Outsourcing and competence

Outsourcing and competence

Summary: The question isn't whether out-sourcers are better where out-sourcers are better, but under what circumstances an organization is better off using an outsourced IT service.

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TOPICS: Outsourcing
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Last week's blog on not out-sourcing mission critical functions led to a particularly interesting talkback discussion.

At the top, Roger commented that Zdnet should out-source its servers and several others mentioned being unable to use talkbacks. I believe there's enormous frustration within the executive ranks at Zdnet over these failures - and that, sooner or later, they'll take the necessary steps to address them.

(As an aside, when Sun first offered a free server to people willing to implement and blog about it. It's quite true that very few CEOs or CFOs credit any part of their organization's competitive advantage to IT... I told the editor I work with that I'd be happy to convert blogs.zdnet.com to an all open source environment on a T2000 and then write about it as a reliability and performance demonstration, but, so far, his bosses haven't wanted to play.)

Next, Erik Engbrecht added a commentary that really set the tone for the rest of the on-line discussion by breaking out the situations in which out-sourcing is generally considered reasonable and then showing that these should not arise in a well run business.

The contrary position was clearly and articulately put forward by a "Paul C" who argued that out-source services suppliers can sometimes do a better job than the internal IT people.

I thought they were both right, because the question isn't whether out-sourcers are better where out-sourcers are better, but under what circumstances an organization is better off using an outsourced IT service.

And the answer to that, I think is implicit in the things Erik said in the first of his contributions to the discussion: fundamentally, out-sourcing is preferable only if management fails to deliver adequate IT services internally.

As part of that, here's his theory on why out-sourcing exists:

 

My theory is two-fold:

1. From the business perspective, Internal IT has conistently failed to make good on promises, so if someone is going to fail, it's better that they are cheaper and/or can be sued for failing.

2. From the IT perspective, those darn business people never give IT the respect it deserves, so doing IT in a non-IT company is a dead-end career. It's better to work in a company where my skill is core to the business.

In other words, IT people don't want to be outsourced, but they typically want to be the outsourcer. The reason being they don't get any respect from the business-side, because they fail to deliver on their promises.

In person he's probably a nice guy; I'm not, so let me put it rather more bluntly: outsourcing is a solution to internal incompetence at either, or both, the business and IT levels. Thus it's quite true that very few CEOs or CFOs credit any part of their organization's competitive advantage to IT, but that says a lot about them and nothing at all about whether IT should be handled internally or externally.

Indeed it's important to remember that IT is only one part of a larger organizational picture and that it's quite possible for an organization to grow and prosper despite providing itself with inferior IT support and services. In other words saying "this business out-sourced IT and prospered" isn't an argument either for or against out-sourcing, because there's no necessary causal link between the out-sourcing and the prosperity amd no evidence that they could not have done better yet had senior management paid adequate attention to IT.

In effect the analogy I used last week: that "passing information control to a third party is a lot like putting somebody else in charge of regulating your heart beat: useful in the short term if your heart is failing, but not a recipe for Olympic success"; is the right one because the question isn't whether the patient walks or jogs now, it's how fast that patient could go with a properly functioning heart of his own.

And I think that's the real bottom line: IT out-sourcing may look, to senior management, like an effective way of firing the IT department without acknowledging responsibility for their behavior, but it is ultimately always an acknowledgment of their own failures in either refusing, or being unable, to manage IT.

Topic: Outsourcing

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  • Defining "Competence"

    I think part of the problem is defining competence. An IT person can be extremely technically adept, responsible, and have a desire to meet his customers' needs and still fail miserably to meet them, because he doesn't understand them. He can't understand them, because he and his customer speak a different language. He doesn't speak the customer's language because there's no incentive for him to speak it. If he looks for a new job, what will get him hired? How do you put "I speak accountant" on a resume? How to you make claims about communications skills meaningful?

    No, IT hiring people are going to search for resumes based on technical skills. Skills like Java, C#, Unix, Windows, Oracle, and SAP are what get people hired. These are the skills that earn respect. Ironically, these are the skills that are easiest to outsource.

    I could go on and on, but ZDNet is probably just going to eat this post. The bottom line is there is a divide between IT and "the business" that is perpetuated at all levels of both sides. It needs to stop.
    Erik1234
    • Consolidate the SuperStars

      Exactly, Erik. The best solution is a person who can combine both technical aptitude with business acumen. And it sounds like you have been around long enough (as I have) to know that you have to pick up a lot of rocks to find that "diamond in the rough" - especially before he/she knows their value and demands a very high price!

      Industries grow through cycles: a bunch of small companies battling to create the market, some become big and then gobble up the smaller ones until an oligarchy is formed (3-4 big players, very few mid-sized players).

      I believe the same is true for those talented people who can span technical and business worlds. The best thing is to consolidate them into central organizations that can meet the needs of thousands of companies rather than each company trying to find and manage their own precious gems.

      Because unlike gems (stones), these talented superstars will want to keep pushing, moving on to other things, and the minute a company's big project is in place and management wants to "reap the rewards of the effort" and not "institute any other major changes at this time", that superstar is going to get bored and jump.

      In a centralized outsourcer, we will keep finding new things, new markets and new ways to help our hundreds (eventually thousands) of clients. That will keep the talented IT/business folks engaged and will create growth. That is very hard to do in a single company's IT shop.

      Paul
      Paul C.
      • Weirdly enough...

        Your "centralized outsourcer" concept was pretty much what existed in the heyday of the mainframe (and minicomputer). Maybe it is time for that model to "rise again".

        On that note, I find in my own experience that the "surviving" main/mini people I know have never ever been out of work, and what's more their salaries have have apparently increased in a greater than inflation way. Hmmm, maybe I should go back into that game...
        zkiwi
      • A little background

        I work for a Fortune 100 company with a multi-billion dollar IT outsourcing business, but work for a different division. Our IT is primarily provided by our IT division. I work in a group that, among other things, provides oversight over certain areas of IT along with other specialty services.

        So in essense we "outsource to ourselves," and I'm one of the people who works to ensure it's an effective arrangement.

        Overall I think the support we get from IT is outstanding. I'm just the type of person who delivers a project under budget and ahead of schedule, and then goes back over the plan at the end a figures out how much faster and cheaper I could have done the project, which usually means at various decision points I should have followed my instincts. There's always room from improvement

        The company I work for, like most of its size, is the result of a massive spree of mergers and acquisitions. Consequently, many people who are IT today worked directly for legacy companies yesterday. Also, many policies are not standarized across the corporation.

        I can tell you from experience the ever step corporate takes that further differentiates the people in IT that serve our business from the people who work directly for our business slightly degrades our level of service.

        I'm talking about little things, like having different pensions and time off policies. A different holiday schedule. Sure, there are big annoying things like futive attempts at data center consolidation, but when it boils down to it, service is about people. Subtle changes make personal walls go up. The people who were peers yesterday feel like contractors today.

        The little things make a huge difference. When your IT people feel like they are an essential part of your business, they perform better, regardless of how "competent" they are.

        I saw something similar at a previous employer, who outsourced it's IT and transferred almost all of its IT employees to the oursourcing company. In that case, people weren't as hung up on benefits, but the motivations changed. Beuracracy reigned. Contract terms became more important than doing the right thing.

        So there's my take. IT is subject to tremendous economies of scale, so it's important to separate the business with a hundred employees from the business with a hundred thousand. The big enough business can have an internal IT department bigger than most outsourcers.
        Erik1234
        • Great Example

          Great example, Erik. You show that "outsource" can sometimes mean to another internal division within the same company. That usually is the case when companies get that large (Fortune 1000).

          I have been mostly talking about small- to mid-sized companies that cannot necessarily support its own IT department. They are the ones that most desperately need to consider outsourcing their IT needs - be it hardware and LAN support or software development.

          There have been some great discussions about this. Your background has been a big help in understanding the ins and outs of this issue. Thanks!

          Paul
          Paul C.
          • IT & Customer Service

            I have spent nearly 45 years in the Customer Service field, 25 years as a Flight Attendant with two different airlines (BOTH out of business due to incompetent management & Boards of Directors), and 10 years in the auto racing business (a well known racing school & a well know engine manufacturing business) after the collapse of the airlines, also dealing directly with customers. I left the auto racing business due to?once again?incompetent management, although the two racing companies are still in business, in spite of themselves.

            In the mid 90?s I embarked upon a new career in IT. I am largely self-taught on computers, but got my MS certifications, an A+ certification, & studied Business Applications programming at Chubb to have some concrete documentation in the IT field.

            I started my own consulting company in 1998, because I was unable to land a job in IT. Either I had no documentable evidence of my knowledge of computers, & therefore couldn?t get hired?or?I had TOO MANY certifications, and companies would not consider me for an entry level position. Even though I knew I HAD to ?pay my dues? (and was more than willing to do so) and work my up the ladder. It was the quintessential Catch-22 situation.

            The one thing I have seen in my years in the IT field is that the vast majority of IT people have NO customer service skills whatsoever. They look down their noses at users, because the user doesn?t understand the ?techno-speak? that they throw at them, instead of speaking English. There isn?t an IT person on the planet that, the FIRST time they sat in front of a computer, had a clue as to how it worked. They had to learn, just like everyone else; except their curiosity took them farther, because they wanted to know more. Not everyone does?and not everyone should have to. It is the responsibility of the IT person to find out the level of knowledge the user has BEFORE opening their mouth, then speak to that person on the appropriate level.

            Outsourcing does not cure this problem, it only exacerbates it, especially when you have someone throwing ?techno-speak? at you with an accent that is barely understandable.

            What?s the answer? Insist that people going into the IT field also get training in customer service & people skills. That will go a long way towards improving the industry.
            IT_Guy_z
  • "Core" Competency and outsourcing

    The question of whether outsourcing or "insourcing" is better is a question without a single answer; it depends on the needs of the business in question. For a small business whose IT requirements are limited to funtional business machines and a working communications network (both LAN and WAN), outsourcing may be the way to go. For an organization with complex technology needs, insourcing may be the answer.

    For many organizations, outsourcing (both in IT and elsewhere) acts as a form of credit. Outsourcing allows you to "lease" capital (in the form of hardware, software, or infrastructure) from another company. This arrangement is attractive when the company in question either can't afford to invest in capital acquisition (whether that's servers, personnel, development time, or hosting-level WAN access), or when the company's needs aren't great enough to utilize the purchased capital effectively.

    To make this last point clear, think about an organization that holds a large annual shareholder's meeting. Should the company build it's own conference center, or rent one for one week a year? Clearly renting is the way to go -- the capital investment in a building will go to waste as the building sits empty for 50 weeks a year. The same is often true of server space.

    Ah! But you say that if the business can afford to make the capital investment, then ~they~ could lease the building and find a return on their investment! Win-win!

    This where the idea of "core" competency is important. Leasing property can certainly be a profitable business model -- but will it be profitable for a company with no expertise in building maintenance and leasing? Maybe, but certainly not as profitable as it would be for a company whose core competency is leasing.

    Any successful organization (large or small) must understand and make use of the principle of division of labor. The same principle applies to businesses. It's why Microsoft doesn't manufacture cars, Apple doesn't make airplanes, etc.... Those aren't core competencies. Microsoft uses cars, Apple executives fly in (or own) airplanes. But it doesn't make sense for them to build or service those vehicles. They outsource those functions. UPS, on the other hand... most likely insources the maintenance of their fleet -- but keeping their vehicle fleet in working order has to be a core competency of UPS -- it's essential to their business model.

    IT is really no different. Yes, IT is becoming more and more ubiquitous -- it's often an essential part of almost all business activities. But so is electricity. So are vehicles. So is office space.

    The essential questions are "How much IT do you need?", "Can you do it yourself?", and "Should you do it yourself?"

    No two businesses will answer those questions in exactly the same way. And it's not always a question of the "competency" of IT staff, or the "competency" of management, but often a question of the ~core competency~ of the business in question.

    Just as it would make little sense for many programmers to divide their work time between programming and bookkeeping, it often makes little sense for a business to divide its time between its core competency and insourcing IT solutions. Other times, it probably makes sense. It depends on how the business can best marshall its resources to make the smartest capital investments.
    pkstephens
    • Excellent Reponse

      I especially liked the UPS example. UPS runs their own fleet because it is central to their business. Their core competency may not be flying airplanes, but if the airplanes don't fly on time the company fails.
      Erik1234
    • Great Write-Up

      I agree with Erik - this was a great synopsis of the discussion.

      I especially like :) that is supports my discussion points on the previous article about how outsourcing does make sense for so many companies. It is all about allocation of scarce resources to maximize efficiency (and profit).

      Great discussion. Thanks to everyone for the bullet points that we can add to our marketing materials to help prove how our business will help many companies.

      Paul
      Paul C.
      • Centralization

        The problem with centralizing "business knowledge" is convincing departments and businesses that they aren't as different or unique as they think they are, assuming that is one's goal. But, what do we mean by "business knowledge"? In my experience, it means striking up a relationship with "Harry" who has run the A/P department for 22 years, is going to his grave making paper copies of certain documents, and must do that as step 19 or his whole system goes to hell in a hand basket. Now, companies could get rid of all their "Harrys", although they rarely do. But is understanding some sterilized, homogenized A/P program really what makes us think we have "business knowledge"? Or is it understanding Harry?
        oncebyten
        • Understanding what Harry needs to get done

          The key is to understand what Harry needs to get done in order to a.) keep his job and b.) keep his company functioning (out of the grave).

          Understanding Harry is what I was referring to generically as "business knowledge". Thanks for prompting me to clarify it. Sometimes the thoughts in my head that form the basis of my writings don't always make it to the sentences...

          To understand Harry requires that you understand something about his business, including what he needs to accomplish his job. It also includes knowing a little about what could help Harry do his job better. That's not to say that you are going to convince Harry to change, but you need to be able to influence him to see why a new process may work better.

          And the big caveat: looking at what improvements you can make to help him do his job better DOES NOT always include the latest and greatest technologies! That is where many IT departments and their techie-oriented folks fail the business.

          They want to play with the latest and greatest tools. The best way to do that is to shoehorn them into some business process. That is a recipe for disaster in most cases.

          The better approach is to look at what is available. We have resurrected the use of faxes, with a 2-D barcode, that allows people to print an assignment sheet, do the work and fax it into our system, which then places it into the project folder keyed by all of their information. That has saved our client thousands of person-hours each month (they have 2,400 people using this system). All of that with a fax.

          So, you have to know what Harry does, what he needs and become a partner with him. That is easier said than done, I realize, but I still feel that it is easier done through an industry partner who does it each day with all clients than it is with an internal IT software development shop.
          Paul C.
    • At last a none emotional response

      What an excellent posting by pkstephens. Well done.

      Why is it we get caughtb up in the emotion of outsourcing. It is a business decision it will always be a business decision. Companies do not survive on emotion, ask any miner.
      PeterGurney
  • Good job Paul

    This is an excellent essay. For too long now technical talkbacks such as ZDNet have been full of IT people who think their knowledge of technology makes them more qualified than management to run "the business". Many apparently feel that all management is either (at best) incompetent or (at worst) corrupt, and the "right" technology is all it takes to be successful. I've long felt that IT is too "full of itself" and tends to place the technology before the business. Perhaps that's a stronger messaage than you intended, but it's a skeleton that needs to be removed from the closet. IT needs to take a serious look at itself and ask why it is so disconnected from the business.

    And thanks, by the way, for not somehow working "incompetent MCSEs" (the universal scapegoats) into the blog. :)

    Carl Rapson
    rapson
    • If the blog system ran on MS, it would have been ;-)

      Just kidding ;-). This was actually a good blog.
      george_ou
  • Codevelopment

    What is the benefit of automated hardware manufacturing? At the minimum it eliminates the need to develop efficient tools specific to the hardware. An automated manufacturing plant has generic tools that could be underused to achieve the performance for making different hardwares. Thus, an automated hardware manufacturing plant enhances productivity by allowing the human to concentrate on specifications.

    The same could be achieved in software through planned outsourcing. The program development team takes the specifications and implements the specifications. Thus, the local IT needs to consider the design aspect of the applications alone.

    As codevelopment, we retain the higher level functions and delegate the manpower hungry lower level functions.

    Such codevelopment would increase the competence rather than decrease it. The local IT need not worry about programming languages and system software which are the responsibility of the off-shore team.
    ibramsha199
    • Ya, I heard that .. in about 1980

      Of course, that was before code generators
      came along, before hardware became so powerful it started to make sense to write prototypes in interactive environments like Unify/Accell and then just let the finished prototype run in production, before open source took care of most of the back end stuff anyway, and before the web; but hey: MVS/XA those were the days, eh? Oh, sorry, guess you're still there, huh.
      murph_z
      • Code Generators

        You're not really a software guy, are you Murph?
        Erik1234
  • Why bother to manage IT?

    Let's extend a point made in the blog: the purpose of IT in most companies is to supply functionality which is in the software the company purchases.

    If the functionality could appear magically without an IT Department, then the companies' purposes would be achieved.

    Mr. Murphy believes in IT, either to expand the available functionality in ways relevant to the business, or to obtain the functionality in the purchased software more cheaply.

    But remember the concept of acceptable pricing: if obtaining the service wanted doesn't cost an unseemly amount of money and satisfactorily resolves the problems identified, then the situation is resolved.

    The last remaining argument for an in-house IT Department becomes adapting the software to the company. But that means dealing with the IT Department. When that does not go well, consultants or outsourcing become an attractive alternative.
    The problem still goes away.

    It's not a new point, but adapting the software to the company requires IT to be subordinate. Do you realize we still see smug advice that changing the company's business processes to fit the software would be good for the company?



    So let's look at how Mr. Murphy's optimism colors his near-realistic view:

    Quoting:
    ... outsourcing is a solution to internal incompetence at either, or both, the business and IT levels.
    EoQ

    No, it's a way to obtain IT services. A competent IT Department may be replaced with less urgency than an incompetent IT Department, but IT is subject to analysis like any other cost center, and personnel are a disadvantaged cost.

    The incompetence can come on the business side when the replacement for in-house IT is an inadequate software package. But that's a misjudgment of IT by an outsider.
    The analysis of IT's utility may be competent.

    Continuing quote:
    Thus it's quite true that very few CEOs or CFOs credit any part of their organization's competitive advantage to IT, but that says a lot about them and nothing at all about whether IT should be handled internally or externally.
    EoQ

    When management is confident it knows what IT is doing for them, the decision about whether IT is replaceable becomes easier.
    The CEOs and CFOs may be right in some circumstances.


    But the excessive pro-IT attitude is really apparent here.

    Quoting:
    Indeed it's important to remember that IT is only one part of a larger organizational picture and that it's quite possible for an organization to grow and prosper despite providing itself with inferior IT support and services.
    EoQ

    Yes, the company may be doing its core business functions successfully. Some companies may want bno more than to have Office and the rest of the Microsoft package start and run every day.

    The company sets its business strategy, including the role of IT. A successful business is having IT do what it is required to do.

    Quoting again:
    In other words saying "this business out-sourced IT and prospered" isn't an argument either for or against out-sourcing, because there's no necessary causal link between the out-sourcing and the prosperity ad no evidence that they could not have done better yet had senior management paid adequate attention to IT.
    EoQ

    Why did management pay inadequate attention. Maybe they got it right, paid exactly the right amount of attention, and found that in the context of this company outsourcing was the cheapest thing to do.


    Sometimes, though, a company does find that the IT Department is more of a disruption. Getting rid of it simplifies corporate life.

    Mr. Murphy's observation:
    And I think that's the real bottom line: IT out-sourcing may look, to senior management, like an effective way of firing the IT department without acknowledging responsibility for their behavior, but it is ultimately always an acknowledgment of their own failures in either refusing, or being unable, to manage IT.
    EoQ

    How many other people thought, reading this, that Mr. Murphy should not have assumed the IT Department shouldn't want to be managed?

    That part of the IT section's job is to increase its value entrepreneurially and courteously by finding things for IT to do that someone outside the IT section would not have thought about.

    And another part is doing what the IT section is required to do, what those outside the IT section have thought about deeply, quickly and effectively.

    Like any other supplier, IT Departments have to get and keep business. Resenting this fact or considering it the result of external incompetence is not a help.
    Anton Philidor
    • Actually what I believe is

      that organizations exist to process information - and that not doing IT internally strips away an opportunity for excellence.

      I do not believe (pace, Carl!) that everyone - or even a majority of IT managers- succeed at this.
      murph_z
      • What about...

        ...an organization who's core competencies are systems integration and (sub)contract management?

        Yes, what they do is process information. But if the details of a company's product development and manufacturing are (sub)contracted, why does IT need to be inhouse?

        Just playing devil's advocate here. IT isn't the only game in town subject to outsourcing.
        Erik1234