Just because IT is one of the few areas that promises to deliver a good ROI doesn't mean the IT department is safe. ZDNet readers tell me there's plenty of pork in IT departments and business executives are keen on routing it out.
Then there's the employee distraction. Entire companies have ground to a halt as pending layoffs send employees running for water cooler rendez-vous.
Finally, there's that incredibly awkward discussion, during which relationships (that took years to build) are destroyed, tears are shed, and, sometimes, security guards are called to escort the jettison.
My description of this process is purposely callous. As much as you and I would like to think these are emotional decisions, they're not.
These are business decisions. But business executives who have been through at least two flips of the economy are painfully aware that the cost of downsizing isn't limited to the severance packages or the graceful shutdown of marginal projects.
The emotional and physical baggage that accompanies every downsizing can be overwhelming. This isn't the first recession and it won't be the last.
Any good business manager who wants to surf the economy's sine wave as gracefully as possible should be looking for ways to lose that baggage. Or, as Ketchum put it, to "create capacity for efficient growth." Nothing presents that opportunity quite like outsourcing.
Outsourcing allows businesses of just about any size to insulate themselves from the negative side effects of any IT downsizing operation.
A good example comes from one ZDNet reader and IT manager who asked not to be identified. According to "Mary," her company got caught with its pants down after the bubble burst.
Not only did she have to downsize her IT department, she had to shell out a fortune in severance. Most of her staff were hired during the boom that dictated premium compensation, or they were long term staffers who renegotiated their pay after finding out what they were worth on the open market.
Over the short term, and when times are good, it's easy to list the reasons a company should bring the entire IT operation in-house.
Given the premiums that you can pay to a good consultancy, it's probably cheaper. After all, IBM and EDS customers can hire the same people that those consultancies hire without having to pay the markup.
But you only have to live through one or two downturns to figure out that, in the long term, outsourcing (with well-negotiated service level agreements) is the most emotion-free and cost-efficient way to shrink and swell with the changing tides.
"Outsourcing makes sense," says Centerbeam's Laube, "because you're giving the job to people who can do it better and cheaper and at a very variable cost."
Citing the traditional per-employee outsourcing costing model, Laube says, "With outsourcing, if you double your people, your costs double. But if you cut your people in half, you cut your costs in half. If you hire your own people, you don't get that linear change."
By letting consultancies deal with the ugliness of human and physical resource management, companies can free their managers to focus on managing the business at those times when that sort of focus is needed more than ever.
Judging by the way the economy seems stuck in a trough while the outsourcing business is on the rise, executives apparently are looking at IT with a longer term perspective--that perspective where the outsourcing premiums turn out not to be premiums after all.
At worst, outsourcing vs. home-growing is probably a break-even proposition--and that's all it has to be. But for many, it can represent a savings in both quantifiable and non-quantifiable costs.
Laube says that's because a consultancy can spread a lot of one time costs across many customers. If you keep your IT in-house, you end up bearing those one time costs yourself.
I predict that this decade will be marked by a giant shift in the information technology mindset.
By 2010, the majority of IT will be outsourced and the companies that outsource their IT will have a skeleton staff of IT and project management professionals whose job it will be to keep their consultancies' efforts closely synched up to the business size and objectives. Depending on the size of the company, there may only be one or two of these people.
If you're keen on being one of these people, you need to start developing a solid track record in outsourcing management now.
If, like me, you prefer to tinker with the technology, press buttons, and watch the lights blink, you should set your sights on one of the consultancies.
If they keep growing the way Centerbeam is, by the end of the decade, you'll be near the top of the totem pole and not where your friend who stayed in her company's IT department will be: at the local coffee shop reading the classified ads.
"At worst, outsourcing vs. home-growing is probably a break-even proposition--and that's all it has to be."
Oh come on, pull the other one!
What has not been factored in here are the other non-dollar costs involved with outsourcing, including :-
- exhorbitant markups for 'non-core' work
- arguments over what constitutes 'core' and 'non-core' work (and don't tell me that this is easily resolved by checking the contract). and if anything does go to court, remember that EDS, IBM GSA, HP etc can be bigger than most businesses that they outsource.
- outsourcer's own turnover of staff, which means that the new starters have to be trained up again.
- your company has an agreement with an entity, not an individual. try working performance management and guarantees around that one!
Look at a prime example.
The outsourcing of IT in South Australia was meant to produce $120 million plus in savings per year, over in-house IT operations. Instead, the savings have been estimated at only $20 million over the entire duration of the contract thus far. That's $4 million per year savings, folks.
Is that worth it? Local businesses have been cut out of the loop, people have been laid off (now what's that cost the community? Oh, forgot - unemployment is a federal government issue), IT processes within state government have become hampered by even more red tape, the government and the outsourcer argue over what is and isn't done. And the crowning glory, in late 2001, EDS were found to have overcharged for their services and had to repay a not insubstantial amount.
Outsourcing only works if the outsourcer wants to provide good service at a good rate. This is what both parties want to pretend will happen. However, if you have an outsourcer that wants to earn as much money for as little work as possible, and a company that wants as much work done for as little as possible, these conflicting goals will mean problems.