You Can’t Outsource Everything

Some outsourcing is inevitable. But as the former deputy CIO of Procter & Gamble learned, it’s crucial to retain enough work in-house to train the next generation of IT leaders.
BY GEOFF SMITH

THESE DAYS, THERE is certainly no shortage of debate on the relative merits or evils of outsourcing. One thing’s for sure: Outsourcing will continue to increase over the next several years. Close to 500,000 American IT jobs have already been lost since 2001, many of them to offshore outsourcing. An unspoken corporate lemming behavior will continue to fuel this growth for years to come. When industry leaders such as GE, DuPont, Citibank, GM or Procter & Gamble do something, others take notice and many will follow.
CIOs cannot single-handedly reverse the forces moving U.S. jobs overseas. While I’d love to see thousands of CIOs come together as a united bloc to influence IT-related policy matters, the sad reality is we don’t have a clear, unified voice right now. Therefore, I strongly encourage CIOs to rise above the “religious fervor” and focus on the things they can control in order to ensure the best possible outcomes for their companies, their IT organizations and the U.S. IT industry.

First and foremost, CIOs need to be proactive. Don’t wait until your CEO or CFO walks into your office asking you about the merits of offshoring or “Why is Company X outsourcing its IT work?” At this point, you’re now playing defense, my friend.

CIOs should proactively look at their own IT operations and determine which portions are strategic, and which are basically nondifferentiated services. The latter may be candidates for outsourcing. For example, CIOs in retailing appropriately view their customer-facing systems as very strategic and usually do their development in-house. But what about application maintenance or help desks? Do those IT services differentiate your company from the competition? I doubt it.

Ideally, the CIO’s offensive game plan should evolve from the company’s overarching business philosophy to focus on its true core competencies. This requires redirecting employees’ energy from internal machinations to focusing only on initiatives that differentiate your business in the marketplace.

At P&G, this strategic philosophy was at the heart of the decision to outsource some of IT as well as other non-IT, back-office operations. About 25 years ago, P&G developed an internal e-mail system, which R&D used extensively to proliferate the best ideas for product development and manufacturing. In 1980, this was a strategic application. Recently, P&G concluded that internally running a world-class e-mail operation no longer creates a sustainable competitive advantage. Now the company gets that service from Hewlett-Packard as part of a large, multiyear outsourcing agreement signed in 2003.

Major-league baseball is rife with examples of teams that neglected to invest in their minor-league farm systems. In virtually every case, those teams went through prolonged bad times.

Roughly half of P&G’s IT organization was ultimately moved to Hewlett-Packard or IBM as part of the outsourcing process. Was this an easy, painless process? Of course not. There was much internal debate on where to draw the boundaries of what to keep and what to outsource. Rising above the emotional stress of the situation, we decided which roles to move by looking through the eyes of P&G’s customers such as Kroger or Wal-Mart, or the consumers who buy the products. If they couldn’t “see” the work or wouldn’t pay extra for it, then it was a candidate for outsourcing. From there, we considered scale and natural synergies. (For example, does it make more sense to break up the ERP system and keep pieces in-house, or keep it whole and push the outsourcer to deliver further economies of scale?) In the end, P&G chose to outsource the running and maintenance of most operational systems, and all of the infrastructure services.

The employees in the half of the IT organization that remains in-house are mostly embedded in the business units, intimately linked to their respective company’s business objectives. IT can now focus its energy on breakthrough use of technology to drive business innovation and value creation. Examples include creating real-time business intelligence systems or managing interactive marketing initiatives (For instance, the digital brand manager of Covergirl.com works in-house.)

In sum, outsourcing should not be a binary, all-or-nothing game. Determine if there are pieces of your IT shop that could be delivered by a partner who offers greater efficiency or expertise. If so, don’t ignore the opportunity out of professional pride. Money saved in your IT back office can be reinvested in your strategic front office to drive business value or simply give back toward the company’s margins if that’s what’s needed.

Major-league baseball is rife with examples of teams that neglected to invest in their minor-league farm systems, either to save money or because they traded their best young talent for “hired gun” free agents who could help them win immediately. In virtually every case, those pro teams went through prolonged bad times as they painstakingly rebuilt their talent base.

Outsourcing, if done wrong, is likely to produce similar problems. How do you grow and develop your talent base, providing broad and essential hands-on experience, when you’re moving many of these roles outside? I believe this is going to be the hardest challenge for corporations embarking on an outsourcing journey.

To ensure the long-term development of young talent, CIOs can make a difference by how they outsource. First, determine the most important IT skills for your organization and retain enough of this work in-house to offer sufficient development opportunities. Do this even at the risk of leaving some outsourcing efficiency dollars on the table.

For example, if your company moves its programming offshore, don’t move all of the work offshore. At a minimum, keep early-stage prototype and pilot development in-house. This work tends to be very dynamic and needs to be close to the business, so it’s not generally very efficient to outsource it anyway. More important, it provides the projects in which your young talent can get hands-on learning that will serve them later in their careers as they are managing large development projects with outsourcing partners.

I’d like to see CIOs extend this farm system metaphor beyond the walls of their companies to education. With enrollment down 23 percent for IT-related majors, CIOs need to become actively involved with universities and even the K–12 education systems in their respective communities. Serve on university advisory boards to help shape the curriculum and to assist universities in recruiting top students for IT majors. Dispel the gloom-and-doom message that students are hearing in the media by putting the offshore trend into proper perspective. Get your best and brightest young talent into the classrooms to speak firsthand about the exciting things they’re doing on the job.

These “farm system” investments have a long payout period. But they’re worth it. As IT professionals, we have the broadest perspective of anyone in our companies—able to see across functional and business boundaries. Let’s apply this same broad perspective to our own functional discipline—IT—to make sure that it flourishes as we go through such dramatic changes in our industry.

Geoff Smith recently retired as deputy CIO of Procter & Gamble and founded LP Enterprises, which provides information technology, strategy and customer relationship management expertise to clients. He can be reached at geoff.smith@fuse.net. Send feedback to Executive Editor Alison Bass at abass@cio.com.