'Take it all' outsourcing on the wane

The messy breakup between Sears, Roebuck and Co. and its service partner Computer Sciences Corp. this month symbolizes a new outsourcing maxim: Bigger isn't better.

While the $33 billion U.S. outsourcing market is expected to grow at about a 4% clip through 2009, the size of outsourcing deals is shrinking, according to IDC and others. Instead of entering into huge, throw-everything-over-the-wall outsourcing contracts, such as the one Sears inked with CSC, corporations are signing on for smaller, more business-specific arrangements.

Take the city of Chicago. It has drawn a clear line between what it will outsource to its service provider Unisys and what the city keeps in-house.

"When we started, we went into it with the mind-set that the city would keep functions of architecture and design and project management of major projects in-house," says Christopher O'Brien, the city's CIO. "In terms of where the boundaries of outsourcing begin and end, that has remained fairly constant. It's not likely that we would do what some organizations have done, which is turn over their whole IT shop to an outsourcer."

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The messy breakup between Sears, Roebuck and Co. and its service partner Computer Sciences Corp. this month symbolizes a new outsourcing maxim: Bigger isn't better.

While the $33 billion U.S. outsourcing market is expected to grow at about a 4% clip through 2009, the size of outsourcing deals is shrinking, according to IDC and others. Instead of entering into huge, throw-everything-over-the-wall outsourcing contracts, such as the one Sears inked with CSC, corporations are signing on for smaller, more business-specific arrangements.

Take the city of Chicago. It has drawn a clear line between what it will outsource to its service provider Unisys and what the city keeps in-house.

"When we started, we went into it with the mind-set that the city would keep functions of architecture and design and project management of major projects in-house," says Christopher O'Brien, the city's CIO. "In terms of where the boundaries of outsourcing begin and end, that has remained fairly constant. It's not likely that we would do what some organizations have done, which is turn over their whole IT shop to an outsourcer."

It's true that traditional, large outsourcing deals, what some call "kitchen sink" outsourcing, are being reevaluated, says Bruce Guptill, managing director at consulting firm Saugatuck Technology.

"The old-school value perception was pretty much, 'Let's outsource IT because it's not our business.' The new-school value perception is more, 'Let's keep, or increase, the internal IT that provides us with unique business advantage, and outsource what's not part of our core business processes,'" he says.

In some cases, the reevaluation is resulting in corporations retreating on their outsourcing plans. A study earlier this year by Deloitte Consulting of 25 large organizations with a combined $50 billion in outsourcing contracts found that one in four companies had brought outsourced functions back in-house.

Not that some huge outsourcing deals aren't thriving. For example, a 10-year, $3 billion managed services contract between HP and The Procter & Gamble Co., signed in 2003, is still going strong.

"We share the same goal: transformation; not cost cutting," says Joe Hogan, vice president of HP managed services.

Companies use outsourcers but on a more-selective basis, analysts say. The vendors involved are expanding. In addition to companies such as IBM, HP, Electronic Data Systems and CSC, smaller vendors, such as Perot Systems, ACS and Hewitt Associates, are getting involved, analysts say.

There's a trend toward using multiple service providers - such as one for the network, one for operating servers in data center environments, and one for handling the help desk, says Lorrie Scardino, research vice president at Gartner.

"There are always going to be a handful of mega-deals that capture a lot of press because they're huge and involve big outsourcing companies and big clients. But we also see more selective outsourcing," Scardino says.

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