Sprint Nextel Reverses Course on Outsourcing

GM, Dell, and Gap all notched mega outsourcing deals, but Sprint Nextel backed out of its own outsourcing accord with IBM

It’s been a mixed bag outsourcing-wise in the first two months of 2006. On the one hand, General Motors Corp. (GM) announced an ambitious IT outsourcing initiative, amounting to some $15 billion over the next five years; Dell increased its already beefy offshore presence on the Indian sub-continent; and one prominent Indian outsourcer reported a surge in its quarterly profits.

There was at least one prominent outsourcing setback, too. Last month, Sprint Nextel announced a plan to substantially emend its existing outsourcing arrangement with IBM Global Services (IGS). Sprint Nextel’s about-face (which is expected to result in the repatriation of nearly 400 former employees) was heralded by outsourcing skeptics as poetic justice of a sort.

Most of the beneficiaries of GM’s outsourcing largesse were U.S. firms, to be sure, but all of these companies have also established substantial offshore operations on the Indian sub-continent, too.

At least one contract winner, Wipro Technologies Ltd., is based in India and is that country’s third largest outsourcing exporter.

GM awarded five-year contracts to Electronic Data Systems Inc. (EDS), Hewlett-Packard Co., IGS, Cap Gemini, Covisint (a Compuware Corp. subsidiary of Compuware Corp.), and Wipro. Collectively, EDS (which was first spun off from GM in 1995), Cap Gemini, Covisint, IGS, and HP gobbled up about $7 billion in outsourcing contracts, with EDS taking home the lion’s share of the prize: almost $4 billion over the next five years. HP said it was awarded approximately $700 million over five years, IGS claimed a $500 million award, and Wipro said it had won $300 million over five years.

But that wasn’t all. Last month, PC giant Dell opened its fourth Indian call center (and announced plans to start manufacturing PCs in India, too); clothing mega brand Gap notched a $1.1 billion deal with IBM Global Services (IGS)—which is itself a giant Indian outsourcer; and sub-continental outsourcing powerhouse Wipro announced a 24 percent surge in its quarterly earnings.

Outsourcing and Its Ever-Changing Discontents

All isn’t smooth sailing on the offshore outsourcing front, of course. At least one would-be outsourcer is preparing to bring it all back home.

In late January, Sprint Nextel substantially revised its existing IT outsourcing arrangement with IBM. The telco giant will “backsource” (or rehire) approximately 400 employees who had been outsourced to IGS 18 months ago. Sprint’s outsourcing about-face isn’t by any means unprecedented—two years ago, for example, JPMorgan Chase nullified a $5 billion outsourcing deal with IGS—but it nevertheless strikes some as poetic justice.

Not quite two years ago, after all, CIO Michael Stout famously argued that IT wasn’t one of Sprint’s core competencies. Stout was true to his word: he notched separate deals with EDS and IBM in a scheme to outsource most of Sprint’s IT operations and (subsequently) announced plans to eliminate several hundred IT jobs. As it turns out, Sprint actually cut about 1,400 to 1,600 IT positions—approximately 1,000 of which were outsourced to EDS and IGS. According to the terms of the outsourcing arrangements, many of Sprint’s in-house IT pros transferred over to IGS and EDS, where they effectively carried on as before. Several hundred IT jobs were sent offshore to India, too.

The arrangement might have been a hit with financial analysts and stockholders, but at least one of Sprint’s line-of-business customers (its Managed Network Services Group) was said to have been highly dissatisfied. As a result, users from this group surreptitiously reached out to former employees at IBM, EDS, and elsewhere as part of an effort to create a “shadow” IT group.

“That’s the group that’s … trying to create its own shadow IT group now,” explained a former employee who (along with several hundred of his colleagues) transferred over to IGS. “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 [the line of business] would like to hire most of us back.”

They got their wish. In late January, the telecommunications giant announced that Stout was out (replaced by Nextel CIO Dick LeFave)—and that IT was back in, albeit in a much diminished capacity, at the new Sprint Nextel. Around 400 former Sprint IT pros-cum-IGS contract workers were rehired by Sprint Nextel. Those that were not, or those who decided not to accept positions with the telco giant, were deemed by IBM to have “voluntarily resigned” their jobs at IGS. “We expect a positive response from IBM employees who are former Sprint Nextel employees,” said an internal IBM document provided by an IGS insider. “If employees elect not to rejoin Sprint Nextel, they will be considered to have voluntarily resigned from IBM,” the document concluded.

According to an IGS insider, all but three employees are believed to have accepted (or responded to) the offer. Near-unanimity of this kind doesn’t in itself portend a joyful homecoming, however. Many former Sprint workers harbor misgivings about resuming their duties with the new Sprint Nextel: CIO LeFave is himself a notorious outsourcing booster, after all. And during a Webcast presentation, LeFave told attendees that Sprint Nextel didn’t want anyone to come back who wouldn’t do so happily. “We’re not running a gulag,” he said.

“It’s not much of a choice given the alternative, is it?” asks the IGS insider.

Nor is Sprint bringing all of its outsourced IT operations home. “The applications that have been successfully offshored will remain offshore, so if one application—if [its] support went overseas, that application is staying overseas,” explains the IGS insider. “So rather than onshore customer groups working directly with the offshore elements, some former Sprint employees were being offered positions as Tom Smykowskis, in effect.”

Smykowski was a character in the movie Office Space who functioned as a liaison between software engineers and line-of-business customers.

Showstopping Costs?

Nextel is itself a successful outsourcer, of course. And Sprint Nextel continues to outsource substantial portions of its IT operations with EDS and IGS.

The lesson, industry watchers say, is that just because an organization has been stung by a bad outsourcing experience doesn’t mean it won’t go back to the outsourcing well. This is particularly true of offshore outsourcing, where most organizations are still feeling their way.

Last November, for example, The New York Times flagged a number of offshore outsourcing-related bugaboos, including attrition rates of between 15 and 30 percent in the Indian contractor force and annual raises of 10 percent or more. Attrition rates for Indian workers, in particular, were said to be two to three times higher than those for Eastern European and Chinese contractors, the Times said.

That’s the real story here, says Bill Miller, vice-president of BMC Software Corp.’s information management (IM) business unit. Offshore outsourcing is still a relatively young discipline, Miller argues, so companies are going to have to expect a setback or two. In fact, the outsourcing lay of the land 10 years from now may look very different from the outsourcing-scape of today, where the Indian sub-continent is the epicenter of offshore-related activities.

For example, Miller argues, there are obviously some tasks for which India’s built-in pool of IT expertise is made to order—just as there are undoubtedly some IT tasks for which it isn’t. Take mainframe management and software development. Mainframe outsourcing is one of the hottest offshore trends, Miller notes, and in India and other offshore locales would-be contract workers are trying to get rapidly up to speed on Big Iron concepts and methods.

That’s a recipe for disaster. Consider this post at Yahoo!’s Mainframe Users Group last year. In this case, the poster obviously has only a basic familiarity with mainframe operations. Nevertheless, he’s trying to obtain a position with global services giant Accenture—and to do so, he’s soliciting help from other, more experienced mainframe hands. “i am learning mainframes course,” the poster wrote. “i went to accenture, they asked that what happens with respect to main memory if u call sub program by using static and dynamic. pls elaborate the answer.”

Another post, also from last year, made the point even more explicitly. “I search for job in Mainframe. I want technical questions for written test. I attended the interview in TCS, PCS, Kanby and Accenture. But I can't complete the first round. Please give me the tips and send the QA. Thanking you,” the poster wrote.

The Yahoo! site also has postings about mainframe “refreshment” courses in Hyderabad and other offshore sites. The not-so-subtle upshot, of course, is that it’s through these courses that many “fresher” attendees get their first exposure to mainframe concepts and methods.

All’s not lost, says Miller. While Big Iron expertise might be hard to find in Bangalore, it’s all-but-commonplace in St. Petersburg. “In India, where we have a lot of our offshore work, they didn’t really grow up on a mainframe, so it was all very new to them—the environment, the model, the concepts,” he comments. “But there’s another place where [the mainframe] isn’t so strange—Russia. In Russia, they grew up on a mainframe, there’s this built-in pool of expertise, and [IT workers as a whole are] more adaptable.”

If the talent is there, Miller suggests, global firms will come knocking.

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