Succeeding at sourcing

How do you strike a successful balance of in-house and outsourced IT expertise?

These days, top IT executives tend to keep strategic IT architecture decisions close to home. But when a large volume of work provides enough savings to warrant it, they hire outside resources to execute on those decisions.

Topping outsourcing priority lists, for example, are software coding and data center operations. IT executives reason that when such tasks are a core competency of another company, it makes sense to take advantage of its expertise and economies of scale.

Yet IT executives quickly note that outsourcing never means washing their hands of accountability for out- of-house work. Rather, it entails striking close partnerships that are carefully nurtured and managed.

"The horror stories you hear about outsourcing are when you hand over [responsibility] and forget to leave somebody smart behind to manage the deal," says Jeffrey McIntyre, assistant vice president of technology services at BNSF Railway in Texas.

BNSF outsources its data center and IT operations, including help desk and desktop support, to IBM Global Services. It takes advantage of IBM's volume discounts on equipment and gets its software refreshed every three years as part of the package.

A team in the BNSF IT department focuses on managing the IBM relationship, which includes monitoring resource consumption, managing costs and verifying that service-level agreements are met. The oversight team at BNSF is led by a director, who oversees managers assigned to separate technologies. The managers are each assisted by one or two senior technical staffers.

"This level of oversight prevents 'value leakage' from our relationship with IBM," says McIntyre.

Chicago-based eCollege , a provider of technology products and services to the higher-education community, keeps even tighter management control. It views its offshore software development relationship with Virtusa in Sri Lanka as an extension of its own staff - minus the payroll, hiring and firing duties.

"I [told] my in-house developers that they have a bunch of [offshore] colleagues to help them create more than what they could do alone," says Mark Resmer, former corporate chief technology officer at eCollege, who located two management employees at the Sri Lanka site. (Resmer recently left eCollege to become CTO at Whitney University in Dallas.)

"We [retained] continuous oversight, beginning to end, in design, development, QA and deployment," Resmer says. Virtually doubling the size of the development organization at what he describes as "a very modest incremental cost" enabled the company to release many new revenue-generating products that would otherwise still be in development, he says.

Beating the odds

Deloitte Consulting earlier this year conducted a study of 25 global companies with average annual revenues of US$50 billion and an average of 60,000 employees and found that the general outsourcing failure rate was more than 70 percent.

Peter Lowes, a Deloitte partner and leader of the company's outsourcing advisory practice, says failures usually occur when a company doesn't take advantage of repeatable processes that scale across multiple customers.

Failures are most common when companies strike a single complex deal with one large provider that is customized for that company, he says. "It's smarter to break down complex projects into deals with multiple providers who focus on the one thing they do really well," Lowes says.

Lowes describes the new competency in IT organizations as "managing a portfolio of suppliers in an integrated fashion." He adds that he usually sees a progression of successfully outsourced functions. They tend to begin with legacy application support activities and often move from there to porting applications from one computing system to another, then to standardized feature updates. The last step is handing off market-facing requirements, Lowes says.

When is it worth it?

IT Leaders seem to be learning the appropriate balance for outsourcing and in-house work. For example, Michael H. Hugos, CIO at Network Services, a US$8.2 billion, 84-company cooperative, outsources new-systems development and security audits. But he won't go offshore for software work without saving at least US$500,000.

"You need a certain scale to overcome the logistics and communications issues that arise," says Hugos, whose company provides IT resources and services for nationwide distributors of food-service items, janitorial supplies and printing paper.

He explains that there are significant time lags associated with sending specifications and code back and forth around the world to conduct testing. "It all takes longer than if you're in the same room," he says. "There's a cost associated with that."

Hugos says his philosophy is to keep IT architectural skills in house, because basic hardware, software and operating system choices are "strategic decisions that we have to live with. But analysis and design work can go outside."

McIntyre says that BNSF determined that it would save on capital expenses with its IBM deal, and although its operating expenses would increase, there would be a net savings of at least 10 percent.

BNSF also outsources about half of its application development to three offshore companies.

"We felt we could learn something from them, because they are all [Capability Maturity Model] Level 5, which is the price of admission for offshore development companies," McIntyre says. "They're the best at this work, because this is their core business."

CMM is a quality metric for evaluating and measuring the maturity of the software development process of organizations on a scale from 1 to 5, with 5 meaning that the process is optimized.

What not to outsource

The one thing eCollege doesn't outsource and says it never will is its call center. While call centers are traditionally a prime outsourcing candidate for many companies, eCollege runs a "private-label," in-house help desk service that it views as strategic to its business.

"Part of [eCollege's] value proposition is quality of the student experience," Resmer explains. That customer service is paramount to eCollege, and the company is best equipped to provide that itself. "I'm a true believer in outsourcing, but you have to outsource wisely," he adds.

Lowes points out that you can't outsource regulatory compliance. He advises having a chief security officer focused on security requirements that apply to the outsourced community, such as policies for access control.

"For example, it's a violation of the Sarbanes-Oxley Act Section 404 if you don't know where your software is being developed or if your outsourcer has further outsourced your development to someone else," Lowes warns.

Offshore considerations

It is now traditional in the IT industry to send software development offshore, particularly to India.

"But in the past, we have gotten our fingers burned many times," says Resmer, who insists that outsourcing staffers become part of his own corporate culture in terms of how they work and when they deliver. In other words, Resmer expects the outsourcer to follow its partner's own business processes and internal deadlines, even though workers are technically employed by another company.

"[Otherwise], you might get back a project that does some things right but not the main things. There are fundamental and cultural disconnects in understanding business needs," Resmer says.

To make the relationship successful, eCollege advocates close integration between each executive level at the two companies. CEOs, CTOs, project managers, developers and others at both companies should remain closely aligned as co-workers with their counterparts at the other company at all times, Resmer says.

And there's one more obstacle to consider. McIntyre says BNSF Railway heard the familiar grumblings from employees and communities that it's un-American to send work offshore. He points out, though, that the railway hasn't laid off a single employee. Previously, he adds, the company used expensive contractors, many of whom weren't interested in converting to full-time employment. The reason, in part, was that they had no competition.

Now, McIntyre says, many of those contractors have converted to full-time employment.

A winning formula

There isn't an exact recipe for successful outsourcing. But among the ingredients is keeping strategic decision-making at home while sending out tasks that constitute the core competency of the partner company. Partners should be able to perform tasks in large volume using scalable, repeatable processes that lead to across-the-board savings for many customers.

IT leaders underscore that while a "set and forget" approach would be convenient, leaving a partnership unmanaged is a death knell to outsourcing projects. Successful sourcing, in contrast, requires an IT department to consider its outsourcing partner as an extension of its staff minus much of the overhead, with staff managed and project results measured accordingly.

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