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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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APRIL 13, 2004
The Let-Someone-Else-Do-It Strategy Outsourcing tech functions can be a big money-saver. Just don't ignore the hidden costs, oversight issues, and other pitfalls The folks who run the Mobil Travel Guide faced a tough decision two years ago. Its competitors had begun publishing their travel books online, and Mobil needed to jump onto the dot-com bandwagon -- fast. Even though it's owned by ExxonMobil (XOM ), the Park Ridge (Ill.) company felt that it couldn't afford to buy servers, build data centers, or hire programmers to put up a Web site that would, henceforth, be the heart of a bustling business. So it decided to hire outsiders to do just about all of the key tasks for its online product. Mobil rented Web hosting from IBM (IBM ). Then, to enter the business of taking hotel reservations from travelers, it engaged a Canadian company called Virtual-Agent Services. Since the guide's hotel and restaurant reviewers were already freelancers, "we've outsourced virtually everything," says Paul Mercurio, Mobil's chief information officer. The IBM deal alone saves his company 25% to 30% vs. in-house Web hosting, Mercurio figures. GROWING BUSINESS. In the three years since the tech bust started, more and more companies have dropped the do-it-yourself approach to tech work in favor of a let-someone-else-do-it strategy. That helps explain why corporate tech budgets have been flat or down the past two years and are projected to grow only 5% this year -- much less than in a normal tech recovery -- according to a recent Morgan Stanley survey of 225 CIOs from among the nation's 1,000 largest companies. Indeed, rarely have the terms of outsourcing been as favorable as they are now. Costs for a data center have dropped by 18% a year for the past two years, according to market consultancy Gartner, thanks to falling hardware prices and increased competition from overseas oursourcers. Such contracts, which used to last seven or eight years, are starting to shrink to three years. That's barely long enough in some cases for outsourcers to make a profit on them, estimates Bruce Caldwell, an analyst with Gartner Research in Stamford, Conn. Even so, the market for outsourced info-tech services, which debuted only in the early 1990s, will grow from $163.5 billion in 2002 to $190.4 billion this year, according to Gartner. And it will no doubt keep expanding, particularly overseas. Indeed, even outsourcing companies are starting a stampede to so-called offshoring: A recent Gartner survey of 35 such companies found that 65% of them plan to subcontract client work to overseas partners. NOT MY PROBLEM. Of course, a lot of U.S. companies would like to avoid the middleman. So in 2004, nearly three times as many CIOs will send new work directly to India as did last year, according to the Morgan Stanley survey, rather than engage a tech-services firm as an intermediary. Partly, that's because of the growing reputation of Indian outsourcers such as Wipro (WIT ), which has 13 offices and development centers in the U.S. to keep in close touch with customers. The recent political fallout notwithstanding, outsourcing, when done right, can work wonders. It can reduce a company's fixed expenses, including tech support, from 90% of its tech budget to 70%, claims Charlie Feld, executive vice-president for portfolio management at EDS (EDS ). Plus, it can help companies avoid pouring millions into risky technologies. Packaging and manufacturing company CCL Industries won't have to worry that its Internet protocol networking gear will become obsolete as long as it outsources the work, points out CIO Akhil Bhandari, who plans to do just that later this year. Outsourcing can also be ideal for companies whose technology needs are seasonal. Once a year, when Mobil releases its ratings of four- and five-star hotels in the U.S. and Canada, traffic to its site increases ten-fold. But instead of maintaining extra servers throughout the year, Mobil can simply get more capacity from IBM on those days, says Mercurio. That's an extension of a much older practice of hiring system integrators to install new software or hardware instead of taking on more employees to do it. FIXING BOTCHED JOBS. When not done right, outsourcing can be fraught with danger, however. As recently as two years ago, offshoring consultancy neoIT in San Ramon, Calif., focused almost exclusively on helping its clients send technology projects overseas. Today, however, its gets 40% of its business from helping fix the botched results of offshore outsourcing, says CEO Atul Vashistha. The most common problem is savings that are lower than anticipated -- often 50% lower, says Vashistha. Poor management of overseas employees is often to blame. Many companies also don't realize that they'll spend 3% to 11% of the cost of the outsourcing contract on management, says Bill Maurer, an analyst with Gartner -- which often is above the agreed upon price. And salaries in places like India and the Philippines are growing by 10% to 15% a year, meaning that terms can potentially change during annual contract renegotiations, which are typical with multiyear outsourcing agreements. To get good results, corporations need to evaluate their outsourcers -- domestic and international -- on a regular basis. Recruitment firm Management Recruiters International Worldwide (MRI ), a subsidiary of staffing and outsourcing company CDI (CDI ) in Philadelphia, has outsourced most of its tech functions since 2000, in the process reducing its tech staff from 45 people to 15. One key to its success is that it evaluates its U.S. outsourcer's performance every quarter, says CEO Allen Salikof. LOST IN TRANSLATION. Another big issue is ensuring the safety of the intellectual property and trade secrets of the company that hires the oursourcer. One option is to put nondisclosure clauses into the contracts with both the outsourcer and its subcontractors, says Vivian Hanson, an attorney at New York City's Morrison & Foerster, which has helped companies such as Hitachi (HIT ) with outsourcing. These clauses can also prevent an outsourcer's key employees from working for a competitor for, say, a year. In addition, companies need to make sure that they own the research and development that outsourcers do for them. What makes this iffy is that copyright laws vary by country: A U.S. company whose outsourcer promises to assign it all rights to a copyrighted work -- such as a piece of software -- might assume that it gets the rights worldwide, in perpetuity. But in India, the same wording will be understood to mean that the right will be limited to a certain period of time and only to India, Hanson says. Worse, a judgment issued by a U.S. court in a dispute might be tough to enforce, Hanson says. Thus, American companies have been known to let matters rest rather than go through international courts, which may favor home-country companies. Despite all these concerns, tech outsourcing is likely to thrive for the foreseeable future -- particularly since money for tech projects will remain tight even as corporations' tech needs grow. As Mobil's experience shows, outsourcing can work, and work well -- if companies approach it with a clear eye.  By Olga Kharif in Portland, Ore.
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