IT comes back home

When Janet Wejman was hired as CIO of Continental Airlines Inc. in 1995, she found herself heading an IT staff of a mere dozen people. Continental, it seems, had outsourced nearly all of its IT to Electronic Data Systems Corp. four years earlier.

Finding the situation “extreme,” Wejman set out to correct it. By considering EDS’s particular competencies, as well as the strategic implications of each IT and business function, she brought much of IT back in-house, eventually arriving at a 50-50 outsource/insource equilibrium and growing the in-house IT staff to 400.

Wejman’s experience is emblematic of a trend that outsourcing researcher Rudy Hirschheim calls backsourcing. “It is not uncommon for companies to outsource initially and then to decide on reflection that they should bring it back in-house,” said Hirschheim, professor of information systems at the University of Houston.

Hirschheim’s conclusions are based on a study that he and Mary Lacity, an associate professor of MIS at the University of Missouri in St. Louis, conducted of 14 petroleum, chemicals, energy, rubber, retailing, food, education and banking concerns, each with two to 10 years of IT outsourcing experience.

The challenge companies face is to develop thoughtful sourcing strategies that combine both insourcing and outsourcing. Here are five key questions to consider:

1. Are there economic advantages to keeping an existing outsourcing relationship? The existing infrastructure often can’t be duplicated economically in-house. Companies that have outsourced their application design and testing to an offshore firm, for example, typically maintain a dedicated communications line and have in-house people to manage the relationship.

“If a company were to cut back on its relationship with the offshore company, it still would have to maintain that infrastructure,” said Colleen Niven, an analyst at AMR Research Inc. in Boston.

In other words, economies of scale can weigh in favour of an existing outsourcing relationship.

2. Can the outsourcing deal be renegotiated? “Utility outsourcing,” used when companies want to cut costs by outsourcing essential but non-differentiating activities, has dominated over “transformational outsourcing,” which focuses on enhancing business processes and relationships, according to Linda Cohen, an analyst at Gartner Inc. in Stamford, Conn.

Excess costs are typically squeezed out in the first two to three years of the utility relationship, Cohen said. “Outsourcing to save money is not an enduring value proposition,” she said. “There needs to be a business benefit to make the outsourcing relationship last.”

If a company’s present outsourcer can provide measurable business improvement, perhaps the deal should be renegotiated to provide for the enhancements the company requires. If not, switching vendors or backsourcing may be the better way to go.

3. Will backsourcing have a negative impact on the outsourced activity? Assuming that a company has the necessary resources, talent and commitment to sustain bringing a function back in-house, the hand-off must be accomplished smoothly.

“That depends on having a good working relationship with vendors and on getting documentation and support during the transition,” said Brenda Kienan, a partner at Tauber Kienan Associates, a consulting firm in Oakland, Calif. Kienan often works as a project manager on backsourced Web development projects.

“If complications in transition will bloat the project budget, it may turn out to be more cost-effective to keep the project going as is,” Kienan said. “If your in-house people are going to have to tackle a steep learning curve, the schedule may be badly affected.”

Ownership of intellectual property may also be a sticking point. “My predecessor signed a deal whereby the Web source code was owned by a third party,” said James Burnett, IT manager at Fidelity Life Assurance Co. in Newmarket, N.Z. “I took this back so that I could plan improved applications. Having full ownership of all the code puts me in a strong position.”

4. Will insourcing divert internal IT resources from core projects? The key is not to think of the insourcing/outsourcing decision as an all-or-nothing proposition. When Continental’s Wejman re-evaluated the relationship with Plano, Tex.-based EDS, she said she looked at “our talent vs. theirs” with the goal of achieving a good mix.

In general, Wejman sought to outsource “commodity” services while keeping in-house those that move the airline business ahead. Wejman is satisfied with EDS’s management of Continental’s data centre, which she said EDS does better and more cost-effectively than the Houston-based airline could do on its own. Among the activities Wejman brought in-house: application development, maintenance and support for processes that define the airline’s relationships with its customers, suppliers and partners, such as online reservations, customer service and supply chain management.

5. Can adequate internal IT staff be developed? Many companies expect that a function that’s backsourced into the company will rely on the talents of current employees, as opposed to having the new tasks assigned to new hires. This can lead to employee-poaching from other departments and relegating the backsourced project to the bottom of the employee priority pile if the project’s importance isn’t made clear.

“When the insourced job is high-profile and rewards will be given, employees may be eager to be assigned to it and to do it well,” Kienan said. “When the project will result in extra recognition, will be seen as a special achievement, will count toward the employee’s review and may even be part of the criteria for a raise, employees perceive more incentive than they do when the insourced project is simply expected of them but not high priority.”

And if employees lack the requisite skills? “Train them,” said James Burnett, who maintains that managing company employees is inevitably less expensive than relying on outsiders. “IT staff generally love challenges.”