, I have the right people for the job."
"We usually don't find we actually reduce our hard-dollar expenses by outsourcing," says UL's Sklenar. "The main benefit is to provide a much higher level of service to our business units, and we need specialized expertise to do that."
For other companies, outsourcing can be an effective "bridge" strategy for resource development, allowing the company to fill immediate needs through hired guns while buying time to develop its own internal resources if it's going to be a recurring need.
"If we're starting a Java development project, for instance, we'll want to see if it's going to be a long-term need," says Guy Abramo, senior vice president and CIO of computer products distributor Ingram Micro Inc. in Santa Ana, Calif. "If we'll need that skill right away but it will be part of our long-term needs, we might hire a specialist now, but eventually hire and train people in-house."
Mike Perkowski, who heads up Ziff Davis Market Experts, is responsible for tracking such market segments as distribution channels and outsourcing, storage and Linux.
Who Outsources and Why? Changing Needs Budget Considerations The Outsourcers
The survey's findings show that more and more often, CIOs are looking to outsourcing partners for more than back-room operational management and building network plumbing.
Customer-facing and revenue-producing applications are increasingly likely to be outsourced, according to the respondents.
A number of outward-facing applications were cited by CIOs as being more likely to be outsourced this year than last yearand that's a significant response in research studies such as these, in which "plan to buy" responses for the coming year are almost always lower than the percentage of respondents who actually bought something in the prior year.
Among the likely candidates for increased outsourcing next year:
- Business-to-business e-commerce, which was outsourced by 22 percent of CIO respondents last year but cited by 32 percent of the CIOs as a likely candidate this year. B2B e-commerce was the application cited most often by CIOs to be outsourced this year;
- Customer relationship management, which increased from 22 percent last year to 30 percent this year;
- Supply-chain management, up from 8 percent last year to 14 percent in 2001; and
- Business-to-consumer e-commerce, which rose from 17 percent last year to an expected 22 percent this year.
Even human resources applicationsarguably the single most sensitive internal application for most companiescould be outsourced more this year. Outsourced by 14 percent of the CIOs last year, HR applications were cited by 20 percent of CIOs as a potential outsourced application for this year.
Yet another indication that CIOs are becoming comfortable with outsourcing critical tasks can be gleaned by looking at the types of IT functions, notably applications hosting and integration, that are more likely to be outsourced in the coming year.
It's been well documented that many companieslarger companies in particularhave been slow to adopt the application service provider model for hosting their critical applications. However, nearly 30 percent of the respondents in the survery said they are considering outsourcing applications hosting in the coming year, up from 26 percent who did so last year.
But by far the most significant increase among outsourced IT functions is in applications integration, which was outsourced by 30 percent of the respondents last year but cited by 44 percent as a likely candiate to be outsourced in 2001.
The proper deployment of skills is one of the most frequently cited reasons CIOs go to outsourcing in the first place.
Fully 35 percent of respondents said that "lack of internal staff" was the most important reason to use an outsourcing company, followed closely by "lack of internal expertise," at 29 percent.
Interestingly, "cost predictability" and "cost reduction"historically the two most important reasons to outsourcewere cited by only 2 percent and 4 percent, respectively, of CIOs as the top reason to outsource.
Information technology is moving to the center of the strategy of every business, and the role of outsourcing is moving in step with it. This trend should not be attributed to desperate measures for desperate times, but to the need to gain expertise in a variety of critical applications and functions.
How the survey was done: CIO Insight designed the outsourcing survey in partnership with Survey.com, a San Jose-based supplier of custom online research services. The study was e-mailed to CIOs,chief technology officers and vice presidents of information technology and services from a number of sources,including third-party lists and other Ziff Davis publications.The survey was posted on a password-protected Web site,and 432 people responded from March 3 to March 8.
's Guide to Successful Outsourcing">
A CIO's Guide to Successful Outsourcing
Assess the culture of your outsourcing partner. This is usually the single biggest reason outsourcing deals fail to achieve their full potential. At the end of the day, it's all about people, not technology or processes. If you can't trust the outsourcer's peopleor they can't trust yoursno proprietary project-management methodologies, cool technology or management support will help. Be sure that your culture and your partner's culture mesh.
Pick an outsourcing partner with a strong partner network. Outsourcing, particularly for customer-facing and supplier-facing applications, has become so complex today that even outsourcing giants like EDS and IBM can't do it all on their own. Superior subcontractors for technologies, services and support skills can make or break an engagement, so ask who they work with, how long they've worked together and on what kinds of deals. (Tip: Ask your product vendors who they partner with and why. Ask them which prime contractors are the best "managers.")
Don't be a guinea pig. One of the most important assets of an outsourcing company is its knowledge of your market. So, if you're in the health care field, be suspicious of any potential partner that can't tell the difference between an HMO and HBO. If they haven't done work in your industry before but you still like the company for whatever reason, at least be realistic in understanding that they'll have a much longer learning curve.
Ask for and check those references. But do not merely call them and do a phone interview. Get out of your office and into their shopsee the outsourcer's work in practice. Remember, they're trying to sell you, so they'll put their prior engagements and customer satisfaction in the best possible light. (Tip: Check out some of the customers who the outsourcing company doesn't give you. You can do a little research on that by reading industry publications, Web sites and market-research reports on deals that go down between the outsourcing company and its customers.)
Don't just get executive buy-inget their sponsorship. It's one thing to have the CEO and the board green-light your project and allocate the funding. Remember that things change, including financial conditions, corporate prioritieseven board members. Having your CEO, CFO or key board members actively promoting your project and sharing your vision is essential. Build coalitions early, and reinforce them often.
Don't be cheap. Translation: Don't be blinded by low bidders. After all, rarely is cost-reduction the primary goal of an outsourcing project, unless you're looking to clean up your balance sheet by taking IT assets off your books. And even then, you still want superior service and support, uninterrupted data availability and ironclad securityqualities not exactly compatible with the term "lowest bidder."
Open the kimono as much as possible. Until recently, the single biggest reason companies have been loathe to outsource mission-critical applications is fear of their corporate secrets falling into the wrong hands, even through inadvertent means. But again, think about why you're outsourcing in the first place. Is it to implement a limited-scope project, like applications development or network infrastructure build-out, or is it to develop new revenue streams, enhance your customer satisfaction or improve your competitiveness? If it's the latter, your outsourcing partner will need to know as much as possible about your strengths, weaknesses, corporate goals, competitive set, customers, suppliers and corporate culture.
Get it in writing. Specifically, you'll need well-defined contracts, service-level agreements and non-disclosure agreements. If you're like the American public at large, the idea of having lawyers in your IT planning probably is about as inviting as a root canal, but this is one place where lawyers are an essential player. (Tip: Unless you're a very large company with a significant in-house legal staff and you've done outsourcing in the past, don't just assume your in-house counsel can handle this. Get a specialist; this is a hot special practice in the legal profession, and there are more and more outside firms who know how to write SLAs and other documents that will protect your company.)
Evaluate multiple optionsboth suppliers and approaches. Don't just go with the outsourcer your CEO's golfing buddy used when his company went down that road. Even though your company's application might be sensitive enough that you won't want to publicly advertise it via a formal RFP, you should go out of your way to get proposals from at least two, and ideally three, viable companies. (Tip: Again, since you'll need to share potentially sensitive information, have your lawyers draw up NDAs for companies participating in this process.)
Metrics matter. Your CEO and the board will want some proof that this mulitmillion-dollar investment is, in fact, yielding dividends. However, keep in mind what you're measuring, if it's measurable, and if the measurements can be a realistic appraisal of the outsourcing project. For instance, if your goal is to achieve a 20 percent increase in customer satisfaction measured on an annual customer survey, don't blame the outsourcing project for failing to meet that goal if your sales organization turns over every six months. M.P.