Top 3 reasons to outsource today

Top 3 reasons to outsource today

Summary: Organizations considering outsourcing need to understand how the outsourcing business proposition maps to their specific needs.

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TOPICS: IBM
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In the early days of technology outsourcing, the driving force behind an outsourcing strategy was cost savings -- culminating with many US firms going so far as to stake out offices in India. With the growth of the Indian middle class, the cost proposition has diminished significantly.

Outsourcing

Today,  outsourcing critics suggest that organizations are reducing costs through the replacement of expensive full time employees with less expensive contractors. This is not a viable long-term strategy.

In the organizations where I have worked, outsourcing was seen as a way to not only reduce costs, but add flexibility to the technology teams. Temporarily adding specialized skills to the bench allowed the firm to innovate, and enabled the firm's technology teams to focus on core business issues.

Today, IT services firms are expected to be strategic partners, invested in the success of their client, not just the project.

For as many reasons as there are to employ an outsourcing strategy, there are just as many reasons not to. Here is a quick rundown from a recent survey.

Reasons to Outsource Reasons NOT to Outsource
Free up staff for more strategic initiatives Outsourcers aren't innovative enough
Ability to deliver projects we did not have the skills to staff Lack of confidence in IT service companies as strategic partners
Access to industry specific expertise Outsourcers don't understand our industry
Cost savings Costs are too high 
Outsourcers produce a better quality product Quality of work is inadequate
Smoother project delivery Project delivery is unreliable
Ability to better deliver projects more quickly Project delivery is unreliable, again
Better align internal IT organization with business requirements Relationships too difficult to manage
Move IT from Capital to Operational expense  

The bottom line is that any organization considering outsourcing needs to understand how the outsourcing business proposition maps to their specific needs. 

Above reasons aside, here are the main drivers today behind outsourcing.

1. Cost Savings

From a cost perspective, the CEMEX outsourcing deal with IBM (press release), recently in the news, demonstrates the level of savings which may be achieved.

"This agreement is expected to generate CEMEX savings of close to US$1 billion during the life of the contract. Additionally, it will improve the quality of the services provided to CEMEX; enhance business agility and scalability; maximize internal efficiencies; and allow the company to better serve its customers."

The outsourcing deal is quite extensive, as it moves finance, accounting, and human resource functions to IBM. The net of the outsourcing deal is that it will allow CEMEX to focus on their core business, while the cost savings are significant.

2. Added Flexibility

When you talk to technologists today they will tell you that more work is expected to be completed with fewer resources -- stretching their bandwidth to the breaking point. They are fully engaged in the day-to-day work supporting their business, never mind the new projects that they are expected to work on. 

Again, from the CEMEX / IBM deal:

"This agreement will bring to CEMEX the flexibility to face the new challenges in the building materials industry. IBM’s state-of-the-art IT infrastructure, business processes and applications will help CEMEX achieve its goals of becoming more competitive. We see our strategic relationship with CEMEX as a powerful example of building a smarter planet.” said Bruno Di Leo, Senior Vice President of Sales and Distribution for IBM.

3. Access to Specialized Skills

Skills that are in high demand can be, by definition, difficult to outsource. This may keep some organizations from taking on initiatives where they have little to no experience. Outsourcing a portion of a project or the entirety of it allows organizations to implement technologies they would not otherwise be able to.

“Together, IBM and CEMEX will implement state-of-the-art business processes, practices, and information systems developed by IBM. CEMEX will also leverage IBM’s worldwide expertise to accelerate and replicate innovative practices in CEMEX business units to achieve better customer service, increase process quality and sustain cost improvements.”

IBM's size allows them to deliver services on a global scale with a network of more than 70 Service Delivery Centers and more than 400 Data Centers, in 170 countries covering more than 40 languages.

As an aside, I continue to be amazed by organizations that throw work "over the wall." Haven't we learned the lesson by now? You cannot simply hand work over to an outside firm and expect it to be completed. Accountability does not end with the selection of the vendor. Firms need to be invested and involved throughout the entirety of the process to be successful.

What are your experiences with outsourcing? 

See also:

Topic: IBM

Gery Menegaz

About Gery Menegaz

Gery Menegaz is a Chief Architect for IBM with more than 20 years supporting technologies in the financial, medical, pharmaceutical, insurance, legal and education sectors. My Full-Time Employer is IBM. I write as a freelancer for ZDNet.

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27 comments
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  • Note to the unions

    This may require some changes to federal labor law (as it probably qualifies as a closed shop), but here's a way to make yourselves relevant in the private sector again:

    Offer an outsourcing service. For financial consideration, the union would send members to the jobsite, as specified by the employer/client; if the employer doesn't like a particular worker, it can send him back for a replacement. The union would be the "employer of record", paying and providing such benefits to the workers as provided in its rules (analogous to what temporary agencies have been doing for many years); and assuming full responsibility for the workers employed under this program. If an employee is sick, or wants to take a vacation, he would notify the union office, who would send out a temporary replacement. The employer benefits because he no longer needs to worry about recruitment, payroll, or personnel management; he merely negotiates a contract with the union and sends it a monthly check for the work performed. I figure this would be particularly advantageous to small businesses which have always been difficult to organize.

    Just thinking...
    John L. Ries
    • Never gonna work...

      because, with unions and union chiefs, the union and the members would want control of how the hiring is done, a guaranteed length of time, a guaranteed minimum contract rate which is higher than regular employees get elsewhere, and, permanent attachment to the company doing the outsourcing. If a permanent attachment is not worked out, the unions could lose out on a lot of contracts, since, a company hiring an external entity could always go to someone else. The unions would have to be very competitive with their contract prices, and with the skills set offered by the union members. As we know, with teachers, they can't really be fired, and, if they do get fired, they get to collect pay by sitting in a back-room somewhere, waiting for some other assignment.

      In fact, unions would be asking for their own destruction by becoming outfits that could receive outsourced work. Not too many corporations would go with them, if their prices weren't competitive with other non-union shops and labor.

      Furthermore, once the become outsource outfits, they're in it as corporations seeking to compete and make profits, which means that, "union" membership would not longer have an meaning, and people could get laid off upon the completion of a contract job if another is not immediately available.
      adornoe
      • Maybe "employee-owned personnel service" would be better

        Remembering that the only stockholders unions have to answer to are their own members (not true of private personnel services). Mind you, this wouldn't be as lucrative as the traditional model, but private sector unionization (following the traditional model) has been in decline since before I was born, so this might be a way forward for them.
        John L. Ries
        • But then, at that point, you end up with just another agency, owned by the

          employees, looking for work to keep the membership busy, and any semblance to a union shop would be lost completely.
          adornoe
  • There is only one motivation for outsourcing..... GREED

    Those that outsource should have their taxes increased 1000% for twice the period of outsourcing.

    The only way to build America is by eradicating ignorant America hating companies with greed being their only motivating factor for existence. Until the parasitic corporate mindset is expunged from the country there really isn't any hope of the country surviving.
    Reality Bites
    • The lamprey speaks

      We'll first need to decide who is being ignorant. You, for assuming that the term "outsourcing" includes the phrase "to a foreign country" (it does not), you for trying to use the tax system as a form of punishment without due process of law (that's against the law), or you for not understanding that IT equipment may not be the best place to deploy assets, and therefore may not generate the most employment, or you for assuming that you are not adopting the mindset of the parasite in your formulation.
      Robert Hahn
      • Outsource to where?

        That is a very good point. Many of the really high demand jobs are held by folks right here in the US. And they are outsourced for a variety of reasons, and as the costs for these folks is quite high, cost saving is not one of them.
        gery.menegaz
    • Ignorant to the max!!!

      Hike taxes to punish a corporation, would be both, counterproductive, and illegal. Perhaps you need to move to Venezuela or Cuba to get your mindset validated.

      Hiking taxes on a corporation, whether to punish or to simply increase tax revenues for government, is ALWAYS counterproductive, since, when money is taken from a company, that company has to either lay off people, or stop hiring new people.

      A company that outsources, does so to a foreign entity to one that exists here at home. But, in both cases, it's always best to outsource, no matter to where, if that outsourcing allows the company to continue operating, keeping employees and paying taxes. A company that is punished for outsourcing will go out of business completely, thereby eliminating all of its jobs and eliminating all of the taxes that government would otherwise be collecting.

      People like you, don't even have right to use the word "reality" in their IDs, since, you're far removed from what reality really means.
      adornoe
    • Ignorant to the max!!!

      Hike taxes to punish a corporation, would be both, counterproductive, and illegal. Perhaps you need to move to Venezuela or Cuba to get your mindset validated.

      Hiking taxes on a corporation, whether to punish or to simply increase tax revenues for government, is ALWAYS counterproductive, since, when money is taken from a company, that company has to either lay off people, or stop hiring new people.

      A company that outsources, does so to a foreign entity to one that exists here at home. But, in both cases, it's always best to outsource, no matter to where, if that outsourcing allows the company to continue operating, keeping employees and paying taxes. A company that is punished for outsourcing will go out of business completely, thereby eliminating all of its jobs and eliminating all of the taxes that government would otherwise be collecting.

      People like you, don't even have right to use the word "reality" in their IDs, since, you're far removed from what reality really means.
      adornoe
    • Reality

      Thanks for your comment.

      I completely understand where you are coming from. I left a position not to long ago because the entire IT organization was outsourced to India. Still, it is not always about cost savings.
      gery.menegaz
  • Outsourcing is importing without tax

    To me, outsourcing is importing without tax.
    The companies are importing the benefits from a service performed in a foreign country.
    An excise duty should level the playing field without going to the extreme of protectionism.
    Steve__Jobs
  • Oh, no wonder...

    First of all, my problem with outsourcing can be seen in Apple's little maneuver where they build in 3rd world countries for slave labor while taking advantage of American tax breaks.

    IBM has at least one Double Irish Arrangement, so I say to you Gery Menegaz that if you're supporting companies outsourcing IT, your parent companies need to leave US shores. When the average citizen pays more in taxes based on percentage rate of income than you as a corporation or corporate sponsor, you need to go.

    Let me add now that these same companies turn around and sell to the US consumer at the same rates they would if they were employing US labor. So that whole thing about cheaper tech..... well maybe they're only making an 80% profit instead of 200%, but still.

    Because these companies also make sure that their slave labor pets are confined to the work site through use of on-site dormitories (they charge rent to the laborers for), they are refusing basic human medical care to their victims while ensuring that laborers (who are mostly young women 18 - 25) are able to meet production quotas 24/7 without compensation for their 12 - 16 hour days.

    This is exploitation and it is inhumane. And it happens with IT support as often as in the manufacturing sector. Microsoft employs a help desk company that, according to an Indian magazine, is guilty of human rights violations for the same reasons.

    How is it that if we put these poor folks in chains that it is called 'slavery' and is illegal, but if we remove the chains but leave them caged in equally obvious ways, it is called 'business'?

    Also, this idea that specific ethnicities are more skilled than Americans is a crock and large business knows it. American laborers are just as skilled at making anything as are Asian as are Indian as are Eskimo---you merely have to teach a person how to make something and they will either learn or not, based on the individual and not the race. It is insulting that big business would try to say that Americans are not only unskilled, but clumsy and aloof, while pandering to our consumer market.

    Finally, on the subject of quality.... well, society has certainly become far more disposable since the outsourcing boom. . . . Textiles, sundries, and tech are at best threadbare or poorly constructed. Plastics and chemicals are now questionable due to quality control issues, we've also had food issues in this country due to outsourced agriculture, and if the issue is whether or not someone can read a Help Desk file, I would like to again point out that it really is no big trick.

    Additionally, as a person with a hearing disorder, I would rather be able to understand the person on the other end (whom my money as a consumer goes to pay) and get the help I need. The last time I called Microsoft, I spent 7 hours on the phone simply being routed and re-routed, so obviously there isn't an increase in professionalism. (It being Microsoft not withstanding.)
    Rilriia
    • Working conditions is one thing; outsourcing, in general is another...

      The working conditions in certain countries might be deplorable, and people might be getting treated like slaves, but, without that work, many of them would have a lot less than they get without that outsourced work. People come by the thousands, just about every week, to work at those "slave" plants, and they do it voluntarily, even after knowing what the working conditions will be. To them, it's either the meager salary they get, and the miserable working conditions they get, or nothing at all. Yeah, I know, it stinks, but, the people in those areas already know what to expect, and the government in those countries are well aware of what their people will be getting into, and in fact, it's the government in many of those countries that define what their people will get in compensation and in working conditions. That Apple and Microsoft and others will take advantage of that is deplorable, but, not having those corporations' business in those countries might be worse for the workers there.

      Also, the benefits to corporations from outsourcing cannot be denied. Getting production at a fraction of what they would have to pay here at home, is a no brainer, and, if a company did not take advantage of what is legally allowed to save huge sums of money, would be the same as being idiotic and negligent on the management side.

      Furthermore, there is no doubt that, by manufacturing at a much lower cost, is beneficial to consumers, since they would otherwise have to pay, perhaps, 2 or 3 times as much for a product. Inflation would be through the roof if outsourcing to foreign entities was not allowed or became outlawed.

      In addition, the number of jobs available would have dwindled tremendously, since, with higher wages and higher taxes and higher costs of doing business, many corporations would have ceased operations, and with that, millions more without jobs. People would have needed to stop having babies, since a growing population needs more jobs.

      We are headed there now, where the population will have to decrease, and the number of people working is going down, because, the jobs are not there. The causes are many, but, one can easily point to the massive number of regulations which force companies to seek better and lower-cost working environments, Then there is the high cost of paying higher taxes, and, when some other country offers labor at a fraction of the cost with NO or lower taxes, that becomes another incentive to send production overseas. Then there is the high cost of labor here at home, which is very uncompetitive against foreign labor. There is also the high-cost of benefits to employees, which corporations don't have to be concerned about when shipping operations overseas.

      So, there you have it; many strikes against companies keeping production at home, and many more benefits to getting production done overseas.

      So, how much do you think you would have to pay for that ultrabook that might cost $699-$899, if that same notebook was produced here at home? Chances are that you'd be paying 2 or 3 times as much.

      Complaining without giving thought to the reasons why things are as they are, is the same as being blind mentally.
      adornoe
      • No

        It is not our responsibility to employ the world, no matter if it gives you a warm and fuzzy feeling. These countries need to build economies internally that can support themselves.
        fldbryan@...
        • Who the heck is arguing the point you're making???

          The argument I made had no mention of us becoming the employer to the world. Creating employment to other countries is just an offshoot of our outsourcing. Outsourcing is not about creating employment overseas, even if it does sound like a nice gesture. Which came first, the jobs overseas, or the outsourcing of our jobs and shops to overseas venues?

          Think before you speak (or write).
          adornoe
    • Outsourcing versus Slave Labor

      You make several points but, I think, your emotions are getting the best of you. Especially when you equate slavery to outsourcing.

      That aside, outsourcing has been around since before the Civil War. It's changed, and it was called other things, but it's been there. So, to say that outsourcing kills quality as a general statement, simply does not hold.

      Perhaps if you provided concrete examples? Who is making a 200% profit? I am open to a discussion.

      Thanks for your comment.
      gery.menegaz
  • Insourcing

    I have trouble believing that adequate technical expertise cannot be found America. We pretty much invented computers, the Internet, and a hell of a lot of other technological advances. If that kind of expertise cannot be found here, then this country is in trouble.

    Aren't there companies here who will provide skilled technological personnel on an as-needed basis? I'm talking about high level technology personnel, like programmers, etc. If there aren't, then there is a need and someone should and would fill it.

    Those "pro" items listed certainly do not require the talent in foreign countries. It is available here. The only pro item that has validity is “Cost savings.” I’m sure it is cheaper to hire programmers in a country where salaries are much lower than here. But, as pointed out by others here, that boils down to greed. No matter if it hurts our economy, increases a negative balance-of-trade, etc. It allows these companies to make more profit.

    If we outsource a substantial portion of our technology, we stand the chance of losing the technological leadership position we have enjoyed for a long time. It is hard to imagine that a country with the ability to put a man on the moon and build the Space Shuttle could become second rate in this field. I don’t want to see that happen.

    I’m not arguing against some of the advantages listed for outsourcing, just for doing that beyond our borders. Perhaps we should think in terms of “insourcing” instead of outsourcing. I am of the opinion that the USA is the best country in the world, not perfect, but still the best. I’d like to keep it that way.

    Thank you. I’ll end my flag waving now.
    Doc.Savage
    • Greed is not the problem! Do some research before coming out with such

      ludicrous charges.

      The reasons for outsourcing are many, and most of them have to do with lowering costs, and the high costs come as a result of government actions which make doing business within our shores a lot more expensive than getting production done overseas.

      Obama and the democrats love your kind of thinking, which leaves them blameless and hoping that nobody will notice how their high taxes and massive number of regulations have forced many businesses to ship operations overseas. Blaming greed and republicans and big, bad corporations is precisely what Obama and the democrats hope you'll continue doing, while they continue making it impossible for businesses to grow and keep and create jobs here at home.

      Wake up already!
      adornoe
    • Technical Expertise

      I agree. I think that we ought to really try to leverage the resources we have here before going overseas. The danger when we outsource so much is the 'brain drain' I wrote about. There needs to be a good balance achieved. Easier said, than done.

      Thanks for your comment.
      gery.menegaz
  • No way

    As an IT consultant with more than 30 experience I can tell you that outsourcing to other countries is fraught with danger. I have seen more than a few companies held hostage for more money and received sub standard. As an outside consultant I am in fact a type of outsourcing, but as opposed to going to other countries, I am bound by the laws of the United States. Too late have some companies learned that they have limited legal options.

    BY all means bringing in outside consultants is the best way to handle a backlog, but if you are outsourcing to another country thinking you will save money, think again.
    fldbryan@...