In-Depth

Who Benefits from Outsourcing? Not the Line of Business

Some business customers are organizing “shadow” IT groups to replace IT resources that have been outsourced

• By Stephen Swoyer
• 05/24/2005

Who benefits from outsourcing? Executives, of course: CEOs at the 50 biggest U.S. outsourcers generally receive more in compensation than do chiefs who are less bullish about outsourcing.

From the perspective of some business constituencies, however, the benefits of outsourcing seem questionable, at best. End users, for example, report having to fight their way through several levels of bureaucratic indirection, and almost all are putting up with longer lag times in response to support calls.

One upshot of end-user frustration with the Brave New World of outsourcing is insurrection of a sort: Mad as hell and not willing to take it anymore, some line-of-businesses are organizing “shadow” IT groups to replace IT resources that have been outsourced, both domestically and internationally.

When IT Isn’t a Core Competency

When a new CIO came on board at a major telecommunications carrier and provider of managed network services two years ago, he had surprising news for the company’s IT staff: We don’t do IT. Information technology is not a core competency, this CIO said, arguing that the money his company was spending on IT could be better invested elsewhere.

Shortly thereafter, the CIO decided to outsource all of his company’s IT operations, tapping the services arms of both IBM Corp. and Electronic Data Systems (EDS) Inc. to do the job. He touted projected savings in the neighborhood of $150 million, but assured employees, analysts, shareholders, and others that cutting costs wasn’t an “overriding consideration.” At the same time, he announced plans to eliminate several hundred IT jobs—although, as it turns out, the company cut between 1,400 and 1,600 IT positions.

Two years later, the telco and network services giant is about to enter the third phase of its lock, stock, and barrel IT outsourcing effort. The results of this move are only now becoming apparent. At least one of the company’s biggest business units—the managed network services group—is far from satisfied.

As a result, says a former employee who (along with several hundred of his colleagues) was hired in a similar capacity by IBM Global Services (IGS), these folks are surreptitiously reaching out to former employees at IBM, EDS, and elsewhere. “That’s the group that’s disregarding the [CIO-driven] initiatives and trying to create its own shadow IT group now,” says the IGS pro. “They weren’t happy about it from the outset, but the deeper [the company has] gotten into this, the more unhappy they are. I still work with the same people over there, and all I keep hearing is how much they would like to hire most of us back.”

What is the managed network services group so upset about? Consider a mundane issue—a production support call to fix a sudden failure in a line-of-business application. Actually, the production support call came not through regular channels—that is, through the IGS ticket system—but directly from the line of business itself, just as it would have before the company’s IT operations were outsourced. According to the IGS IT pro, the fix—which required some tinkering at the database level—would have taken all of 30 minutes to implement. Before he could do it, however, he had to get approval from his IGS supervisor, which he assumed would be a mere formality.

“I was told the specific request was something that they had not paid for, something not explicitly covered in the contract, that I was not, under any circumstances, to do anything about it until they paid for it,” he reports. The result, he says, was that he didn’t receive instructions—through IGS channels—to fix the application until a week later. “It was kind of ridiculous, because this would have taken me thirty minutes at the most to do.”

IT in Exile

In some enterprises, there’s another kind of shadow IT group, too: IT pros who’ve survived big lay-offs, often because they’re needed to support critical operations that can’t be outsourced—yet. In the world of outsourcing, these hardened survivors often become the touchstone for end-user and line-of-business gripes. More often than not, many report, they’re forced to pick up the slack for the shortcomings of “green” outsourcing tenderfoots.

Take Don Cave, an IT professional with a prominent global insurance giant, who survived his company’s decision to outsource one of its database applications to the Indian subcontinent. In a previous life, the same application was managed by a veteran crew of in-house professionals, says Cave; these days, it’s supported by several “green” IT pros.

The result? Cave and his co-workers have been cleaning up after the offshore team for several months now. “We will make it a success, and the company will save millions each year,” he says. “As a result, the offshore groups will gain even better understanding of the system and how to modify it successfully. Then they will hold even better cards to back up an increase in cost. Eventually they will become as skilled as our former staff, and probably cost 70 percent with extra overhead for testing and other interfaces.”

What stings most, says Cave, is that management is willfully oblivious to this situation. In fact, he says, his company recently concluded a project in conjunction with offshore “experts” that—by any objective criteria—was an abject failure: Not only did it go over budget, but it also resulted in a dissatisfied line-of-business customer. The reaction of company management? Deny there’s a problem, Cave says. “Of course dissatisfaction [was] denied, except if the user is asked directly.”

Coming Full Circle

Most IT pros hold out hope that company management, intoxicated with the purported cost savings of outsourcing, particularly outsourcing of the offshore variety, will eventually get wise to the inevitable trade-offs. There are some indications this is already happening, actually.

A recent study from professional services giant Deloitte Consulting found that many one-time outsourcers are bringing it all back home, so to speak. The Deloitte study, "Calling a Change in the Outsourcing Market," found that 70 percent of survey participants reported having negative experiences with outsourcing projects. Almost half (44 percent) didn’t realize the expected cost savings, and a majority (62 percent) found that outsourcing requires a greater-than-expected degree of management and oversight.

As a result, Deloitte says, fully 25 percent of one-time outsourcers are bringing applications and services back in-house.

The Deloitte study also debunked several other oft-claimed benefits of outsourcing. For example, proponents frequently claim that outsourcing can free up internal company staff to focus on projects that deliver more business bang-for-the-buck; for a majority of respondents (57 percent), this wasn’t the case. In fact, because of the increased management overhead associated with the outsourcing model, many companies said this was impossible.

This is far from surprising to most IT pros, of course.

“This project [I’m now on] has been joked about for staying mainframe, but the cost savings over implementing this in ‘newer technology’ will be in the tens of millions of dollars,” says Cave. “If it were the outsourcers alone, they would probably just do as desired by upper management and build a whole new subsystem. But once [management] was presented [with the cost estimates], they realized that the numbers don't lie.”