Strategy isn't driving outsourcing.Outsourcing most of a corporation's I.T. budget is more like an emetic than a miracle cure.
Statistics show the real reason companies outsource is simple:
They're in financial trouble.
Despite all of the reasons offered in the press, so far there is only one good explanation that fits almost every case of large-scale outsourcing. The outsourcing corporations are trying to return to profitability by cutting employment. One way of achieving this objective is by ending their commitment to keeping up a home-grown capacity to master the introduction and maintenance of information technologies.
Announcements about the dismissal or transfer of computer personnel feature imaginative stories about why a function that was previously seen as critical success factor can now be reassigned to outsiders. Some corporations claim their I.T. has ceased to be a "core competency." For others, the divestment of "commodity" functions make it possible to concentrate on "strategic" systems. One also hears that outsourcing is preferable because contractors offer technical expertise which the firm can't support.
Should top management view massive outsourcing of I.T. as a new and imaginative way of obtaining I.T. services, or, as an excuse for getting rid of responsibilities they have been unable to fulfill?
Statistical analysis could show whether outsourcing is a random, evenly spread phenomenon, or, clustered around some causal connection. To examine that proposition
I asked a librarian to assemble a list of commercial companies which were most frequently mentioned in the trade press about their outsourcing actions. With this list, I searched in my productivity database which includes data about operating performance of U.S. corporations, as well as their I.T. budgets. With that I set out to determine if there were no discernible unique characteristics among corporations which chose to outsource most of their I.T. functions.
EVA Prior to Outsourcing in $Millions
Company Contract Prior Year Prior 2 Yrs. Prior 3 Yrs.
Awarded
Halliburton 1994 ($354) ($170) ($497)
Delta Airlines 1994 ($1,147) ($1,239) ($1,075)
CSX 1994 ($693) ($943) ($1,159)
USAir 1994 ($621) ($954) ($1,011)
Unisys 1995 ($472) ($818) ($1,636)
General Dynamics 1994 $398 $66 ($928)
Polaroid 1995 $3 $44 ($22)
Scott Paper 1994 ($481) ($269) ($520)
Xerox 1994 ($1,267) ($1,806) ($725)
McDonnell Douglas 1994 ($110) $106 ($308)
Southern Pacific 1993 ($140) ($456) ($241)
Eastman Kodak 1991 ($778) ($572) $57
General Motors 1985 ($776) ($442) $1,368
------------------------ -------- -------- --------
Total Negative EVA ($6,438) ($7,453) ($6,697)
Those
corporations which outsourced heavily were economic losers heading into the
outsourcing act. They were shedding I.T. along with other corporate functions
because they were in financial trouble. I could not find any corporation with a
consistently large Economic Value-Added and rising employment which outsourced,
despite all of the claims about "synergy" or "advantages of getting rid of
commodity work." The losers were casting off I.T. because they were already
shrinking their firm, as illustrated in the following table:
Corporate Layoffs
Company Employees 1991 1992 1993 1994 Change 91-94
Halliburton 73,400 69,200 64,700 57,200 -22.1%
Delta Airlines 66,512 70,907 67,724 65,596 -1.4%
CSX 49,883 47,597 47,063 46,747 -6.3%
USAir 48,700 48,900 48,500 43,600 -10.5%
Unisys 60,300 54,300 49,000 46,300 -23.2%
General Dynamics 80,600 56,800 30,500 25,600 -68.2%
Polaroid 12,003 12,359 12,048 11,115 -7.4%
Scott Paper 29,100 26,500 25,900 15,900 -45.4%
Xerox 100,900 99,300 97,000 87,600 -13.2%
McDonnell Douglas 109,123 87,377 70,016 65,760 -39.7%
Southern Pacific 23,396 22,793 18,982 18,010 -23.0%
Eastman Kodak 133,200 132,600 110,400 96,300 -27.7%
General Motors 756,300 750,000 710,800 692,800 -8.4%
--------- --------- --------- --------- ------
1,543,417 1,478,633 1,352,633 1,272,528 -17.6%
If
outsourcing truly had all of the advertised advantages, economically prosperous
and growing companies would use it because they were unable to absorb a
sufficient number of computer people into their expanding businesses. The
winners also would be the most anxious to secure ready-made technical expertise
so that they could concentrate on their "core" competencies. I could not find
any.
Cutting staff, divesting businesses and getting rid of hundreds of person-years of accumulated know-how seems to be a prevailing compulsion among large firms which are seeking to improve profitability by shrinking their size.
One could say that outsourcing has many of the attributes of a widely prevailing disorder known as "Anorexia nervosa." It is a psychological disturbance involving the refusal to eat to the point of starvation. People with anorexia have a distorted self-image which makes them feel "fat" even when emaciated. Preoccupation with food and low self-esteem, along with emphatic denial of the problem, characterize most anorexics. Similarly, executives in companies with poor financial performance seem to concentrate on downsizing as the preferred method for restoring competitiveness.
I am in favor of outsourcing for any of the good reasons that would take advantage of somebody else's capacity to accumulate know-how faster than if it remains home-grown. It should not be applied as an emetic. I will be especially encouraged about the prospects for outsourcing services when I get a large list of prosperous and growing organizations that have picked this option as a way of enhancing their mastery of information management.