Long live the CIO, but kiss the IT dept. goodbye

Summary:When times are good, in-house IT makes great sense. But after a downturn or two, outsourcing starts looking like the most cost-efficient, long-term approach. By 2010, David Berlind predicts nearly all IT will be outsourced.

Remember when everybody was talking about the comeback that the IT business was going to start making toward the end of 2002? Well, 2002 came and went and the IT recovery has yet to materialize. According to a recent Goldman Sachs report, it isn't coming anytime soon.

Meanwhile, not a week seems to pass without news of another outsourcing megadeal.

Last week, in a seven-year deal valued at $5 billion, IBM Global Services won an outsourcing contract with J.P. Morgan Chase that involves the transfer of approximately 4,000 staff members and contractors to IBM's payroll. Earlier, EDS completed a five-year, $1.3 billion deal with Dutch bank ABN AMRO. And only weeks before, IBM secured another 10-year, $2.5 billion outsourcing contract with Deutsche Bank, and EDS scored a 10-year, $4.5 billion bit of business from Bank of America.

At Comdex Fall 2002, I bumped into former Novell CTO Sheldon Laube, who is the founder of Centerbeam. According to Laube, "we take all the smaller contracts that the big boys like EDS and IBM won't touch." Smaller? After seeing who some of privately held Centerbeam's clients are (NASDAQ and General Motors for examples), I have to wonder what sort of business the big boys are turning down. Says Laube, "Our business is enjoying double-digit revenue growth."

IT spending is down, and outsourcing is on the rise. What gives?

The answer can be found in a canned statement from J.P. Morgan Chase vice chairman Thomas B. Ketchum, who said, "Our agreement with IBM will create capacity for efficient growth and accelerate our pace of innovation, while reducing costs."

Ketchum probably could have replaced the work "growth" with the word "sizing." I have no doubt that J.P. Morgan Chase has intentions to grow its business. Don't we all? The reality is that when a floundering economy takes control of our business, staff reductions are high on the list of actions to take. Just because IT is one of the few areas that promises to deliver a good ROI doesn't mean the IT department is safe. ZDNet readers tell me there's plenty of pork in IT departments and business executives are keen on routing it out.

Unfortunately, staff reductions are such a drag that it's hard to gauge the impact they have on a company. First, there's the management distraction. Most managers have something better to do than to go pork hunting, let alone the time it takes to write up the incident report once a few kills have been identified. Then there's the employee distraction. Entire companies have ground to a halt as pending layoffs send employees running for water cooler rendez-vous. Finally, there's that incredibly awkward discussion, during which relationships (that took years to build) are destroyed, tears are shed, and, sometimes, security guards are called to escort the jettison.

My description of this process is purposely callous. As much as you and I would like to think these are emotional decisions, they're not. These are business decisions. But business executives who have been through at least two flips of the economy are painfully aware that the cost of downsizing isn't limited to the severance packages or the graceful shutdown of marginal projects. The emotional and physical baggage that accompanies every downsizing can be overwhelming. This isn't the first recession and it won't be the last. Any good business manager who wants to surf the economy's sine wave as gracefully as possible should be looking for ways to lose that baggage. Or, as Ketchum put it, to "create capacity for efficient growth." Nothing presents that opportunity quite like outsourcing.

Outsourcing allows businesses of just about any size to insulate themselves from the negative side effects of any IT downsizing operation. A good example comes from one ZDNet reader and IT manager who asked not to be identified. According to "Mary," her company got caught with its pants down after the bubble burst. Not only did she have to downsize her IT department, she had to shell out a fortune in severance. Most of her staff were hired during the boom that dictated premium compensation, or they were long term staffers who renegotiated their pay after finding out what they were worth on the open market.

Over the short term, and when times are good, it's easy to list the reasons a company should bring the entire IT operation in-house. Given the premiums that you can pay to a good consultancy, it's probably cheaper. After all, IBM and EDS customers can hire the same people that those consultancies hire without having to pay the markup. But you only have to live through one or two downturns to figure out that, in the long term, outsourcing (with well-negotiated service level agreements) is the most emotion-free and cost-efficient way to shrink and swell with the changing tides.

"Outsourcing makes sense," says Centerbeam's Laube, "because you're giving the job to people who can do it better and cheaper and at a very variable cost." Citing the traditional per-employee outsourcing costing model, Laube says, "With outsourcing, if you double your people, your costs double. But if you cut your people in half, you cut your costs in half. If you hire your own people, you don't get that linear change."

By letting consultancies deal with the ugliness of human and physical resource management, companies can free their managers to focus on managing the business at those times when that sort of focus is needed more than ever.

Judging by the way the economy seems stuck in a trough while the outsourcing business is on the rise, executives apparently are looking at IT with a longer term perspective -- that perspective where the outsourcing premiums turn out not to be premiums after all. At worst, outsourcing vs. home-growing is probably a break-even proposition -- and that's all it has to be. But for many, it can represent a savings in both quantifiable and non-quantifiable costs. Laube says that's because a consultancy can spread a lot of one time costs across many customers. If you keep your IT in-house, you end up bearing those one time costs yourself.

I predict that this decade will be marked by a giant shift in the information technology mindset. By 2010, the majority of IT will be outsourced and the companies that outsource their IT will have a skeleton staff of IT and project management professionals whose job it will be to keep their consultancies' efforts closely synched up to the business size and objectives. Depending on the size of the company, there may only be one or two of these people.

If you're keen on being one of these people, you need to start developing a solid track record in outsourcing management now. If, like me, you prefer to tinker with the technology, press buttons, and watch the lights blink, you should set your sights on one of the consultancies. If they keep growing the way Centerbeam is, by the end of the decade, you'll be near the top of the totem pole and not where your friend who stayed in her company's IT department will be: at the local coffee shop reading the classified ads.

Has David gone mad or has he touched upon a trend that will result in the complete restructuring of IT as we know it today? What percentage of your company's IT is outsourced today and how much of it will be outsourced tomorrow? Rage the debate with your fellow ZDNet readers using TalkBack below, or write to David at david.berlind@cnet.com.

Topics: CXO, Data Centers, Enterprise Software, Outsourcing

About

David Berlind was fomerly the executive editor of ZDNet. David holds a BBA in Computer Information Systems. Prior to becoming a tech journalist in 1991, David was an IT manager.

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