CIOs must manage what’s left

If all your neighbors lose their jobs, you call that an economic recession. If you lose your job, you call it a depression.

The same reasoning seems to apply to the enormous attention that computer people are suddenly giving to outsourcing. The fact is that CFOs have always pushed for outsourcing everything associated with the cost of goods sold. What is different now is that CFOs have shifted their target and placed IT on the top of their list of functions that should be subjected to competitive pricing.

Outsourcing is widely practiced with regard to factory labour and materials supplies, without distinction between domestic or foreign sources. It is labeled as “competitive purchasing,” “best value procurement” or “commercial off-the-shelf acquisitions” (in government). After 50 years of abnormal growth in the number of IT jobs, and after a period of above-average increases in compensation for IT people, CFOs are seeking lower overhead expenses. That’s where IT is most vulnerable, because most of IT is an overhead burden.

A squeeze on profits necessitates cost-cutting. When it comes to picking where to cut, why not select what has escaped pruning for at least 20 years? The CFOs — still nursing a grudge for having lost possession of IT — are happy to oblige.

The CFOs understand that corporations already purchase (e.g., outsource) most of their costs. Given the high percentage already devoted to purchasing to gain a competitive cost advantage, the current outsourcing initiatives shouldn’t come as a surprise. Offshore procurement would be a logical choice, since imports already account for 14 per cent of the gross national product of the U.S.

I have calculated “outsourcing ratios” (e.g., the ratio of purchases to revenues) for over 1,000 global companies.

As a rule, I find that diversified multinational corporations — already engaged in global commerce — show higher outsourcing ratios than smaller firms. Therefore, one can expect an acceleration in the awarding of outsourcing contracts in US$100 million increments. The primary purpose of such contracts is to take over the job of migrating the obsolete client/server architectures to network-based data-centric designs. Such outsourcing would pass on to vendors the technology risks for fixing the creaky and unaffordable computing infrastructures.

Sensational headlines notwithstanding, the CFOs fully comprehend that IT does matter. IT median costs now equal median corporate profits. They are not a mere three per cent of revenues but 13 per cent of overhead (e.g., transaction costs), which is nowadays the principal cause of eroding corporate profits.

In about a quarter of companies, IT constitutes the largest cost centre and therefore will get intense attention in budget reviews. In this environment, asking for massive reductions in IT spending will always be a politically popular move — except that IT innovation has now become a strategic necessity. Without injections of new sums of money, we won’t be able to free companies from 50 years of emphasis on intracompany information processing and start moving toward a future that mandates global interoperability with vendors and customers.

Whether refocusing your firm’s IT infrastructure results in a bleeding amputation or in simple outpatient surgery depends on your information architecture. If you have built up your infrastructures separately for each organization, invested in isolated client/server farms, depend on desktop-centric applications for too many applications or do not have a company-wide data dictionary, you will need to remedy your conditions prior to passing on your IT infrastructure to the outsourcers with the most attractive bids.

The CFO will always show reasons for outsourcing to reduce costs. The job of the CIO after outsourcing more than three quarters of IT spending is to manage risks and preserve those parts of the IT organization that are the essential core competency for safeguarding future prosperity.

Paul A. Strassmann ([email protected]) finds that much of the organizational conflict associated with outsourcing reflects a neglect in anticipating the inevitable.

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Jim Love, Chief Content Officer, IT World Canada

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