Publication Date: October 4, 1996

Outsourcing Evolves as a Business Model

By Ken Shulman

Outsourcing. For CEOs, the word once conjured up visions of a one-shot, comprehensive solution to thorny, labor-intensive problems. For employees, the word stirred up panic and job anxiety. But as the practice of assigning internal tasks and duties to external vendors becomes more common in the workplace, both company directors and employees are realizing that outsourcing is neither magic wand nor corporate wrecking ball, but merely a new and still evolving business model striving to meet the needs of an increasingly demanding and selective marketplace.

"Executives spend much more time today trying to develop a competitive market strategy than they did in the past," says Dr. Winford "Dutch" Holland, CEO of the management consulting group Holland & Davis in Houston, Texas. "Because of this, they really have less time to worry about how things are going to be managed or configured on the inside. More than ever, they need their organizations to run smoothly. And one of the ways to achieve this is through outsourcing."

"Outsourcing used to be sort of a bad word," says Chuck French, manager of consulting at META Group in Stamford, Conn. "And in the beginning, it was a threat to jobs, and to employee well-being. But we believe this model is changing. And that outsourcing often offers people the opportunity to transfer to a new company where their specific skills will be more valuable than they were to their previous employer."

While IT and MIS departments are not the only corporate sectors whose functions are regularly ceded to outside vendors, a series of factors makes them prime candidates. Many IT tasks require sophisticated equipment and capital outlays that are beyond the means of many small and mid-size companies. IT departments at even the largest corporations cannot always provide technical and communications support as well as a world-class vendor might. Most of all, many in-house IT departments still isolate themselves from management and marketing strategy, focusing too much on technology and not enough on how that technology can contribute to their business.

Over the past two decades, a wide array of companies has turned to outside vendors in an attempt to streamline their IT operations. Eastman Kodak, Unocal, Xerox, British Petroleum and General Dynamics are only a few of the major corporations to sign contracts, a trend that has spawned a group of large vendors that provide IT services, including EDS (Electronic Data Systems Corp.) and CSC (Computer Sciences Corp.), and a host of midrange and highly specialized "boutique" outsourcing companies.

Positive results have not been lacking. British Petroleum Exploration (BPX) reported a 75 percent reduction in costs after signing a major IT outsourcing deal in 1989. At Pirelli Tires in Italy, the IT department reacted to a management decision to go to an outsourcer by conducting a thorough examination of its functions and operations, an examination that allowed it to concentrate on those IT tasks that were truly vital to the corporation.

Keeping Expectations in Line

Although IT outsourcing is often a viable alternative for corporations striving toward efficiency and profitability, it is by no means a guarantee of either. And corporations that use the practice to shovel unresolved technology or communications issues off their own agendas and onto the agenda of an outsourcer are often disappointed.

"I usually get involved with an outsourcing relationship one or two years after it has begun," says Fred Joy, senior research analyst at META Group. "And I find that there is usually some level of dissatisfaction. Usually, the dissatisfaction arises around issues or terms that were not properly defined at the signing of the contract. It is not a question of blame or fault. In most cases, both sides are victims of their own unrealistic expectations."

From a management side, executives can fall prey to the illusion of the infallible outsourcer, only to find that its problems have not been resolved but merely transferred from one site to another. "If management has been unable to obtain what it needs from its internal people, it may not have the skills to get what it needs from an outsourcer," says Holland. "Too often, management decides to turn to an external vendor for negative reasons. You can outsource your specific tasks. But you can’t outsource your unresolved problems."

According to Holland, companies decide to use external vendors for three main reasons: to allow management to preserve strategic focus; to reduce costs; and to obtain easier and better alignment with their goals. In theory, and many times in practice, outsourcers can relieve management of secondary responsibilities, perform these responsibilities more efficiently, and respond to management’s changing needs more rapidly than an in-house division can. Traditionally, corporations have generally entrusted their mainframe and data center operations to outsourcers. Recently, more companies are turning to external vendors for help with client/server and customer service functions.

While outsourcing often leads to a reduction in company payroll, it does not necessarily mean unemployment for those workers whose duties have been contracted out. Often the external vendor hires the existing IT department of the company with which it has entered into an outsourcing agreement. Some companies are even turning to a phenomenon called "insourcing," where internal departments are treated like external vendors by management. "The technological and competitive scene is changing so quickly today," Holland observes. "Companies need to be able to change with them. One of the beauties of insourcing is that you fire and rehire an employee on the spot. You say that the contract you had until today is null and void. Here’s your new contract with today’s task. Now go and do it."

Still, the euphoria that greeted outsourcing in its early years has given way to a sort of guarded, cautious optimism. CEOs, external vendors, and consultants are realizing that the decision to outsource certain tasks is only the first step of the process. "The most frequent difficulty in outsourcing relationships is that the client end user thinks that the outsourcer will fix all of his problems," says French. "We like to point out that the successful outsourcing contract takes just as much effort to manage as it does to sign. It’s like a marriage. Even the best prenuptial agreement doesn’t guarantee a successful marriage. It simply forms the foundation of a successful marriage. The only thing that guarantees a successful marriage is working hard at it."

Ken Shulman writes from Cambridge, Mass.

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Chuck French and Dr. Winford "Dutch" Holland are featured speakers at DCI's Outsourcing Lifecycle Conference.

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