The realities of outsourcing

A recent flurry of stories in the trade press suggests the current economic decline has heightened interest in outsourcing. Analysts forecast a surge in outsourcing, ranging from large-scale contracts to newer forms of outsourced services such as Web hosting and VPN services. But despite the growing arguments in favor of outsourcing, network executives continue to be apprehensive about the negative implications. As a consequence, the rate of outsourcing growth is unlikely to match industry expectations.

Network executives have been reluctant to outsource all or part of their IT operations - for good reason. Gartner has estimated that 80% of major outsourcing deals fail to achieve their original business objectives and are terminated or significantly restructured before the contract period ends. One notable case of a deal gone bad happened last summer, when McDermott International ended a 10-year network outsourcing contract with AT&T after less than two years because the contract no longer fit corporate goals.

There are many reasons for these deals coming undone. First, many have been signed without sufficient baseline data on the current health of the client's IT environment. As a result, the outsourcing companies are making promises about cost savings and performance improvements they can't keep. Second, outsourcers make money by automating IT functions and delivering generic solutions that can produce operating efficiencies and reasonable margins. This doesn't leave room for the continuous changes in many enterprise organizations.

The current economic environment is forcing companies to rapidly change their corporate goals and operating procedures. Traditional outsourcing agreements are not flexible enough to accommodate this level of change. This has led to a new wave of outsourcing models, including application service providers, management service providers (MSP) and Web-hosting companies. But these new outsourcers have also had their problems. A recent IDC eWorld 2001 Survey of more than 2,100 respondents found that only 15% had purchased or were interested in purchasing MSP services in the next 12 months.

Nonetheless, the research firms continue to forecast double-digit growth in outsourcing. How will the growth become a reality? Two things need to happen. First, outsourcers need to repackage their offerings to give their prospective clients more "bit-sized" alternatives to the all-or-nothing outsourcing approach of the past. Second, IT executives must overcome their fear of outsourcing and more carefully evaluate the business benefits of the expanding outsourcing alternatives.

Whether they like it or not, IT decision-makers should recognize that outsourcing is a necessary evil that can bring true cost savings and performance improvements if properly structured. Taking the right steps and demanding the right solution are essential to success.

Kaplan is managing director of THINKstrategies, a consultancy in Wellesley, Mass. He can be reached at jkaplan@thinkstrategies.com.