CIO Insights: IT offshoring/outsourcing – how much is too much?

Not all companies offshore or outsource purely to cut costs – freeing up staff, getting access to skills and getting a foot in a new markets are also important reasons. But cost is still a key factor, as business heads demand more bang for their buck while still wanting to be able to innovate. But is there even such a thing as getting the best while driving down costs?

In the second instalment of CIO Insights, we talk to three leading Australian technologists on how much is too much when it comes to IT offshoring and outsourcing, and when to put your foot down and keep the IT functions in-house that will allow you to do your job well.

Scenario: The CEO or another business head is looking to offshore/outsource some back-end IT functions that are costly and time consuming to run. The CIO likes the idea of having time freed up to focus on more strategic business-focused projects that could make the company more competitive.

However, it doesn’t stop there – with a tight budget, the CEO also wants to offshore/outsource important roles in project management, software development and IT architecture. The CIO fears that this could lead to issues such as lack of agility and innovation, loss of control over quality and performance, difficulty to replace staff in future, vendor lock-in, etc.

What would you do in this situation?

Simarjit Chhabra, CIO at Xtralis

In any offshoring or outsourcing environment, what you have to do is make sure that everything is structured. Any deviation from the structure creates additional costs. That is one thing many people forget.

For example, a software developer could be working on things outside his or her usual work, or on broader business projects known to the CEO or the relevant stakeholders. So if you take that role away you are not only taking some projects out of the organisation, but it could also impact on other areas of the business. While these may seem like soft changes at first, you could run into issues down the line which may not be immediately reversible.

One issue is related to the flexibility and agility of an organisation. Today we are talking about agile project management and developing things on the fly. We no longer have five-year budget plans. Yes they may still exist, but they are guidelines. We are now budgeting quarter-to-quarter and we are meant to be flexible, to be able to do things on the fly in terms of decision making and reacting to the competition.

If you look at successful leaders in business, they always look at how they can grow innovatively – they don’t always look at costs. We need to get value for our dollar, but not keep looking at the cost as a primary driver for being successful in a business.

Consider this analogy: You can get a $5 or $6 Domino’s pizza, for example, or you can get a $30 or $40 pizza in an Italian restaurant. The latter is more expensive, but you are going for a better experience and better service. If most restaurants delivered crappy service, customers would just end up going to the cheapest place they could find. You only get what you pay for.

The customer experience model developed by Steve Jobs has never failed its loyal fans. Apple devices are deemed to be more expensive than an average handset in the market, but the company's loyal customers still stand in queue for hours and hours. It is how one connects with the customers that’s important. The customers don’t mind waiting but as long as you give them that ‘special’ attention or experience they can’t easily get elsewhere, they will pledge loyalty to you.

As long as the CIO can articulate these metrics in price versus value, he or she will be more successful in making others think. It’s always easy to look at cost line on a budget sheet and say, ‘IT is expensive because of all the infrastructure or whatever that’s needed’. But you need to talk about the metrics that bring value to the business and its customers so they can understand.

It comes down to trust between executives, so that’s important. The CEO or other business executive and the CIO need to realise they are both working for the same business. Their goals are common, so it’s not that IT is a separate business from the rest of the organisation. IT is working with the business, but they just need to articulate that better and market themselves more.

David Hoysted, IT consultant and former IT director at Mars Information Services, Asia Pacific

When having this conversation with the CEO or other business head, remember not to come across like you are trying to resist offshoring or outsourcing completely, because there is value in it if handled properly. The internal IT team can’t do everything and it’s not possible to have all the expertise you would like to have. There’s a reason why this consolidation of capability and virtualization of services happens and that’s because it becomes too unaffordable for everybody to do everything inside their business.

I would try to highlight to the CEO or other business executive that there can be hidden costs and challenges in IT offshoring and even outsourcing to a third party. If the intention is purely to save money, then they should have at least created a very detailed business case, because there can be unexpected costs, particularly if establishing a new offshore capability.

When it comes to offshoring, if you focus purely on what looks to be cheaper salaries then you could have some nasty surprises. There can be unexpected additional legal costs and compliance costs particular to other countries. The rules around pensions or social security provisions may be different or non-existent. Also, in some developing countries salary CPI increases are quite high by comparison to what we experience here.

Turnover can be challenging, particularly if you’re moving capability to very competitive markets like China and India, where good people are sought after by competitors and may be offered good salary incentives to move. So you could be chasing your tail building capability and then trying to retain qualified people once you have them sufficiently developed. If you or your provider are constantly replenishing the organisation, you’ll have challenges around capability and therefore performance.

Offshoring or outsourcing IT functions that rely on collaboration can mean challenges to both formal and informal communication between the remote IT organisation and either the business or the local IT organisation. Things are harder because people are not located with each other.

Additionally, the remote organisation may not be part of your business, introducing challenges around culture and shared values. You just don’t have that same ease of operation as you do when you are in person and part of the same business. There is more bureaucracy and overhead in terms of setting up meetings, too. These things are not insurmountable, but it does take time to build the connection and the associated trust.

You’ll also undoubtedly have challenges from a cost point of view around extra travel. You can’t do everything remotely; there will be some occasions where people visit the offshore or outsourced location and vice versa.

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There has been a trend to move functions out of businesses in search of savings or to remove non-value-added work. IT capability has also been on a path to greater centralisation as technology has allowed it. Now that we have things like cloud and virtualization, we take this next step to move capability outside of businesses or to ‘cheaper’ locations.

But by centralising and virtualizing your people as well as your technology, it makes it harder for people to count on long-term careers in IT. It potentially also makes it harder for people coming through to get a traditional set of IT experiences in their development.

There’s some loss of business knowledge and capability when moving your IT off-premise as well. I guess this is change though, and the nature of it is that people have to and do adapt to a changing marketplace.

If your business is prepared to take a long-term view, or if you have other good reasons for moving some of your IT overseas or to a third party – for example, moving to a location where your business is growing and it’s very important to have capability in that country – then they are stronger reasons for doing it than purely cherry picking on a cost basis with a short-term return in mind.

It’s a matter of drawing a conclusion in your own mind on what can stay internally, what must stay internally and what you can afford to give up. Have a position that you think will work and then articulate the pros and cons of it.

It’s important to have trust and credibility with your CEO, have a good quality relationship where you are going to be listened to in the first place. It can be successful, but it needs time and investment and it needs to fit into your long-term strategy.

Alex Jones, CIO at Synergy

People have very strong personal opinions when to comes to offshoring or outsourcing. Too often decisions are driven by opinion and emotion and too little by fact. That’s the wrong angle to come at it from, you have got to try and take a step back. There are many people who have strongly positive or negative experiences from the past that they bring into the situation; they tend to believe that whatever they have experienced in the past is what’s going to happen again.

The key with this kind of discussion is take the opinion and emotion away and strip it back to what it is: a business transformation. Talk about it and plan it in those terms. Then, hopefully the benefits or disadvantages of the different options should become apparent through a more rigorous and objective process. If you let it become an emotionally driven issue, you are not going to be treated with much respect.

You have also got to remember that the vendors who are providing these services are in business to make money as well so they are always going to be presenting you with reasons why you should extend your investment with them. But it’s up to the organisation to make the right commercial decision in its own interest.

I think in any material decision that gets made, whether it’s at the start or along the way, you have got to make sure you are making it from an objective perspective rather than just the default – the default being allured into more and more offshoring or outsourcing.

It’s true that in some situations you could actually limit your agility if the kind of agreement you have with the outsourcing company is very specific and you would have to change the commercial agreement, which takes time. On the other hand, you might have more agility with an outsourced company if they are much more able to obtain the latest technical skills that you can’t just go and hire yourself every five minutes.

It can be quite difficult, especially in an organisation whose core business is not IT, to look after the careers and the skill sets of technical staff whose whole focus is staying up-to-date with technology. Some IT staff might see their career path as staying up-to-date with the latest in their area of technical expertise so that in five years’ time they can go an implement the next latest technology. The company, however, doesn’t want that; it wants to keep the technology it has got and to keep it running and not have to upgrade it to the latest and greatest all the time.

So you have got a conflict of interests between the company and its staff. The staff has a direct interest in their personal careers and development, and the company has a direct interest in keeping the same technology because it’s fit for purpose and they don’t want to spend any more money on it. That’s often a good reason why you would look at an external company, because if the objectives of a company are not aligned to the careers objectives of the people then you kind of get that conflict of interest.

I think you can get better service at a lower cost when it comes to outsourcing or offshoring. At first glance, that might seem like a contradiction, but it’s not at all.

The perfect example of how we have achieved that in the last year is improving our online offering so that more customers can get what they want online instead of calling us up. The customers are happier and they get better service because they can do it online, and it is lower cost for us because every phone call cost money. It absolutely can be the case in outsourcing as well. But it’s completely false to believe that all outsourcing is always cheaper than all in-sourcing. Sometimes it is, sometimes it isn’t.

Are you facing a particular challenge and need some advice? Contact Rebecca Merrett at rebecca_merrett@idg.com.au

For more articles in the CIO Insights series, be sure to check out:
How to approach innovation
Dealing with shadow IT
Legacy systems – love them or leave them?
What not to do when hiring talent