Tuesday, December 11, 2007

Outsourcing Hazards and Limits

Murphy's Law Applied To Outsourcing
-Special Thanks to John Soat-

John Soat contributed this article below to InformationWeek's CIO's Uncensored Blog

December 7, 2008 Boeing's aggressive effort to outsource development of its new 787 jetliner has resulted in delays, missed deadlines, and unhappy customers and suppliers, all of which, more than likely, has a very familiar ring to many CIOs. How are all these negative lessons-learned affecting future outsourcing plans -- if at all?

The Wall Street Journal had an extensive story on the problems the airline maker is encountering with its much-anticipated Dreamliner 787. According to the Journal, the new plane is at least six months behind schedule, customers are concerned that they won't receive their orders in a timely manner, and suppliers are working overtime to accommodate increasingly aggressive production schedules.

Boeing had conceived a radical new construction process for the Dreamliner, with big chunks being manufactured by outside parties and then assembled by Boeing at its Everett, Wash., plant. That's not dissimilar to the way big application development projects are conceived and constructed. The results Boeing is experiencing aren't dissimilar to what's happened with some (many?) big outsourced applications.

There's certainly something familiar about this statement from the Journal article: "The first Dreamliner to show up at Boeing's factory was missing tens of thousands of parts, Boeing said." Substitute "lines of code" for "parts" and the lesson as it applies to software is the same.
"The missteps underscore the hazards and limits of outsourcing," the Journal article said. Hazards and limits such as these, all of which apply equally to IT outsourcing projects:

>> Communication barriers, including language and geography.
>> Lack of institutional knowledge, which required Boeing to "parachute in" its own engineers and executives to help suppliers.
>> Outsourcers outsourcing to third parties, which compounded problems with production and quality assurance.

Outsourcing may be at something of a crossroads (so to speak). The era of the big-bang IT outsourcing contract is probably over, the last nail in that particular coffin driven in three years ago when Jamie Dimon, CEO of JP Morgan Chase, canceled a $5 billion outsourcing deal with IBM (NYSE: IBM) and rehired about 4,000 of the workers involved.

There are indications that less-ambitious outsourcing efforts may get suffocated next year. In the Society for Information Management's most recent survey of IT managers, respondents indicated that they had allocated no IT budget dollars for outsourcing in 2008. Whether that means zero funds to IT outsourcing next year, or zero ADDITIONAL funds, isn't entirely clear, but nonetheless it indicates a strong negative trend.

Outsourcing is not a fad, destined to whither away. It's a step in the evolution of the global economy. And negative lessons are important, but not the only lessons to be learned. What companies are wrestling with now is the proper equilibrium for outsourcing -- what, where, and how much exactly. CIOs are at the forefront of that evolution, and of determining that equilibrium. Their experiences with outsourcing will help decide the shape of the global economy for years to come.

What's your take? Have your experiences with outsourcing been mostly negative or mostly positive? And how have those experiences shaped your outsourcing strategy -- more, less, or about the same? -JS



Citizen Carrie said...

I worked for employee benefits outsourcing companies for a number of years. Although it makes sense for a HR department to outsource a lot of functions, I felt that our companies were doing a lot of tasks that could have been more efficiently performed by HR staff. (For example, too much paperwork, emails, and phone calls being traded back and forth in order to enter a new employee into an eligibility system, when the HR staff could have easily entered the information themselves.)

I also administered COBRA and Workers Comp. programs for a company that outsourced these functions. I had to spend so much time keeping track of things, I can't imagine that I would have had to have put in many more hours per week to just do the work myself. It was a real headache being accountable for work being outsourced to others.

Citizen Carrie said...

I remember reading a lot of articles in the late 1980's and early 1990's about the pros and cons of outsourcing. The subject was still open to a lot of debate. Now it seems to be a given that everything that can be outsourced should be outsourced. If the costs of outsourcing don't seem to provide the desired benefits, instead of bringing the work in-house, companies just outsource the work to lower paid workers overseas.

I’ve worked with companies where outsourcing HAD to work. If employee hours (formerly devoted to tasks that were supposedly outsourced) were insufficiently reduced so they could work on other projects, then employees had to work more unpaid hours to get everything done. That’s why I laugh at the claim of “outsourcing ultimately creates more jobs.”

I'm also not seeing a lot of cost analysis after the outsourcing begins, except just strictly within departmental budgets. Companies don’t seem to factor that reduced costs due to outsourcing one part of the operations can result in reduced revenue due to lower customer satisfaction and lower sales.

I was hired by one company to do work that was just brought back in-house. We could do the work at about half the rate that their law firm was charging. The law firm cranked out paperwork strictly based on a template. Their paralegals produced flawed documents simply because they lacked the experience to notice certain discrepancies. The in-house staff could spot the problems and instantly ask someone for verification. The ability to talk to the right people while bumping into them in the break room should not be underestimated.

2Truthy said...

Execs here are bound by the see no evil rule of outsourcing as this comes down from the venture capitalists who are in the sheets with what some would refer to as the "Elites" who meet in secrecy...


Here's a couple of recent, real life examples. There is a vp at a tech company here who made a few bucks on options on an acquisition a few years ago. He was brought over a few years ago on an H-1b visa. He doesn't have an engineering degree, but hie cronies in management have given him reign over what he says should be an eight person engineering staff headcount. A year ago, he "hired" five engineers from a third world country that shall remain unnamed and had my friend up from midnight on to "get the work done." My friend (with Ph.d) was essectially told that if he didn't like it, he could leave.

The outcome? Within six months, all five of those engineers faded away. One told my friend that he couldn't stand the fact that he couldn't interact with people in person and found a job in his country even though it didn't pay as well.

The lesson? These engineers did not have degrees from universities of 'note' nor did they have the skills required to do the work on their own like my friend could do it (yes, this really happens. one smart person can do the work of many if on the premises and they have the education and experience and know how...)