Secret CIO: Outsourcing Isn’t Always the Answer

Herbert W. Lovelace shares his experiences as CIO of a multibillion-dollar international company (changing most names, including his own, to protect the guilty). Send him e-mail at [email protected].

I had two reactions when I read that JPMorgan Chase had decided to pull the plug on its $5 billion outsourcing contract with IBM and rehire the 4,000 IT workers it sent to Big Blue. My first thought was that we've come a long way from the days when nothing a company's IT group could do would have sufficient financial impact to make The Wall Street Journal. My second reaction was that no one who had ever run a systems organization would be the least bit skeptical of Jamie Dimon's decision.

Any astute CIO knows that outsourcing has to be considered as a service-delivery option. It certainly is the appropriate choice when an external firm can do a job more effectively or efficiently than you can. It's quite possible, for example, that engaging an onshore or offshore vendor is going to be the most logical approach to implementing a new technology or maintaining a relatively stable old system.

On the other hand, the hype has been so high at the CEO and board level about outsourcing being the silver-bullet solution to IT woes that many have ignored the basics of when it's a good idea and when it ranks right up there with garlic-flavored ice cream (it does exist) as being intuitively appealing. If executives would logically evaluate outsourcing instead of believing the cost-savings numbers put in front of them, a lot of grief could be saved -- and maybe fewer lives would be disrupted. Here are some of the hard-learned truths that are so frequently ignored.

First, outsourcing takes more management, not less. It requires significant effort to develop the metrics and legalese to govern a contract and a large, ongoing cost to keep it relevant while making sure everyone is adhering to it. Outsourcers want to provide cost-effective service, and they certainly want good references from you, but they may not understand your businesses as well as you and they also have to make a reasonable profit to keep their own management happy.

The second truth is that the economy of scale promised by outsourcers disappears very quickly. Certainly, outsourcing is a great way to learn about a new technology or buy services too expensive to implement internally, but with the continually decreasing cost of boxes and the variety of options available to the smart software buyer, it doesn't take a very big budget to get vendors sharpening their pencils to earn your business.

Finally, and most important, IT remains an opportunity for competitive advantage. As some writers (who have gotten all too much press) don't seem to understand, it isn't computing that gives a company competitive advantage, it's the ability to use computer technology to implement process improvements that differentiate businesses and win customers. IT is a competitive advantage, not for the technology itself, but for how it enables and integrates improved business processes. Especially vital are those internal to your company for identifying and servicing customers who add significantly to your bottom line.

Until computing is a utility like electricity, flowing from a wall socket -- and IT is simply not a fungible commodity today -- the smart CIO with a competent staff, supported by external vendors where appropriate, will be the best way to win in business.

Article originally appeared in InformationWeek, Oct. 4, 2004.