Outsourcing gone to pot

Ever since we got married about a year ago, my wife and I have been struggling to spend a $100 gift certificate to Williams-Sonoma that we got as a wedding gift. I realize it shouldn’t be that hard. We’re fortunate enough to live close to one of the stores, and it’s filled with all kinds of kitchen-related items that appeal to people, like us, who love to cook.

And yet, the closest we’ve come is a $75 pasta maker, but we’re still debating about whether we really need to make our own pasta or whether we’re content to let an outside company provide that for us. This is ironic, because Williams-Sonoma is going through the same process about its IT systems.

In a regulatory filing last week, the retailer said it is cancelling the bulk of a five-year, multi-million dollar technology outsourcing contract with IBM less than three years into the deal and is handing its IT operations back to in-house staffers. No explanation was given, but you only have to look at Williams-Sonoma’s first quarter profit drop of 21 per cent to get a hint.

This is a company grappling with financial pressures, and paying IBM multi-millions of dollars annually to keep its IT infrastructure running may only be adding to that pressure.

Big Blue and other major outsourcing firms would probably argue the reverse is true.

Outsourcing has been pitched, in many cases, as a strategic way of getting costs under control. It should be cheaper, in theory, to have an outside firm manage compute resources among a pool of other customers than to invest in state-of-the-art hardware and software yourself.

Working with outsourcers is also supposed to focus your organization on what it does best — in Williams-Sonoma’s case, that would be providing elegant platters and glassware, rather than deploying the latest Microsoft operating system.

Backing out of its outsourcing deal, one would think, means it won’t see those benefits.

What outsourcing firms don’t dwell on is the notion that being involved in day-to-day IT operations might shed a lot of light on how business processes are functioning, and whether IT is really contributing to the overall goals of the organization.

If you are really good at managing these kind of relationships, you should be able to assess the situation through an outsourcer the same way you would if dealing with your own internal IT department.

But most enterprises aren’t that good at managing these relationships, and certainly not in their first three years of a multi-year deal.

Outsourcing may be the right approach but the largest organizations, and even some of the smallest. For those in between — and I’m open as to what defines a mid-market enterprise — there may be a threshold at which you simply can’t afford to outsource. Those deals might be seen as the luxury of an industry behemoth or the escape route for an up-and-coming firm.

If we could better establish what that threshold is, companies might be able to do a better job of setting up deals with the right timelines, rather than doing a 360 (as some firms appear to be doing) in reaction to adverse market conditions.

Such a benchmark would be highly valuable — almost as valuable as the kind of stuff I’ll continue to browse on Williams-Sonoma’s shelves.

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