IT Outsourcing Is No Good

2011-03-06 Initial Post

IT outsourcing is one of the biggest blunders in the corporate world and I was unfortunate to have worked for one of the largest IT outsourcing companies in the world. I don’t have any numbers and charts or in-depth research to show why I feel that IT outsourcing is not a good idea. What I do have is experience working on a few IT outsourcing contracts. Here are my observations. I’ll use the fictitious names of MyCorp for the client and ITService for the IT outsourcing company.

MyCorp feels that it can increase its bottom line by outsourcing its day-to-day IT operations such as helpdesk, desktop support, and server support and systems administration. It’ll still keep IT architecture/engineering and core business process-related functions in-house. With this arrangement, MyCorp estimates that it can save $10 million annually and keep its focus on IT functions that bring it more value than day-to-day IT operations.

So what’s wrong with this scenario? Here are some things I see wrong:

• The CFO or other non-IT exec probably pushed this decision because the numbers worked out in MyCorp’s favor. The CEO fully supports the CFO (who wouldn’t with that kind of savings?). The CIO reluctantly agrees to this since he doesn’t want to “rock the boat.”

• ITService has unrealistically underbidded its competitors. If all things go well, it hopes to squeeze out a small profit annually. The key term here is “if,” and as we know in IT, things usually don’t work out as we plan and we either spend more time or money on a project or issue.

• With the outsourcing contract signed, some MyCorp employees transfer over to ITService. Accrued vacations and most other benefits are retained, for the most part, so on the surface this doesn’t seem so bad for the transferred employees. But this is bad for ITService because now it has a bunch of employees that it might not have hired had they gone through the regular employment process. Multiply this by dozens or hundreds of similar outsourcing contracts and you can see that ITService could potentially have thousands of subpar employees that it had to hire because of the contracts.

• ITService also brings in its own employees, many of them from foreign countries—this is where ITService thinks it can increase its margins the most—hiring lower-cost foreigners. The foreigners can understand English, but as many of us have experienced, understanding a language is one thing, but being able to speak clearly and be understood by native English speakers is another thing. There’s also the cultural differences which language fluency doesn’t account for.

• What the contract has unintentionally done was put up a wall. Now it’s ITService on one side and internal MyCorp IT on the other side. This is the issue that I think drains all the value out of IT outsourcing. For one thing, now it’s a game of “cover your ass,” meaning ITService has to tiptoe around certain things because MyCorp is its customer. ITService has certain obligations that if it fails to meet, will cost it financial penalties. The other thing is that both sides start to hide information from each other.

For example, MyCorp is looking into using another IT services company, GCC (Global Computer Corporation) to work on a upgrading its HRIS system. GCC is actually a competitor of ITService’s in many areas. Even though ITService has experience with such projects, MyCorp had already worked with GCC before on the previous HRIS system upgrade, so it doesn’t see any reason to bid out this latest upgrade project. ITService had no knowledge of this until the day that GCC came onsite to start working on the project. Now ITService is left bitter about this situation. One of the ways that ITService hoped to keep profitable on the contract was to offer additional services beyond the scope of the contract. The HRIS system upgrade was valued at $1 million, which would have helped ITService stay in the black for this contract.

• Basically the political issues are what kill the entire outsourcing model. I’m not talking about outsourcing one small area, but outsourcing a majority of IT operations to these huge global outsourcing companies. It’s just not feasible to believe that people from two different companies are going to be able to collaborate as well as people from within the same company.

• ITService would have its own system for certain things and MyCorp might have similar systems. So if I work for ITService on the MyCorp contract, I might end up using two different systems for the same process. For example, both ITService and MyCorp have their own change control systems. If I’m making a change to an ITService asset that affects the MyCorp contract, I’ll need to put in a change control request in both ITService’s and MyCorp’s change control systems. Overall, this is just a waste of time and instead of understanding one system well, I know enough on both systems to just get by.

• There are also corporate cultural issues. Yeah, I technically work for ITService, but I really work for MyCorp since I have a cubicle there and use some of the applications that MyCorp employees would use. I want to do a good job and do what’s best for MyCorp, but I can’t because some things aren’t in the contract between ITService and MyCorp, so I can’t cross certain lines. I end up frustrated because, as a systems admin, I don’t have much say in matters regarding the contract. For someone who wants to be good at what he does and have his ideas and options valued, working on this type of contract isn’t for him.

• MyCorp is fooled into thinking that it can wipe its hands clean of certain responsibilities because ITService has taken over some areas. MyCorp doesn’t want to spend the money to have its own employees double-check ITService’s work and instead relies solely on what ITService says it’s doing. Yes, there are audits that can be done on ITService, but audits don’t tell the whole story and can’t be the only source of assurance that ITService is doing what it’s supposed to be doing. And even if there are financial penalties to ITService if it doesn’t meet certain SLAs, those penalties might not cover the loss of business to MyCorp because of a Web server outage, for example.

To put this another way, if another driver hits your car, that driver’s insurance will cover repairing the damage and rental car expenses. But the inconvenience to you and waste of your time to file the insurance claim, etc, isn’t covered. What if you were on your way to meet a potential client and because you were late, you lost the potential deal? Nope, the other driver’s insurance doesn’t cover that either. You could sue the other driver, but then that’s more time and money out of your pocket with no guarantee that you’ll win the case.

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