Technology outsourcing comes hom

BUSINESS INTELLIGENCE
Technology outsourcing comes home

By Robert Weisman, Globe Staff | May 29, 2005

Technology outsourcing is widely viewed as a runaway horse. Now the barn door is swinging open, and the steed is coming back.

Consider this item: In a May 13 public filing, Sears Roebuck said it ended a $1.6 billion technology services contract with Computer Sciences Corp., because CSC's performance failed to live up to their agreement. Not surprisingly, CSC disagreed, charging Sears with breach of contract. The matter is in federal court. (Read More)

That wasn't the first collapse of an outsourcing deal. Last fall, J.P. Morgan Chase & Co. abruptly canceled a $5 billion outsourcing arrangement with IBM Corp., while British grocery chain J. Sainsbury PLC said it would renegotiate its $3.25 billion outsourcing contract with Accenture. And both Dell Inc. and Lehman Brothers earlier moved some customer service call centers back to the United States from India.

Jeffrey M. Kaplan, a senior consultant with the technology consulting firm Cutter Consortium in Arlington, sees those examples as merely the tip of the iceberg.

The trend toward ''backsourcing," when companies pull outsourced information technology functions back in-house from a contractor in the United States or abroad, is more widespread than is generally understood, Kaplan argues in a new Cutter report. There are little data on the outcome of outsourcing or backsourcing moves. But Kaplan says the main reason parties retreat from outsourcing deals is that they had agreed to unrealistic objectives.

''Enterprises are driven by competitive pressures, and they're often in a hurry to offload operations to save on costs," Kaplan said in an interview. ''Meanwhile, the outsourcing companies are competing for the business and often aren't doing the due diligence on the customer to see if their objectives are realistic and their expectations can be met."

Once a multiyear outsourcing pact gets underway, any number of factors can trip it up. Customers can conclude they're not getting the productivity gains they'd anticipated or can fret about losing control over key business functions. New owners taking over companies with outsourced functions, as Bank One did when it acquired J.P. Morgan, can quickly pull the plug.

The breakup of outsourcing deals can be as painful and disruptive as the deals themselves, Kaplan writes in his report:

''Just like a marriage that falls apart and leads to a costly divorce, terminating an outsourcing agreement can be equally devastating for both the enterprise customer and the outsourcing company. There can be direct business costs due to operational disruption and penalty fees as well as many indirect costs associated with the damage done to a company's reputation and corporate relationship with its customers, partners, employees, and investors."

Kaplan advises clients to develop sourcing strategies to assure that their moves to farm out operations align with their corporate objectives. Among other things, he recommends ''pre-nuptial agreements" for outsourcing, spelling out how the companies can discontinue the deals, specifying kill fees, and arranging for a smooth backsourcing transition.

Companies bringing work back in-house today can be pleasantly surprised to find quality information technology employees are more plentiful than they were several years ago, when they made their decisions to outsource, said Peter Karlson, principal at NeuEon, a technology consulting firm in the Cape Cod town of Orleans.

''Sourcing is very company specific," Karlson said. ''In some cases, companies are better off outsourcing. But if companies feel there's some strategic reason why they want to have technology functions in-house, you don't want to change their minds."

Robert Weisman can be reached at weisman@globe.com.