The Era of the Mega Outsourcing Deal Isn't Over

Posted by: Steve Hamm on March 20

For the past couple of years, the average size of outsourcing deals has become steadily smaller. Corporations increasingly divide their outsourcing tasks up into chunks and dole them out via competitive bidding to specialists in one area or another. They don’t necessarily want “one throat to choke.” It seems three or four throats are better. Yet the era of the mega outsourcing deal isn’t over. Proof came this week when Reader’s Digest Association inked a $350 million, seven-year deal with HCL Technologies and Kaiser Permanente agreed to hand off management of its datacenter operations to IBM for seven years.

Neither deal seems to have been the direct result of pressures from the global economic meltdown. But they both represent significant shifts in strategy.

Kaiser Permanente has always handled its own IT. The $40-billion-a-year healthcare and insurance giant has 6,200 IT employees. In fact, CIO Phil Fasano told me he doesn’t consider the IBM contract to be classic outsourcing since Kaiser will continue to own its datacenters and equipment. Kaiser employees will continue to manage its applications, including the electronic health records system.

IBM will manage the huge datacenter, with 5,000 servers. Kaiser’s company’s member services Web site, KP.org, handed 40 million interactions last year, and the volume of traffic continues to grow. “IBM will bring in their capabilities, their service discipline, to allow us to continue to improve this part of the organization,” Fasano said. Kaiser’s is one of the most respected IT operations in the world, so IBM must have some kind of special sauce to be able to wedge itself in there.

The Reader’s Digest/HCL deal, in contrast, is a so-called “total outsourcing” arrangement. HCL, the aggressive Indian services company, will manage the publishing company’s IT from applications development to datacenters. It includes a help desk operation capable of handling 14 languages—yet another signal that HCL, long considered a second-tier Indian company, has joined the big leagues in global outsourcing.

The idea of outsourcing Reader’s Digest’s IT had been floated even before Ripplewood Holdings bought the company and took it private in 2006. It was mostly about saving money and producing new applications quicker. CEO Mary Berner told me that she took her time in going through the process of coming up with an outsourcing strategy and picking a service provider. HCL had the capabilities she sought and offered an attractive financial deal, but she said it was the approach of HCL CEO Vineet Nayar that sealed the deal. “I chose HCL because Vineet got on a plane and flew to New Jersey to see me. They all had great proposals, but he was the only one who looked me in the eye and told me he’d take care of my company.” After she made her choice, Nayar called her up and asked her why she chose him. She said it was because HCL was “aggressive, smart, forthright, and collaborative.”

Those are good attributes in any economic environment, but vital in one like this. I expect other IT services companies to be ripping pages from Nayar’s playbook.

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