Thinking of outsourcing IT? The CEO's 1st question.

For over thirty years I've been involved in all aspects of managing IT. For the past ten years I have focused on working with CEO's to improve the value of their IT department. For several of these assignments I was providing input on whether to outsource. Not a single client has outsourced after we complete our two week review.

Considering that two weeks is a ridiculously short time frame to evaluate an entire IT organization you are probably thinking this proposition is a bet silly. So did we until we couldn't make the process take any longer. In fact, our offering was a pretty confident deal. If at the end of two weeks and after reviewing a brief (usually 5 pages) report the client believed we missed the mark with our recommendation, we would not invoice the work. If the client thought we hit the mark, we asked only to be considered for providing the solution.

The challenge we had was coming up with that one single question that the CEO should be able to answer before even considering outsourcing. In all cases he knew things were bad, availability issues, projects took too long, cost too much and delivered too little. His officers were constantly complaining about IT. IT performance was even affecting customers.

Most clients were on their second or third CIO in as many years and still the problems persist.

So, after twenty years of reviewing under performing IT departments and subsequently fixing them without outsourcing, what's the question the CEO should answer before issuing the RFP?

Well, there's only one question, but it covers a lot of ground, a decision to outsource without the answer amounts to acquiescence, not informed decision making.

THE QUESTION: Specifically, why is IT failing to deliver value, do we have the right people, are we spending too much, are we spending on the wrong projects, are there enough controls?
Every account was different so the list of sub questions could be different, but the concept was always relevant. Our premise for the CEO was simple, if he could not articulate exactly what was wrong, how in the world was he going to tell if outsourcing was the solution. And believe me, that's what the outsourcing vendors are hoping for. If the CEO is frustrated enough almost any solution from a prime vendor is going to look good.

Here's where we began. A client was going to outsource and I was asked to sit in on the presentations. Having run two "FOR PROFIT" IT organizations, I was dumbfounded by the fees. At that time the best operations managers in the business were making $80 to $100k. The vendors were charging $250/hr, roughly $500k a year. It occurred to me that the client could really splurge and and hire the best OP's manager in the city for $200k, (it would not have been necessary to go that high) and save $300k right there.

After the presentations were complete I met with the officers and asked them what problem were they trying to solve and no one could go beyond "it's not working today". I offered to look at the IT organization for five days and tell them what problem outsourcing would solve. At the risk of being too cute, the only problem outsourcing was going to solve was reducing their operating margins.

Here's how we arrived at our belief that outsourcing isn't what it's cracked up to be. First of all, if you closely follow the major publications that cover the subject, all with major advertising from the outsourcing vendors, it's almost impossible to find a story critical of outsourcing. This fact shouldn't surprise anyone, but you would think that a publication with CIO in the title would periodically find worthy a discussion that's negative on outsourcing , even if it was gratuitous..

One of our clients who hired us to identify the problem and then hired us to solve the problem was purchased by another company several years later. The purchasing company had already outsource their entire IT department several years before the acquisition and made a decision, with no competitive bidding, to outsource the acquired company's IT as well. Because we had such a good relationship with many of the employees we were able to follow the success or failure of that project over several years. What was even more valuable for us was the close relationship we had to the business managers who were now faced with using the outsourcing vendor to solve their IT problems. It became so cost prohibitive to use the vendor, that within three years of the outsourcing, the company had acquired 100 programmers back on their own payroll because that was the only way they could afford to get any work done.

Another company in the Midwest also outsourced their entire IT department and within only 18 months they had acquired 75 additional programmers due to the hourly cost of the outsourcing contract, again, there were their own former employees.

We knew we were on the right track with our service offering when I had the opportunity to discuss my feelings about outsourcing with a recently retired executive of one of the worlds major outsourcing companies. His description of what happens after they signed the contract was shocking. He said that the first thing that happened after they signed a contract is that the financial side of the outsourcing company took over the leadership. And their first question to the outsourcing team was, "how do we monetize this deal beyond what we contracted for".

Here's some additional questions we started asking ourselves about this outsourcing process. How is it that you save money moving from a fully burdened employee programmer at $60 an hour and save money replacing that person with a contract programmer at $150-$200 an hour. Is it even remotely possible that you're going to get three or four times more code for that incremental money (Don't forget that many of these $200 and hour programmers are your own, formerly $60 an hour employees). No, more likely you won't be able to afford the code so you're going to save money by not requesting as many lines of code. You might feel better about it because you have fewer failed projects, but the basic financial structure doesn't work. You just can't replace a $60 and our programmer with a $200 an hour programmer and save money, you end up with fewer lines of code, that's the only way it can work. I have to admit that the numbers are less clear when outsourcing the network and the operations area.

So, our advice to any company considering outsourcing their IT department is to do the math. How do you spend 2 to 3 times per hour the internal cost, (initially for the same people) and end up with a better deal. Granted there are some companies who are so terrible at project management, just having the outsource vendor managing the projects will save some money. However, we believe that if the CEO and his management team can accurately articulate exactly what's wrong with the internal organization, they would find it far easier to fix those problems than to deal with the lowered morale and increased costs of outsourcing.

One final observation. Even though we engaged with our clients as "agents", meaning that we could hire and fire their IT employees during the IT re-engineering, that was rarely necessary. We tell every CEO during the initial sales call that it is going to be extremely unlikely that IT is the only major problem. It has always taken us far longer to fix the business management that has abused the IT resources than it took to fix IT. Few CEO's want to hear this, but that's our bottom line, and we have not found a single exception. Yes, some IT people had to go, but the primary solution was in getting the business disciplined.

Thinking of outsourcing, interview companies two or three years into their deal. Many contracts prohibit discussing the deal, but if you can find out how many people have been hired back on the payroll, you'll get a good idea of how well it's working. And another interesting occurrence, is the number of your former employees who will have been let go during the second year and replaced with lower cost staff that have no ideal how your systems work. And you should also look at the margins for the outsourcing vendors, how do you suppose they provide the same volume of work and such high margins and still save your money. Kind of like perpetual motion don't you think, or is it perpetual profit? Do you think this might be why Xerox want's into the outsourcing business.

Until the CEO is absolutely certain that he knows what's causing the IT problem and that everything has been done to correct the real problem, turning to outsourcing as the solution is just acquiescence.