2011 Outsourcing Survey: Chasing Fast And Cheap

Apr 22, 2011 (08:04 PM EDT)

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Even as the economy improves, the reality of IT service delivery is less positive: We're not willing to fight to hire talent, opting instead to outsource more and more, yet not investing in vital management tools and skills.

Worse, quality is too often an afterthought.

Our second annual InformationWeek Analytics State of IT Outsourcing Survey shows an increase in the number of respondents using service providers, and the vast majority plan to increase their outsourcing activities across all categories--hardware, telco, data center, software development, and public cloud and software as a service. That enthusiasm is despite ongoing concerns about value and just how much time and money we're really saving. Respondents say they're three times more likely to be able to engage a contractor than to bring on staff.

Let that settle in for a minute. In the past 32 months, we've been through brutal recession, uneasy recovery, and dramatic technology change. That's more than two and a half years of turmoil and transformation in your business. Not only have IT operations had to morph based on business realities, we've had to adapt to expanded virtualization options, data center convergence, increasing storage volumes, and the rise of mobile devices and consumerization, as well as shifting compliance standards for everything from credit card payments to Web security.

Given a whole new set of strategic variables plus fewer resources, it's no wonder IT is looking for help. But we're not figuring out how to apply outside talent as a means to deliver quality IT. We're still just chasing fast and cheap, and that's no way to excel.

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What's On The Rise?

Cloud and software development outsourcing lead the way, with 76% of respondents to our March 2011 survey now in the public cloud--a 10-point increase over February 2010. We saw growth in almost every category, from SaaS versions of human resources apps to raw storage. Forty-five percent of those already employing cloud services plan to increase use. However, it's not all rosy: Just 30% of respondents say their cloud services provide better quality at lower cost, down from 37% last year. Delivering that benefit is the benchmark for any outsourcer's value.

The primary benefits cited year over year are freeing up staff for more strategic initiatives, gaining access to industry-specific expertise, and delivering projects that wouldn't have been possible without external help.

However, we saw a discouraging lack of investment in technology to manage these new outsourced networks: 49% lack automated RFP and bid management, 43% are without vendor time-management systems, and a whopping 62% don't monitor their cloud application performance. These gaps steadily eat away at gains made by outsourcing and can even cast us into a pernicious kind of IT hell. For every respondent who talks about the benefits of outsourcing, another complains bitterly about being "trapped" or "held hostage" by providers.

That said, use of all forms of outsourcing will continue to grow for the next few years. Why? Because hiring is a nonstarter at many companies. We asked, when it comes to staffing and support, is it easier to bring in an outside contractor or a full-time employee, or is it a wash? A mere 15% say they find in-house hiring the most likely route. This confirms a trend we cited in our recent InformationWeek Analytics IT Budget Survey report: Companies are moving away from long-term IT investments, whether for capital equipment or staff.

Are we mortgaging the future by pushing technical chops out the door? A number of respondents sound this alarm. "Core and tribal knowledge has to be maintained internally," says one. "If this transfers out of the organization, this is a major contributor to increased cost."

chart: How great a concern are these factors when outsourcing?

Hunters Being Hunted

In our consulting practice, we're seeing a sharp rise in the use of "gig" contractors--individuals brought in on a long-term basis to perform key tasks. This term, coined by Daily Beast editor Tina Brown in 2009, describes the growing number of independent workers who survive project to project as freelancers, relying on their contacts, social networks, and online tools to find work. IT has always had its go-to experts, gurus you bring in to fight fires or implement complex systems, but we've seen a marked rise in companies relying on these independents vs. larger consulting firms. Seventy-two percent of our survey respondents use gig workers, with a surprising 45% saying it's a new approach for their companies.

It's interesting--big outsourcing firms, such as IBM's or HP's services arms or Tata, that once pecked away at internal IT are now competing more against nimbler, hungrier startups and pros working through individual marketplaces, at least for project work.

While the gig economy may bring companies entrepreneurial talent, it has downsides. For starters, it makes addressing the gaps in outsourcing management even more crucial. If you have a 20-person IT staff and hire even a half-dozen contractors quarterly for key activities, you need automated project and contact management, vendor time tracking, and performance surveys of end users or customers to ensure you're getting the quality you're paying for. Our advice is to engage the HR people in the process of hiring contractors. They're experts on tracking, performance evaluations, and monitoring. Involving HR also covers you as you navigate the slippery turf of contractors vs. staff, a distinction that's getting foggier.

In addition, these IT mercenaries are often former employees of a hiring company, or just working for themselves; they don't come with an established managed services firm behind them to provide escalation paths, compliance checks, or defined quality controls. In that sense, there's something to be said for the big vendors of the world.

Still, among respondents leaving comments in our survey, we see a strong preference for on-shore and particularly local providers. "We do not use generic outsourcing," says a respondent. "We have specific vendors, experienced in our industry, to handle each of our application areas. All vendors we currently utilize are based locally--within 300 miles."

The personal touch is nice, but don't get complacent. We know of a senior IT engineer who voluntarily left a high-level position to strike out on his own. He was the go-to guy for some critical tasks, and when he left, the CIO didn't bother to get much documentation--she was going to hire him back as a contractor anyway.

Can you say "knowledge hostage"?

chart: To what degree have these benefits been realized through your company's  use of outsourcing?

What Are We Gaining?

Outsourcing has always been an integral part of IT, from the day we set up our first WAN links. Now, anything from end user support (done by 33% of companies) to data center ops (38%) to development of internal and external applications (45% and 68%, respectively) is fair game.

Why do we love outsourcing so? The No. 1 benefit last year was the venerable "freeing staff for strategic projects." But this year, that's tied for top spot with access to industry-specific expertise and ability to deliver on projects that couldn't be done with in-house staff. In fact, we're seeing an increase in specialization. The ability to deliver projects more quickly was close behind.

In dead last: Gaining a better quality product.

In fact, year-over-year quality opinions are down across all categories, with a marked dip in the quality of end user support. A staggering 57% of respondents cite lower-quality results, regardless of cost, with 20% admitting to paying more for inferior outsourced end user support.

Think that will mean a mass exodus from these services? Nope. Just more than 3% plan to scale back on use. On the contrary, most respondents plan to maintain or increase use of all outsourcing--regardless of opinions about quality.

And, presumably, hiding from their underserved co-workers.

We're not just suffering on the caliber of services; unplanned costs, time spent managing providers, and communication problems also dominate concerns around outsourcing. However, the intensity (measured on a 1-to-5 scale of problem significance) dropped versus last year.

All this presents an interesting scenario: We're less happy with quality, but more on board with outsourcing in general. That means either: A, we're actively managing our outsourcers and doing what we need to internally to shore up quality and avoid negatively impacting the business; or B, we're simply pushing whatever we can off our plates and hoping quality will magically improve before the masses revolt.

We're thinking it's B.

To minimize problems, start being more selective when picking partners.

Good Hires Avoid Bad Fires

Almost one-quarter of respondents fired a vendor in the past year, with 65% citing an impact on their businesses; 10% say it was a major blow. This is consistent with 2010 results.

To avoid that fate, don't follow our respondents' lead on the initial review and award process. Most rely on manually pitching an RFP to handpicked vendors. When you combine this narrow focus with the fact that almost no one uses automated systems to manage the RFP/bid process, it's no surprise we get off on the wrong foot.

There is some good news. We see a rise in the number of respondents expanding their sourcing options, especially via online soliciting of RFPs. And contractor marketplaces like Elance, Guru, oDesk, and OnForce continue to see their traffic jump as companies look to get broader benches of talent.

The other side of the oversight coin is monitoring external service-level agreements. Unfortunately, companies using cloud computing are particularly prone to throwing the concept of oversight to the wind. We asked respondents whether they directly monitor the performance and uptime of their cloud applications. Last year, 59% said no, they rely on the vendor to police itself. This year, that number actually went up to 62%.

Come on, people. All the major monitoring tools now have capabilities to track services, and there are dozens of cloud providers up and down the stack that do nothing but monitoring. Make sure you get what you pay for.

Compliance is another concern, as one-third of respondents say they rely on vendors to verify that they conform to company policies and rules. That's a big red flag for auditors. If you have HIPAA, PCI, or SOX compliance requirements, you need to manage those vendors. If you run afoul of regulators, it's your business on the line. Now, we realize monitoring takes time and costs money and cuts into why you're outsourcing in the first place. Only PCI has real teeth, with fines that can hurt the business. So in many cases, turning a blind eye is a calculated gamble. However, email marketing vendor Epsilon swears that its recent breach wasn't caused by internal staff, but mysterious outside attackers. No mention of the number of outsourced partners that have access to its systems.

Lessons From Software Land

If there's one area that fires up the outsourcing debate it's software development. Nightmare stories abound, from disappearing vendors to language barriers that threaten to topple critical projects entrusted to overseas providers.

However, we found a very interesting data point here: In our survey, more than two-thirds of the companies that develop software for external customers rely on some level of outsourcing for their development. Call it subsourcing. And this group has significantly higher opinions about quality compared with all other outsourcing categories. In fact, outsourced development for customer-facing applications has the highest percent of respondents citing higher quality and lower cost than all other categories, including the cloud.

Why? These people are willing to get tough when they aren't happy. Nine percent even intend to decrease their use of outside development this year. While they're naturally more inclined to invest in tools for software development, they're also more likely to use tools for managing vendor evaluation, compliance, and performance.

There's a simple reason for this no-nonsense stance--app dev results are visible to the entire company, not just IT.

Ask yourself this: Does anyone outside of IT understand exactly what's outsourced? Does accounting know you don't own the servers that run the billing system? Does your CEO ask about SaaS vendor evaluation reports or the RFP process when evaluating a new telco partner? Not likely. But if a new e-commerce application is buggy, everyone notices.

Think Different With Cloud

The cloud presents not only a new set of outsourcing options, it creates a rare opportunity to rethink your approach to staffing the entire IT organization. It moves the classic outsourcing model beyond a help desk or smart virtualization engineer to include almost every aspect of IT, powered by a new generation of consulting and cloud alternatives.

However, just chasing lower capital costs drowns out the very real requirements for investments in time, staff, and systems to support this expanding base. If we continue our march to the public cloud, most CIOs will need radically different skill sets in a few years. Internal teams will need to become managers and directors of resources and have core business process and information architecture skills. Simply being a great engineer won't cut it. Nor will trying to manage it all with an Excel spreadsheet and a hodgepodge of partners you can call on in a pinch.

We already mentioned bringing in HR, particularly for monitoring gig workers. In addition, invite the security pros to lunch and get them dialed in to vendor compliance. Chances are they'll find multiple gaps staring you right in the face without even trying. Stop with the "cloud is easy" b.s. and start saying, "We need to invest in monitoring, integration, and staff so we can take advantage of all the cloud can offer."

Hear this: "You cannot outsource your responsibility," says Steve Ward, IT manager at Montgomery Bank. "Everything is a trade-off. The gain has to be weighed against the cost." Exactly.

Michael Healey is president of Yeoman Technology Group, an engineering and research firm focused on maximizing technology investments.