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Outsourcing: Is it a boon or boondoggle?

Among the many terms competing for your attention these days is "outsourcing." Let's define this technique as contracting out all or part of a company's information systems operations to a suitably qualified third party.

Outsourcing can make sense in these difficult times, but it must be carefully assessed before trying. This month's column examines both sides of outsourcing and spotlights comments by Dale Kutnick, president of META Group in Westport, Conn. By the way, if outsourcing interests you, call Digital Consulting Inc., Andover, Mass., about their outsourcing conferences.

First, let's define two types of outsourcing. The type most familiar to users is "total outsourcing," in which a company turns most or all information systems management and operations (including telecommunications) to an outside organization. Two examples of that are Eastman Kodak and Bank South.

The other type, which offers more opportunities for smart telecomm managers, is "selective outsourcing," according to Kutnick.

Users simply pick one or more specific services from the menu, such as PBX system management, and add custom activities as needed. "We see that as where the services industry is headed in the 1990s," he adds.

According to Kutnick, outsourcing candidates exhibit certain characteristics. "A Type 1 candidate is growing its overall business rather slowly over the next three to four years," Kutnick says, "and is reducing the strategic importance of information technology over the same time frame. The company is probably downsizing as well." Outsourcing becomes cost-effective when the company clearly identifies areas in which costs can be reduced.

Type 2 candidates are similar to Type 1, but they have a specified need to reduce expenses.

"Typically, these companies can buy back some of their capital investments over the short-term," Kutnick says, "and spread them out over a period of time, such as five years. An example of this is when the company sells off some of its existing hardware to the outsourcing firm."

In a Type 3 candidate, upper management believes its information systems (and possibly telecomm) staffs are unable to properly run the operation.

Total outsourcing provides benefits in terms of cost savings, reduced staffing, access to a larger talent pool (e.g., provided by the outsourcing firm), access to the latest advances in technology, and dependable service and support operations.

With selective outsourcing, users can identify operation areas that can be outsourced, freeing up the staff to concentrate on more important tasks.

According to Kutnick, "The real benefit of selective outsourcing is the redeployment of people. For example, outsourcing lets you shift your best and brightest people away from 'drudge' tasks, such as maintaining operating systems and networks. Now these individuals can help you build a new operating environment, such as the introduction of client/server computing."

More attention can be focused on strategic activities, which is absolutely essential in today's tough economy.

Kutnick offers an example of selective outsourcing: "Bankers Trust, New York City, outsourced the management of its network switching systems to Northern Telecom. The company views this as one step beyond the standard maintenance contract it already has with NT. Now NT is also responsible for managing hardware and software upgrades, plus moves, adds and changes (MACs) to the switching equipment. Bankers Trust still manages its own network, including transmission facilities.

But what about the darker side of outsourcing?

When considering total outsourcing, the mjaor risk is loss of control. According to Kutnick, "Once you totally outsource, you are at the mercy of that vendor, because you have effectively lost most of your staff. When a client is unhappy with outsourcing, a return to the previous method of operations will be quite costly, (e.g., replacing staff). It may also be difficult legally, depending on how the outsourcing contract was written.

Users must realize that just about everything in an outsourcing deal is negotiable. "You need to identify what they are going to charge you for doing certain additional tasks," Kutnick says. "Anything that isn't nailed down is open for negotiation."

As with any new arrangement, make sure you are represented by legal counsel.

By contrast, selective outsourcing, but the same cautions are still appropriate, according to Kutnick.

The best way to benefit from outsourcing--especially selective outsourcing--is to identify and classify specific tasks in your organization in catergories like strategic, operatinal, and applications. Strategic activities should not be outsourced nor should applications definition and development.

The primary focus of outsourcing should be "systems integration services" (e.g., operations and technical services), which, according to Kutnick, make up 80% to 90% of a typical information systems staff. Examples include computer center operations, network management, PBX and key system operations, LAN deployment, installing intelligent wiring hubs, and basic equipment maintenance.
COPYRIGHT 1992 Nelson Publishing
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Communications Management
Author:Kirvan, Paul
Publication:Communications News
Article Type:Column
Date:Mar 1, 1992
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