Project Management

Outsourcing warning as time runs out for struggling IT departments

As the tough times continue, will CEOs decide to wash their hands of their entire IT department?

Even IT departments that have largely escaped cuts so far are at risk of being outsourced in the near future - if CIOs fail to deliver on tough targets set by the business.

The warning from analyst house Gartner is that, in these cost conscious times, CEOs and CFOs are increasingly likely to offload the whole IT department, rather than individual roles, as they look to make short-term savings.

If CIOs are to persuade execs that IT is more than just an overhead they will have to meet demands to reduce running costs and add value to the business, the research report CIO' s Should Beware of a Return to Full Outsourcing warned.

But adding business value while also reducing running costs will be particularly difficult for the IT department, said the research author Claudio Da Rold, and the risk of failure is significant.

This increased risk of failure by CIOs and the board's eagerness to cut short-term costs puts the IT department at the greatest danger of being outsourced wholesale that it has faced in recent years, according to Da Rold.

"CIOs, business unit leaders and IT shared service managers — especially those working for distressed businesses — should nevertheless beware of the attraction to CEOs and CFOs of full outsourcing arrangements that deliver cash upfront or greatly reduced running costs in exchange for long-term fixed-price contracts," the research said.

"The potential threat is…the whole of IT or a shared service gets moved to a service provider," said Da Rold, adding that CIO roles themselves may also be farmed out.

"In this case it's not unusual for some of the top jobs in the unit get moved to the provider."

If Da Rold's prediction comes true it will mark a reversal in a recent trend for businesses to source services from multiple suppliers using short term deals, and a return to multi-year deals with single suppliers that have become less common in recent years.

The return of these Big Bang outsourcing deals is made more likely by supplier pressure, Da Rold said, as vendors try to find ways of preserving revenues while adapting to cheaper service delivery models like cloud computing.

Suppliers will jump at the chance to secure five to ten year deals, he said, which are priced at today's costs and allow them to increase their margins as cloud drives down the cost of service delivery over time.

CIOs who want to see off the threat of losing their in-house department need to mix and match the best value services from suppliers to ensure they can compete with what a third party provider would charge for a wholly-managed IT function, he said, while also remaining focused on adding business value.

"If a CIO implements this kind of strategy they will reduce greatly the risk of being outsourced. A CIO just running their IT as they traditionally did will see this risk rise quite considerably over the next three years."

About

Nick Heath is chief reporter for TechRepublic UK. He writes about the technology that IT-decision makers need to know about, and the latest happenings in the European tech scene.

30 comments
martythesandler
martythesandler

Nothing illustrates the dual weaknesses of our accounting systems and the way we measure company success than the push for outsourcing. ??? First, they measure success in too narrow a context. ??? Second, they ignore long term losses When you outsource you are doing what, in another context, Benjamin Franklin deplored. He said that "those who sacrifice essential liberty for a little temporary security deserve neither liberty nor security." When you outsource IT, you are setting a trap for yourself. You lose control of your data and your processes. No matter how trustworthy and conscientious your providers are, they can never either understand your business or care about it as much as you do. But, you ask, what can I do about my very real and immediate IT problems? Think outside the box. Hire a new Vice President of Information Technology. Give him or her a noticeable chunk of stock. Then give him or her clear, measurable, and attainable objectives, negotiate a reasonable timeline, and inform your beancounters that they WILL keep their hands off IT. Finally, renegotiate the objectives as you go along. You will NEVER get it right the first time. Oh, and tell any financial analysts who look at you that they are [i]persona non grata[/i].

jaxxm
jaxxm

Maybe somebody should tell the CIO he can save money by going opensource. Oh sorry he wants MS because ..... mmm I cant think of a specific reason. Linux has no cost for the OS or License fees. Any amount of users can connect. If a service doesn't run you restart the service, not the whole system. It doesn't use all the server's resources for itself. So you can use the servers for longer before having to upgrade, as it runs on older system too. It is stable as some systems have not been restarted for a couple of years. Plenty of support to the willing Googler. And if the CIO wants dedicated support he can pay for it from almost and distro vendor. OK so we will not outsource, we'll upgrade to linux, and keep using our old servers till they completely collapse, by which time the recession should be over.

syvehc
syvehc

This article isn't worth the energy my monitor is emitting.

martythesandler
martythesandler

A company that outsources any of its functions is surrendering control of that function, no matter what agreements they have with their supplier. So is any company that places any vital function in a distant facility. It is essentially impossible for two widely separated facilities to maintain the minute-to-minute communication that characterizes "easy face-time" environments. If this viewpoint causes you to label me a Luddite, I am proud to wear that label.

da philster
da philster

Nowhere in the "quarteritis" based beancounting systems do I hear the word "Value". Value in its purest form determines the true worth of an enterprise. All I hear is "costs" ...... not at all the same thing. With all due respect to the accounting profession, this mantra of obsessing simply on cost has produced unintended consequences as demonstrated in some of the other posts on this subject. Cutting fat and cutting muscle is not the same thing. Interesting times.

j2will
j2will

Outsourcing is a mine field disguised as a Garden of Eden! I use to work for a small startup company that provided cable TV, Internet, and Telephone services over fiber to the home. Due to the initial costs and regulations associated with becoming a CLEC, the president decided to outsource its phone system. He chose a provider that had just got established (unknown to us at the time). Everything went well until the company got a couple of large clients. Then our phone system went to hell due to lack of support. This destroyed our reputation along with any hopes my boss had for expanding his business beyond what had already been planned for. By the time he realized what was happening there was no way we could fire the current phone provider and get another . . . it would have been too expensive and labor intensive. While working on a research project concerning the pros and cons of outsourcing, I discovered that while initial cost savings could be substantial, the long term costs always tended to creep upward due to the outsourcer's unfamiliarity with the business practices and procedurres the company used. The worst cases involved outsourcing to other countries where language and cultural differences came into play. Foreign companies do not have the stringent security and compliance standards that are associated with US businesses. In every instance of a successful outsourcing, the vehicle that drove the success was the legal contract between the company and the provider. But the legal costs involved in these successful cases drastically reduced the the initially quoted cost savings. Legal costs were continual since lawyers had to be called upon to enforce the terms of the contract. Another aspect that has already been mentioned is the cloudification of everything. While this reduces immediate costs, the risks associated with the outsourcing also raises. No one really knows the state or level of security of another company at any given time. All companies are pushed into the cost savings and, from what I have read in many of the trade journals, information security is one of the first areas hit by cost reductions. To me I would not be able to sleep at night worrying about outsourced data being breached, I would also worry that the company I selected for outsourcing might outsource my data in order to save costs on their end. Once data is outsourced I see no way of knowing where my data is, who might be reading it, or using it for illegal means that would make my company liable for any damages. From my level of exposure, outsourcing IT is a trap that will ultimately lead to major problems, increased costs, and possible financial disaster.

bonnie
bonnie

When an IT department does a good job... keeps everything running and available so everyone in the organization can get their work done... upper management (CEO's and CFO's) believes an IT staff is waste of money. "Why do we need to have all these computer nerds hanging around, paying their salaries when everything is running smoothly? Let's outsource IT so we don't have to pay anyone until that rare occasion when something breaks. So what if we have to pay 3 times as much for someone to come in and fix an issue?... 3 times as much for only a few days, as opposed to paying salaries and benefits for a full-time staff is a bargin that is a no-brainer!" How can an IT department even justify its existance? We'll all be working for consulting companies before long. Might as well submit your resume to GeekSquad now and avoid the rush.

denvercamera
denvercamera

Putting aside costs, I wonder how much of a company's operations could be outsourced. I would bet it possible to outsource damn near everything, including sales.

Systems Guy
Systems Guy

Yeah, I just don't get it. No matter what dept. gets outsourced, one of the things it does is make the CIO or CEO look good. "Look, I lowered costs." The money has to stay here in order for the economy to improve. The taxes revenue has to stay here. "Civilized" , "It's what everybody is doing . ." What an idiot. Anybody can out source. Do your job and find other ways to reduce cost.

mckinnej
mckinnej

So typical these days. They take a short-term gain in spite of the long-term losses. These are the companies you do not want to invest in.

info
info

Shades of RIM here... I had a meeting with a company pushing managed print products. Their presentation was good, albeit using stats describing an organization with it's printing totally out of it's control. Ours is tightly controlled, with costs kept very low. When I asked point-blank what the extra overhead would be, the only response was, "No, it'll cost LESS!" My CFO boss is in favour of the idea, even though we know it'll inevitably cost more. His comment? "It's 'civilized'. It's what everybody's doing..." *Sigh* Follow the other lemmings, right over the cliff. It's a mind-set that will inevitably ruin us. As described above, cut to maximize short-term gain, but then throw that saved money into the toilet?

sfaid
sfaid

Even when companies PROFIT over a billion in a quarter it is still NOT ENOUGH! "We need to cut IT expenses". Somehow I think that they think they have IT by the balls because of the economy. It WILL flip around just as it did 10-12 years ago. Big IT will be left with mediocre employees, and NEEDING to get the job done. I can state that I have been with the same BIG company 12 years(lazy?) and have not gotten a raise in over 4 years. They think I make too much for what they think I can get somewhere else in this economy. NEVER about the employee(except the BIG BOYS), always about what Wall Street might say.

somawee
somawee

You are spot on in identifying the next wave of outsourcing model. It used to be that companies would outsource certain aspects of their IT operations while retaining key services in house to manage the vendors. Royal Dutch Shell has outsourced the major part of its IT operations to 3 main vendors and has been working over the last 3 years to drive the vendors to deliver on their commitments as well as shape the services that they deliver to meet Shell's requirements - using retained IT staff to manage the vendors. Shell is now embarking on revamping the remaining IT-related staff into a separate organisation and calling it IT Operations. It seems likely that the most logical step would be to outsource the entire IT space than to have it half-in and half-out. This is inline with a strategy developed years ago to focus on its core business - which is to find and market energy resources.

Necker
Necker

Pete above has it spot on! Take the word IT out of the article above and replace with any other service department, paste into any other department specific website, it will read the same. Theres a core out there that believe that the world needs 'cloudification'. Theres also a core that believe it does not or will only when ready, not when forced or scared into it. This whole article seems to point towards all us IT department guys having no input or choice, its out of our hands, inevitable, resistance is futile. I'm waiting for the first REAL big cloud problem. Theres been issues, little 'tap-dancing' ones around the edges but theres that deep down in the gut bad feeling any IT guy worth his salt should have about this whole area. This article feeds off this cleverly, I think its in the wrong vein to be frank.

Pete6677
Pete6677

Why do you never hear anyone proposing to outsource the entire accounting department? Or HR? Except for in the smallest companies, this is never done. Outsourcing all of IT is a consultant's dream however, as they will be called in to clean up the resulting mess and bill lots of hours for it.

Charles Bundy
Charles Bundy

As long-term contracts = monopoly = too big to fail. An example would be the Commonwealth of Virginia - Northrop Grumman IT outsource deal, which went from 10 years and 2.36 billion to 13 years and 3.4 billion. This took place as soon as republican governor Bob McDonnell took office. It also happened in spite of NG being told formally that they were in breach of contract. This doesn't sound reasonable but the whole structure seems designed to obfuscate responsibility. Every once in a while a news story will mention that some executive branch agency has not been able to pay the approved device rates for months on end. Not good business to shovel critical infrastructure out the window and give the receiving end a monopoly regardless of performance. As far as cost savings, a quick back of the napkin calculation using the latest rates from JLARC yields a monthly cost of $14,400 if my current employer was to utilize NG services. Needless to say our in-house overhead doesn't approach that. This is a concrete example of why many can't afford mandated, long term, substandard service and yet there is no contractual teeth to hold the providers accountable.

tbmay
tbmay

Remember the old line, "Nobody ever got fired for using IBM." I'm a *nix guy through and through, but if I needed my job to feed my family, the last thing I would do is go off on some hair-brained initiative to put *nix on the corporate desktops. These people have jobs to do, their software already works on Windows, and they are at leastly moderately familiar with how to use it.

j2will
j2will

You hit the target dead center. I bet CEOs and CFOs do not count the lost prodivity costs associated with having to wait for a service tech to show up or the on the spot training local IT personnel give to their users. They also do account for the times when a major viral outbreak or DDoS occurs and outsourced support personnel cannot gain access to the company's servers and computers to fix the problem. In addition, they usually do not even call in the CIO or CTO to discuss the ramifications before they make these decisions. Personally, I cannot fathom the idea of totally outsourcing an IT department. With a million dollar plus loss of revenue per hour of downtime that face many businesses, the risks would be too great. How would I justify the "cost savings" if a DDoS or viral outbreak knowcked my business offline for a day or two? Or, if the company experienced a major data breach with the astronomical costs ($214 per compromised record and averaged $7.2 million per data breach event; http://www.ponemon.org/blog/post/cost-of-a-data-breach-climbs-higher)? I believe these would be career ending events if I had oursourced my IT department. I guess there's always truck driving school . . . not much differrence in hours, more change of scenery, and less responsibility. Plus outsourcing truck drivers is still a long long way away.

j2will
j2will

I agree. To me everything except for the core IT functions could be outsourced without any major problem. That includes the Chief Executive positions as well. Talk about cost savings! With some CEOs making millions in salaries plus mega stock options and bonuses, any right thinking board of directors would outsource their executive positions before anything else ;-)

Kevj
Kevj

It makes sense to keep staff in house to manage vendors. Otherwise, you can very easily wind up with services fragmented across multiple vendors, and no one who understands how all the pieces fit together. I have seen this happen in small companies where the customer database is maintained in house, or hosted by one vendor, and the website is hosted by another vendor. Integration between the systems becomes very difficult, or impossible, if poor decisions were made in the planning and vendor acquisition process.

Charles Bundy
Charles Bundy

The detail you provide seems to indicate that Shell has lost control of their Information Technology assets. E.G. 'working over the last three years to drive vendors to deliver'. It sounds like Shell no longer has [b]critical[/b] services provided by people with a stake in the success of the company and is working extra hard to make up for it. Why is this a goal of management?

tom.marsh
tom.marsh

It will require something big, like a high-profile bankruptcy that comes out of some stupidity surrounding the cloud. And it wouldn't necessarily have to be a technical problem, either. For example, a supreme court ruling that forces a ruinous court decision loss and also says data on third party servers isn't protected against unreasonable search and seizure would be extremely problematic. Or a ruling that tenant-data from a cloud could be subpeonaed from the provider directly, rather than through the tenant. In essence, anything that exposes your data to exposure in an arbitrary scenario would be pretty jarring to the cloud universe.

markp24
markp24

LOL our HR, ACCT and IT are all outsourced, i m still there because i so client troubleshooting as well

Professor8
Professor8

HR out-sourcing was one of the earliest, though it was mostly domestic (i.e. on-shore). Ditto accounting: the Big 3 or Big 6 or whatever the current label is. I recall trepidation when the B-school at the U solicited funds from them for remodeling, and installed brass plaques outside each class-room door "A Accounting Bodyshop", "B & C Accounting Bodyshop", "D Accounting Bodyshop"... Out-source firms that specialize in pay-roll processing -- just one sub-set of accounting -- have been around for quite a while. One of the last identifiable fragments of the super-computer/financial services/software products/custom programming and analysis services firm where I once worked is the pay-roll processing, back then a teeny tiny sub-sub-subsidiary... but, tellingly, it was the one the new company CEO hitched his wagon to and rode down the cliff as the sequence of the destroyed a GREAT AMERICAN TECH firm. Execs of non-tech firms have always considered computing services ("data processing", or "IT" as most folks at Tech Republic and Ziff Davis apparently think of it) to be a cost center. But they expected it to reduce their costs, and it did, but never as much as they wished, because, quite frankly, they never really understood computing, never wanted to invest the effort to do so.

Kevj
Kevj

Actually, in the case of a data breach, if IT was outsourced, you can blame it on the vendor who will have to take ultimate responsibility (if the agreement was written correctly). The company can simply find another vendor to salvage their reputation.

Deadly Ernest
Deadly Ernest

to look at data for a certain client or two?

Deadly Ernest
Deadly Ernest

not the other vendor. You WILL be held fully responsible by the courts. This sort of thing has happened in other spheres - think state child welfare services who employ contractors to care for the children and something goes wrong, it's the state authority that gets hit with the compensation for the kids, and then they have to take the contractor to court and prove the contractor was negligent under the specific terms of their contract.

tom.marsh
tom.marsh

It isn't that simple: Outsourcers are wise to this and simply don't provide such insulation. Anybody who does will likely do so through a cut-out company that they'll bankrupt if the deal goes south, so your customers will still be suing you in the event of a breach. Reality is that your company is responsible for your data, even if you give it to somebody else--that doesn't mitigate your responsibility except in the rarest of circumstances. If you giving the data to a third party creates damages for a customer, their recourse is in your bank account. You would have to go after the outsource firm. This isn't a model you want to follow, or encourage others to follow.

Deadly Ernest
Deadly Ernest

serious financial lost if it came out their database was taken and looked at by a US Gov't agency under the Patriot Act. Just being unable to do anything while they made their investigation would have a tremendously negative effect. Most gov't investigations require all to mark time until it's over. However, the real concern is an Aussie company with data in the cloud and having to hold still while the US gov't examined that server farm would see a major loss due to Aussies being outraged that their data the company had could be accessed by another gov't without their permission. We're a volatile lot about that sort of stuff.

tom.marsh
tom.marsh

If it caused them serious financial damage then yes, absolutely, that would be the perfect example. Also if their executives ended up (wrongly) imprisoned because of data taken out of context in this way, that would probably do the trick as well.

Editor's Picks