Wednesday, July 25, 2012

IT Outsourcing - the trend is reversing.

I just saw this great article on Information Week.

In it Jim Ditmore talks about why companies are starting to realize outsourcing isn't a silver bullet and shares some times he reversed an outsourcing deal. I really like this article. I think he does a great job of hitting the nail on the head. I'm paraphrasing a bit with the next line

Outsource only what you don''t have scale, cost advantages, competence or capacity and what is not part of what makes you special

I've actually been involved in two outsourcing due diligence discussions and analysis almost 8-10 years ago. One as the project lead. Both times we didn't do it. The first time was all of IT. Application development was going to go to one company and Operations to another. While the companies were "partnered on the engagement" I can't imagine there wouldn't have been finger pointing. We, at the last minute, passed on it.

The second engagement was for IT Operations only. Supposedly the vendor could save us 20-30% of our costs and at the time we were a public company and very concerned about the "revenue per headcount" metric. 

Apparently somewhere, someone external to the company decided that even though our costs were in line and we were profitable, we had too many people. Personally I always think focusing on a single metric at the cost of profit seems silly, I wasn't involved enough in that discussion to understand the entire decision. I firmly believe "If we all have the same information, the answer is obvious". I didn't have all the information. 

Anyway, we looked at the entire scope of the project, our costs, growth projections and after six months at our final presentation, determine that the costs were going to go up 20%. I still remember the vendor saying to me "Rich, we think the problem is you don't understand your true costs", to which I replied "No I think your problem is I do understand my true costs and they are about 20% less than yours".

As it turns out Jim says exactly that. In a mediocre company, outsourcing is likely to save you 30% or more. If you are well run it should be about the same, and if you are world class you are probably 20-40% less. I guess we fall into world class, cool.

Now I do think outsourcing can work, but the contract needs to be very clear, with measurable metrics and review of those metrics. Also the vendor needs to be very closely aligned with your business goals. 

Let me say that again. BUSINESS GOALS. This doesn't mean an SLA around uptime. That's not a business goal. I mean more like "We will pay you our current costs -X% and a bonus if we meet our revenue, EBITDA and profit goals". Then they have some interest in really making sure your company does well. 

If you haven't read his article, take the few minutes and read it. He has some great examples. It's definitely worth the time.


  1. Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic.

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