When I first became CIO of a large multinational company I was visited by a senior vice president. He told me that if I was smart, 12 months from now I would have only one person reporting to me and he would work for IBM. In truth the IT shop had some problems. The prior CIO had been out sick for months during a time when the company was experiencing 20 percent growth.
Procedures, organizational structure, and architecture that had worked well for the company just a few years ago were now hopelessly outdated. The individual running IT in the CIO’s absence was a smart and dedicated worker, but he lacked the training and political power to secure the required funding or drive through the needed changes. Outsourcing was an attractive alternative. It was also the absolute worst time to do it.
Cheaper Onshore Options
Outsourcing and offshoring have some definite attractions, the first being cost. To the surprise of no one, employees in Guatemala or Malaysia are cheaper than employees in Detroit or Atlanta. By sending work overseas staffing costs can be cut in half. Though not all jobs can be offshored, certainly anyone who spends their time in front of a computer screen is fair game. One need not even go overseas. An outsource vendor could have the bulk of his staff within the US, but located in a cheaper part of the country. Using HR experts from Mississippi rather than in-house staff from New York can reduce costs while keeping jobs in the US.
The second reason to outsource is quality. Substituting highly educated IBM staff for less well trained local talent can significantly improve the quality of service. There are also ancillary benefits. Many companies find the searching for and hiring of highly skilled workers, such as those in information technology, expensive, time consuming and sometimes frustrating. Giving that problem to someone else is an added plus.
However, there are also some significant disadvantages to outsourcing as well. Most critical are the threats to core competencies, staff morale and the difficulty reversing the outsource decision.
One of the problems with outsourcing is the lack of an inexpensive exit strategy
A Danger Zone
First, outsourcing core competencies is dangerous for any company. A core competency is a significant and meaningful competitive advantage. It is the one thing that an organization: (1) does better for its customers than anyone else, (2) has value and (3) customers are willing to pay for it. A business should protect is core competencies at all costs since, put simply; it is their reason for existing. Allowing others to acquire your core competencies is a milepost on the road to bankruptcy.
Some organizations mistakenly outsource their core competencies – giving to another firm the family jewels. The television and the video tape recorder might have been invented in the US, but the American manufactures gave this competency to other, non-American, companies as well as the future profits for their manufacture.
Core competencies can be applied to internal (overhead) organizations as well as an entire business. The same relevant question remains: what is it that IT, HR or accounting does better than any outside organization can do?
While a company should protect its core competencies at any cost, non-core competencies deserve no such protection.
Second, today few people step on a plane, visit a supermarket or even shop in some department stores without presenting a customer loyalty card. Doing all you shopping in one store or flying only one airline can garner the card holder free travel, free meals, even cash. Companies have discovered the value of customer loyalty. Loyalty within the company is another matter. The trade press abounds with stories of staff morale problems when outsourcing is even mentioned. The fear is not limited to the candidates for outsourcing. Angst can permeate all staff. It might be empathy, it might be pondering their own uncertain future, or it might be the despondent feeling that companies that demand loyalty from workers are not willing to reciprocate.
Third, everyone, every business unit and every company makes mistakes. New Coke, Ford’s Edsel, and credit default swaps were ideas that should have stayed ideas. Coca Cola was able to go back to Coke Classic, Ford had a lot of other cars it could sell and the financial industry will come up with some other product needing a taxpayer bailout. Product managers, unlike army generals it would seem, tend to have exit strategies. One of the problems with outsourcing is the lack of an inexpensive exit strategy.
JPMorgan Chase spent millions reversing its outsourcing deal as have a number of other companies. Some organizations have kept unsatisfactory outsourcing deals in place because of the pain and suffering involved with reversing them. Like a black widow’s marriage proposal, outsourcing deals tend to be a one way trip.
Navigating around these potential disasters can be difficult but not impossible. Outsourcing to cut costs might have some tactical value but its strategic advantage is unclear. Acquiring needed skills through outsourcing only makes sense if the skills are not essential to the company doing the outsourcing.
What did I do as a new CIO? Well, I didn’t outsource the entire IT function. However, I did an analysis of our core competencies, our strengths and weaknesses and put a number of remedial programs in place. Then I did outsource a few limited areas using four evaluation criteria.
First, core competencies were off the table. We identified what we did or could do that no outside organization could or should do better. If we were not the best at core competencies, getting up to snuff became a prime objective. We concluded that since no one should know our business better than we do, we would not turn over to outsiders work that required knowledge of the business.
Second, outsourcing had to provide better value (quality or cost) to our IT users. Making IT easier to manage or reducing administrative burden was not relevant. Value was to be measured at the end-user level only.
Third, outsourcing could not diminish our internal ability to provide value in other areas. We would not outsource if it would decrease IT productivity or morale. We felt we had to be as loyal to our employees as we expected them to be to us. As a result, we did not lay off any staff. Rather we redeployed them to core competency related areas where they could be more productive.
Fourth, the outsourcing of any function had to be easily reversible. In some cases it meant being able to quickly move internal staff into critical functions or to be able to hire staff (consultants, temporary and permanent workers) as needed. We also favored situations where we felt we could hire a significant portion of the outsource vendor’s staff if needed.
Is it working? Well years down we can confidently say, “so far, so good.”
George Tillmann is a former CIO, management consultant, and the author of The Business-Oriented CIO (John Wiley & Sons, 2008). He can be reached at firstname.lastname@example.org.