PRESS RELEASES:
Outsourcing roasted

By DAN TEBBUTT
Reprinted with acknowledgement from The Australian 14/12/1999.

OUTSOURCING was recently the subject of a lighthearted roast that saw a rare public confrontation between image-conscious vendors and leading corporate IT buyers.

Organised by the Melbourne chapter of the Women are IT (WIT) networking group, the humorous debate pitted the (female) chief information officers of Australia Post, Faulding (Adelaide-based pharmaceutical and health care company), and Telstra Superannuation against the (male) representatives of outsourcing heavyweights CSC, Compaq and Andersen Consulting.

Opening the charge for the affirmative, Faulding information services vice-president Teri Whiting asked whether any successful nation would invite a foreign country in to manage its affairs – and then pay for the privilege.

"Why would competent managers make work for themselves?" she asked.

"Why would you outsource to a range of vendors who beat each other up and claim they are better than the next one?"

Ms Whiting got stuck into what she claimed were the myths of outsourcing.

Projected cost savings in the order of 30 to 50 per cent rarely materialised.

Indeed, the very assumption of savings should lead IT managers to question the basis of the vendors' claims.

"How do they do that? Of course they don't cut staff or services or quality, so there is only one possibility: they are brighter than you are, and you must be stupid," she said.

Selling outsourcing was a lot like selling an exercise bike, according to Whiting: vendors will throw in proverbial steak-knives and other junk to shore up an otherwise dubious value proposition.

"That is the sort of marketing they use," she said.

The most odious outsourcing mythology centred on notions of benchmarking and management contracts.

"We're told if we outsource we can get really good benchmarking," she said.

Yet this assumes competent IT managers do not already know how to benchmark and could not learn.

Then comes the hateful multi-volume contract that is supposed to specify every goods and service to be provided by the outsourcing company.

Most clients end up caught in a vendor trap when they later find important features are not actually included in the agreement – leading to costly contract variations.

"The vendor is going to say you didn't specify it properly in the first place, but now that you specify it, for some extra money, you can have what you really wanted in the first place," Whiting said.

Vendors often sell outsourcing as a partnership akin to marriage.

"I thought marrying strangers and paying a dowry was passe," she said.

Taking up the argument for the negative, Andersen Consulting partner Martin Ralston rejoindered the marriage comparison: "If I went home and said to my wife that our marriage is a waste of money, that would be a fairly difficult conversation!"

Delving into the history books, Ralston said outsourcing had a long and distinguished record – starting in the 1970s with computer service bureaux, evolving in the 1980s with outsourcing of major application projects and into the data centres of the early 1990s. Outsourcing was now moving into networks and application management. "So it's not a new phenomenon," Ralston said.

Moreover, growing demand for outsourcing suggested the trend was likely to continue. "Those well-known and rarely wrong industry observers" GartnerGroup and IDC suggest outsourcing will continue to show a 25 per cent compound annual growth rate.

Company boards and CEOs are accountable to shareholders and regularly conduct due diligence before signing up with an outsourcing provider.

Ralston pointed to many successful IT services contracts, highlighting Telecom New Zealand's expectation that it would save $NZ10 billion ($12 billion) over five years by outsourcing IT to EDS. "Do you think Telecom NZ chairman Sir Roderick Deane could stand up before shareholders and say 'I've just wasted $NZ10 billion of your money'?"

While his trans-Tasman example might not have been the best choice, given recent outsourcing litigation between IBM and New Zealand's police force, Ralston said there were plenty of other examples, including the Commonwealth Bank's EDS partnership, Telstra's desktop deal with IBM GSA and the global alliance between General Motors and Arthur Andersen. "We continue to see these deals being done."

Even Canberra was realising the benefits of contracting through its controversial whole-of-government outsourcing program, he said.

"John Fahey continues to stand up in Federal Parliament, under intense pressure from the Opposition, claiming to have saved $1 billion of our money. As a taxpayer, I think that is outstanding."

In many cases, Ralston said, the main driver was not cost reduction – although he maintained costs savings could be achieved "if we look at the holistic cost of IT service delivery".

The main benefit was increased certainty and improved performance in IT project performance and service delivery.

Outsourcing helped companies to approach world-class benchmarks through access to the global skills of the big vendors. In turn, these new IT skills generated new revenues and markets.

"The growth opportunities in outsourcing are not limited to one industry sector," Ralston said, pointing to deals across financial, government, telco and manufacturing fields.

But he acknowledged the traditional paradigm of simply selling IT assets and recruiting a service provider did not usually work.

"What we have got to do is move to the new world of outsourcing, which is to finance the new world assets, up-skill the people, improve the business performance and partner in the wealth created," Ralston said.

For the affirmative, Australia Post CIO Valda Berzins said historical examples should not dictate current practices. "We are all in the game of making money and profit margins, and let's not forget that," she said.

Berzins questioned how outsourcers could make profits without any detriment to the client or waste of money.

Most outsourcing companies claimed they would supply specialist people and save training and staff retention costs for clients, while providing better people and cheaper services.

But Berzins said skilled IT staff were in ever increasing demand, meaning it could actually cost more to attract qualified staff – since the outsourcer does not always have the promised skills readily on hand. Moreover, the client would be paying through the nose while contract staff learnt the job. In many cases, it would be cheaper to simply train up internal IT staff.

Management by contract was always brought up as a key advantage and cost saving component in outsourcing.

However, while Berzins believes contracts can handle simple tasks such as cleaning, "how can we manage something as complex as IT if we really don't know IT ourselves because we are managing by contract? It's very hard to work out what the people are doing and what we are paying for."

Organisations needed to consider how much IT was part of their core business competency. Since IT runs through almost all lines of operation, it should be regarded as a core activity.

Australia Post had decided to "insource" strategic IT infrastructure projects, and Berzins believes many more companies will start to "think outside the square" – like Mayne Nickless and South Australian Brewing, which had acquired companies with IT expertise.

"We should keep things in-house, save money, do new things and that way our business will grow," Berzins said.

Compaq Asia Pacific professional services director Graeme Shorter said the absolute proposition under debate was too extreme.

If IT outsourcing was a waste of money, the market would reject it; instead, demand was increasing.

However, the model has moved from pure cost containment and cost reduction to evolving IT as "an enabler of current business and a catalyst for future opportunities".

Outsourcing allowed companies to focus on core tasks, such as attracting customers or faster fulfilment.

"Certainly you will get statistics that indicate there are failures, but I would warn against taking statistics to prove a generalised statement," Shorter said.

Among the many companies that have used Digital and Compaq for outsourcing, only one had taken IT back in-house. Shorter raised gales of laughter when he suggested that even this one client saw the experience as a lesson learnt rather than money wasted.

"Outsourcing is, at very worst, an incomplete waste of money," he said.

Telstra Superannuation CIO Helen Radatti came up third for the affirmative to suggest outsourcing was not just a waste of money, it could actually harm the client business.

Predicted cost savings were largely mythical, and companies would pay a long-term price in terms of lack of flexibility and declining speed to market.

"In a global world where customer demands are increasing and customer loyalty is decreasing, you can't afford to slow down," Radatti said.

The trend may have been around since the 1970s, but that just proved one thing: "They still haven't got it right."

She pointed out the fundamental disconnect behind the competing objectives in an outsourcing partnership: while the client wanted to decrease costs, the service provider had to increase its revenues over time.

"The two don't meet."

The traps were always the same for companies embracing third-party IT services: obscure customer references, inflexible contracts, expensive variations and high costs for the client to switch vendors.

"It's a long-term marriage based on short-term convenience and a pre-nuptial contract in complex and non-plain English," she said. In the end, clients would only stick to their vendor when, like Bill and Hillary Clinton, they had "too much at stake to split".

While vendors were exemplary with golf days and long lunches during the courtship and honeymoon, when things went awry clients could expect slow turn-around, unreturned phone calls, outages and inexperienced contract staff.

Moreover, outsourcing undermined the management cliche that a company's best assets are its people.

"With outsourcing, you have knowledge capital walking out the door."

Once trust and loyalty were lost, it was very hard to recover. "You can save yourself a lot of trouble if you design and use internal metrics that will help you bring costs down and efficiency up – without wasting money," she said.

Radatti ended with a quote from the movie Apollo 13, when Tom Hanks surveys his spacecraft and says: "Doesn't it give you lots of confidence to know this is built on the lowest quote to NASA?"

CSC consultancy practice manager Peter Aitken said outsourcing customers would ultimately get what they paid for. The question for clients was whether IT should be a core competency. "Is that the business that your organisation wants to be in?"

Aitken took heart from the fact most marriages do work out: "Outsourcing is maturing and we are getting better at it."

In an economy where speed to market was a critical success factor, many organisations simply did not have the capacity to adapt quickly enough.

E-business was the best example: "The competitor is not the guy down the street – it's the guy across the world, and he is using world's best practice," Aitken said. "If you make a mistake and it takes you six months to get it right, then you may have lost market share."

In a concluding rebuttal, Radatti said the facts spoke for themselves: 38 per cent of outsourcing projects fail outright, while 62 per cent have varying degrees of failure.

For the negative, Shorter said the market would determine what was waste – and demand for outsourcing was only going up: "At some point your marriage partner was a stranger. But you got to know them and you learned how to live with them until it became a partnership that was really working."

The verdict? An audience vote awarded the debate to the negative after what most observers regarded as unseemly amounts of pandering and flattery, but WIT convenor Susan Coleman said CIOs could never be wrong and declared the affirmative the winner.

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