When to Use Other People’s People

Don’t look to Kellwood Chief Information Officer Don Riley to obsess over building an information technology empire at the apparel company. “No sacred cows” is his mantra for deciding what technology will be kept under his company’s roof, or contracted to another company.

PDF Download

Not everyone would agree. Some companies use outsourcing to handle their heavy-duty technology infrastructure including mainframe support, but decide to keep control over other functions. For example, there is an in-house technology staff person assigned to each business unit at Blue Shield of California to work out technology problems. “We do not let the business units interact directly with the outsourcer,” says Dave Bowen, senior VP and CIO at the health insurer.

As tempting as it may be for a CIO to offload the management of technology personnel and equipment, there are considerable issues to weigh before entering into a contract with a traditional player like EDS, IBM Global Services and Computer Sciences Corp., a newcomer like Accenture, or a more specialized company like Qwest Cyber.Solutions.

Following are four critical points CIOs should keep in mind when making a decision about what to outsource:

1. Don’t outsource what’s core

What’s critically important to your business? What’s not? Depending on how you answer that question, you should be able to assess what technology you can outsource and what you should keep in-house.

“Within any IT organization, there is always a commodity service—things like systems administration, Unix administration, networking or help desk— services that the EDSes, IBMs and CSCs excel at,” says Paul Fusco, CIO with clothing retailer J. Crew, which has a seven-year contract with EDS for its data center. “We’d rather concentrate on our core business.” Application development cuts too close to J. Crew’s central mission to be an outsourcing candidate, says Fusco. “We’re very good at e-business. We’re the only retailer in our market that boasts top-line revenue of 15%” from the Web, he says. “We pride ourselves on the applications we’ve created within SAP. We also pride ourselves on what we’re doing with credit analysis and data storage.”

Bowen warns that companies should not blindly hand off all of their IT resources to an outsourcing vendor. “Outsourcing is not a panacea,” says Bowen, whose company is a longtime EDS client. “You shouldn’t turn over everything about your IT organization to an outsourcer,” he says. “A company has a responsibility to oversee the activities of the outsourcer. Its business motives are different from our business motives.”

2. First put your beans in piles. Then count them

If your business is in shambles, don’t rush to an outsourcer to solve your problems. You may need to make some hard decisions to overhaul other business units before you hire an outsourcer to operate your technology. “The worst possible strategy you can have is outsourcing an inefficient business,” says Capco partner Alan Paris, whose company delivers technology for the financial services industry.

Consider what Kellwood went through in the mid-1990s. A longtime supplier to Sears, Kellwood wanted to get rid of high overhead operations that fell outside its core mission of designing and distributing apparel. It set out to cut costs associated with running an elaborate information technology infrastructure, in addition to selling some manufacturing operations and streamlining business divisions.

For technology operations, Kellwood and EDS spent a year working out performance targets and other aspects of the outsourcing contract. The companies took two tacks when putting the arrangement into motion: Project-focused engagements running from one to three years covered the consolidation of legacy systems, and long-term service-level agreements (SLAs) covered day-to-day operations as the updated systems were phased in. Riley, Kellwood’s CIO, says fiscal 2000 was the first year when EDS was operating under SLAs across the board after migrating technology to EDS over five years.

The number of IT staffers on site has remained relatively constant, Riley says, although the companies have derived some efficiencies. At the outset, “Kellwood had 10 to 15 business units and nine different business systems, each with its own business structure and IT infrastructure. Now, we have one consistent desktop system, software system and mail system. We got through most of that work in less than three years.”

These efforts have resulted in significant savings, Riley says. “That does not mean it’s gone straight to the bottom line. Some went to price deflation and so on to remain competitive. Basically, the retailers put immense pressures on manufacturers to help them retain their margins. Consolidation has provided a significant benefit and value that has helped us remain a healthy, competitive company.”

Service-level agreements can be a vital tool to track the financial performance of an outsourcing deal. “I think that all comes down to the SLA that you want to build into the contract,” J. Crew’s Fusco says. “A 0.4% difference [in service levels] can be a lot of money.” By setting a baseline in the SLA and carefully tracking the outsourcer’s ability to deliver, he says, clients can meet or beat agreed upon numbers for financial performance.

Joe Bologna, director of IT infrastructure and services for Expanets—a provider of networked communications services—says the buck still stops with his company, not its outsourcer, Qwest Cyber.Solutions. “I see [Qwest] as an extension of our IT organization,” he says. “Typically by outsourcing, people are buying the freedom to forget about responsibility. When you do that, things go south on you.”

3. Factor people into the equation

Most traditional outsourcing deals include the transfer of personnel from your payroll to the outsourcer’s. In most cases, many of those same staffers will remain at the same desks taking care of your business. How are you going to get the best service from workers making the switch?

“People transferring out still need to get eyeglasses, go to the dentist, have the same sense of seniority,” says José E. V. Cunningham, vice president of the Outsourcing Institute. “On the other hand, the service provider can often offer enhanced career opportunities” to IT professionals who may have more chances to advance in a company focused on information services.

In looking for an outsourcing provider, J. Crew was sensitive to the fate of its technology employees. Although they would be transferred to EDS’ payroll, they would continue to work closely with J.Crew employees—even continue to share office space. “We made it very clear that it was important to do right by our associates while keeping as close to cost-neutral as possible,” says J. Crew’s Fusco. “Not every outsourcer will make a commitment to take people over,” he says. On this basis alone, “we culled down the list very quickly to IBM, EDS and CSC.” EDS was also responsive to other concerns about the treatment of transferred employees. “We even went after EDS in terms of our vacation policy,” says Fusco, so the new EDS staffers would continue to enjoy J. Crew’s more-liberal vacation schedule.

Let the outsourcer absorb risks

Consider this dilemma: Your company invests in some heavy-duty computers and brings on staff to run them. Then, the economy falters and business tapers off. “You’re stuck with the machines and the staff needed to run them,” says Doug Plotkin, director of sourcing strategies for the Meta Group. “You can’t shed those assets.”

That’s where outsourcing can work to your advantage. “If you write the contract the right way, you can come up with a way to pay on a volume basis. The vendor can take on the responsibility for eradicating fixed costs, not you,” says Plotkin.

Sure, you pay outsourcing companies a pretty penny to maintain and operate your information systems. But you may consider going one step further and creating other incentives for outsourcers to work with your business.

Dow Chemical’s global styrenics and engineered products division serves as an international “test bed” for EDS’ converged IP network for voice and data. In turn, EDS will be able to sell that IP offering to other companies. “Productivity is a two-way street” between the outsourcing vendor and client, says Darryl Zavitz, Dow Chemical’s business IS director for that division in Zurich. “You want to create a win-win for you and the outsource provider.”