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.
The failure of certain multibillion-dollar mega-deals has captured a lot of press lately, including the one between Sears and CSC. Then there was JPMorgan Chase last fall backing off a $5 billion, seven-year outsourcing agreement with IBM, but stressing that the two companies remain technology partners.
“We value our strong relationship with IBM and we will continue to partner in delivering selected technology infrastructure services to several of our specific lines of business,” said Austin Adams, JPMorgan Chase’s CIO.
A change in leadership and significant organizational change are the two biggest catalysts that modify an IT services agreement. “We often see companies that have gone through mergers and acquisitions either increasing the amount of outsourcing or decreasing the amount of outsourcing and bringing things back in-house,” Scardino says.
Shifting corporate agendas also are likely to change a number of outsourcing agreements with respect to duration, scope and technology implementation plans, says Frank Dzubeck, president of consulting company Communications Network Architects.
The major issue is the effect that business transformation efforts – and the eventual manifestation of those efforts into a service-oriented architecture (SOA) – will have on outsourcing agreements, Dzubeck says.
“If any company in the midst of one of these agreements decides to start to do a business transformation, where they’re looking at the company itself and how it does business, and then works its way toward an SOA, that’s going to modify all these agreements,” he says. “The agreements are very legacy-oriented, and now you have to modify them to bring the legacy into the new architectures.”
At the same time, technology advances are paving the way for more creative use of IT outsourcers, analysts say.
“It’s easier and cheaper than ever to build, and buy and rent IT on a functional basis,” Saugatuck’s Guptill says. “CIOs don’t have to outsource everything, or even most of everything, in order to get the economies they want or need. They now have more tools, and better, more affordable skills and resources to manage the mélange of technologies and applications.”
That makes it increasingly important for corporate end users to have a clear idea of their goals, and their exit strategies, when entering into outsourcing arrangements.
Sears and CSC, as an example, are in litigation after Sears killed the 10-year, $1.6 billion technology services agreement less than a year after announcing the mega-deal. Sears, which declined to comment for this story, said in a Securities and Exchange Commission filing that CSC’s failure to perform resulted in the termination. CSC dismisses the allegation, calling it an attempt by Sears to avoid or reduce termination fees of tens of millions of dollars, as well as a breach of agreement.
“It’s a classic example of how difficult it can be both financially, as well as operationally, to extricate yourself from a mega outsourcing deal,” says Jeff Kaplan, managing director of Thinkstrategies. “It highlights the need to make sure, right up front, that the rules of engagement are not only clearly spelled out from the point of view of how you’re going to enter the outsourcing agreement but also from the point of view of how you might have to extricate yourself or exit the agreement later on.”
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