Outsourcing on Upswing in Public,Private Sector
By John Makulowich
Whether the general acceptance of outsourcing follows the tidy innovation adopter categories made popular by Everett M. Rogers and F. Floyd Shoemaker more than 30 years ago, the practice is clearly gaining currency.
In fact, the attention that outsourcing is getting in the federal government as well as the U.S. Congress probably brands it as having reached the late or laggard stage featured in their 1971 book, "Communication of Innovations."
Witness the recently released report from the U.S. General Accounting Office, "Defense Outsourcing: Better Data Needed to Support Overhead Rates for A-76 Studies." The Office of Management and Budget's Circular A-76 outlines the policy and procedures agencies must use in deciding whether to contract out for commercial goods and services. Perhaps surprising to some, federal agencies have been practicing outsourcing at least since 1955. Current efforts focus on tweaking the process.
Observe the number of legislative initiatives in the 105th Congress. They include HR 716 and S 314, proposed bills to require that the government procure from the private sector the goods and services necessary for the operations and management of certain agencies.
Covered in pending legislation are such diverse activities as eliminating the backlog of maintenance and improvement projects at federal hydroelectric generating facilities (HR 2988) and preventing abusive and exploitative child labor by manufacturers who outsource the production of clothing and sporting goods (S 554).
On the association front, another indication of the upswing in interest in outsourcing comes from attendance figures at a seminar recently convened by the New York-based Outsourcing Institute. The get-together, "Partnership & Alliances: Synergies for Success," which normally draws 20 to 30 attendees, attracted nearly 80 executives. In fact, that group just notched 15,000 members worldwide, with more than 20 percent beyond the U.S. borders.
"Outsourcing is OK now among executives, more OK than it was four or five years ago. Back then it was something that big companies did because they were in trouble. It's gone mainstream. Now you outsource to increase profits," notes Frank J. Casale, the institute's executive director.
"Today, overall, we see strong growth in outsourcing in IT sectors. What's becoming more evident is a shift in the make-buy question, from 'Why should we buy when we can make?' to 'Why should we make when we can buy?'"
Among the patterns, if not trends, he sees is attention to office and administrative functions as well as business process outsourcing.
"There's more outsourcing of [human resources], payroll, financial accounting and order entry. These are all functions and processes that IT enables but are beyond the purely IT function. Another good example is the year 2000 problem. That's ripe for outsourcing," says Casale.
He explains that there are three major factors that go into the outsourcing decision: cost (the make-buy scenario); time to market, "where the organization has no choice but to go outside for what they need"; and risk.
That last factor is the subject of intense debate today, especially with the economy roaring ahead and the stock market reaching new highs almost daily. Any executive with an ounce of sense knows every boom has its bust.
"With outsourcing, many companies have turned around and are now lean and mean. They certainly don't want to go through the process again of downsizing and layoffs. Many are taking the approach that they just want to sign a contract and get the job done. This is especially so when the project is considered noncore, where people are not needed at the back end, where you can minimize the risk of getting stuck with extra resources," says Casale.
Surprisingly, that notion of core business and core competency is a major stumbling block for many executives, according to Casale. More often than not, executives struggle to define it and fail to take the steps to properly identify it at the highest level.
Why is defining core business so important? Because of the impact it has on letting the corporation maximize its strategic benefits, in positioning it clearly in the eyes of its industry, customers and shareholders.
And how exactly is it done?
"There are three ways. First, you can identify what you do best, that is, what is world-class. Another way, which is the acid test, is to take the expertise and try to sell it, to see if you could beat the marketplace. A third way is through analysis and benchmarking, the standard quality management approach," says Casale.
Talk with him for an extended period and you start to realize that in the ideal world, anything that is not core business is outsourced. That was part of his mission in creating the Outsourcing Institute, to develop a business network that allowed resources to be more intelligently leveraged, a channel for buyers and sellers to meet.
With the advent of the Internet, that channel is getting broader and deeper, or as one news magazine aptly described it in a review of outsourcing, is moving from vertical to virtual.
The CTS Approach
A good example is Cognizant Technology Solutions, a software solutions provider that is part of Westport, Conn.-based Cognizant Corp. (which also owns Gartner Group and Nielsen Media Research). Based in the United States, CTS has offices in Canada and the United Kingdom and development centers in Chennai (Madras) and Calcutta in India that provide software solutions to organizations worldwide. The company contributed $27 million to Cognizant's $1.7 billion in revenues last year.
One area CTS is exploiting is the year 2000 issue, the need to reprogram computers that use only two digits to designate the year. The company also views Euro currency conversion as an opportunity.
Among its newer clients for year 2000 outsourcing services is Douglas County in Nebraska. Using a pool of 800 programmers and software engineers in India, CTS was able to beat the bids of its competitors for the Douglas County work by more than $4 million.
As Michael Carpenter, director of Douglas County Information Services, explains it, "We had 4 million lines of code that had been developed between 1970 and today. And we had the problem that everyone else has - millennium compliance. Add to that an early retirement program and buyout in 1992 and we found ourselves short 16 analysts and systems programmers. The only alternative was to outsource."
Posting his solicitation specifications for the work on the Internet, Carpenter received bids from five vendors. Cognizant came in lowest. While the competitors each ranged around $6 million, CTS bid $2 million.
"While the hours were basically the same, the other companies' rates were higher. One thing that CTS did that the others didn't is conduct an analysis phase prior to the bid. Whether that gave them a leg up, I can't say for sure," admits Carpenter.
In its original bid, CTS estimated it would take 18 months to complete the work that they started last November. According to Carpenter, most of the code is mainframe critical applications, but his department is now looking at Lotus Notes to expand the client/server base. What he finds appealing about CTS is the number of staff they have on site.
"Cognizant has one person in this department. All the rest are in India. They broke up the applications into five groups and are now working on the financial. They finished the analysis and are now into unit testing with systems testing set for May or June. When we have questions, we connect through a high-speed line at their headquarters on the East Coast. It's worked well so far," says Carpenter.
CTS boasts facilities that include high-speed data and voice links via satellite with the United States and Europe and which allow interactive computing and distributed software development.
Francisco D'Souza, director of U.S. operations for CTS, is crystal clear about how widespread the practice of outsourcing is in IT and the areas into which he sees it moving. He refers to the practice as external service providers or ESP.
"There are at least three key forces driving the move toward using external service providers for IT. First is a basic shortage of IT skills; companies find it increasingly difficult to attract and retain qualified people. Second, the accelerating rate of technological change is making companies evaluate, select and implement new technologies more often. This forces companies to implement new technologies and classes of solutions with extremely limited in-house skills. The burden of maintaining legacy systems persists while the pressure to release resources to build new systems becomes more intense.
"Finally, the mega conversion projects that many companies have to undertake, such as year 2000, Eurocurrency and Stock Decimalization, usually consume huge amounts of time, energy and resources. The bottom line: Clients are increasingly seeking to outsource all activities that do not yield them a core competence," says D'Souza.
The critical issue for a company like CTS in a sector in which almost any computer firm can claim to offer outsourcing services is staying competitive. In the case of CTS, the answer is offshore service.
The bid for the Douglas County, Neb., work, as one example, took advantage of what CTS touts as its ability to offer clients better, faster and cheaper solutions by creating seamless teams of offshore and on-site computer professionals to solve a client's business problem.
"Due to the shortage of computer professionals, we are tapping into global talent pools to make them available to our clients, regardless of location," explains D'Souza. "What CTS offers its clients is access to the talents of the world."
According to the Gartner Group, during the next three years 40 percent of type A enterprises (aggressive adopters of new technology) and type B (moderate adopters of new technology) will spend up to 40 percent of their legacy budgets on offshore programming.
Looking at the trends from his vantage point, the view only gets better for D'Souza. He not only sees firms increasing their focus on building the core capabilities, which make them unique, and outsourcing other activities, he also sees increased use of the Internet to mold the virtual corporation.
"The increase in outsourcing is particularly true of activities where there are economies of scale. And, yes, there's been a lot of discussion recently about 'virtual corporations' in the age of the Internet. We've been building virtual teams for several years. For example, our developers in India work closely with our on-site team at the client location for a tight virtual team (separated by thousands of miles).
"Tying it together is our advanced communications network. It carries data, voice (telephone) and video (for videoconferencing). Our focus is to make virtual teams work for our clients. We want the clients to feel that working with a CTS team is like working with a single, on-site team," says D'Souza.
Every executive working the outsourcing field cites the desire of their clients to focus exclusively on their core competence. This even applies to those companies serving the federal government and agencies like the National Aeronautics and Space Administration and the U.S. Department of Defense.
A case in point is Michael A. Berta, president and chief executive officer of RMS Information Systems Inc., Lanham, Md. His company, which has provided IT support services to federal agencies for more than 20 years and has served as a NASA contractor since 1981, plans to bid on NASA's outsourcing desktop initiative known as ODIN. Plans call for the contract award to occur in the third quarter of fiscal 1998.
This effort will essentially outsource NASA's desktop computing environment. This includes the purchase of hardware and software as well as maintenance, help desk and other support services for NASA civil servants and on-site contractors. Similar requirements may also be included for local area networks, and some science and engineering workstations.
Berta's firm is among the nearly 180 listed as Registered NASA ODIN RFP companies. Leading the effort will be the Goddard Space Flight Center, Greenbelt, Md., which will work with other centers and NASA headquarters.
To bid ODIN, RMS is teaming with GTE Corp., Stamford, Conn., and CompuCom Systems Inc., Dallas, to offer NASA a complete life-cycle solution for the agency's desktop, networking and communications needs.
In the event there was any doubt about the notion of outsourcing, NASA offered this detailed description as part of its ODIN solicitation documents:
"Outsourcing is a strategic business concept to be used in certain applications when there are clear benefits to be gained through the use of this technique over continued performance of individual functions within the agency. It is not to be considered for use in performing inherently governmental functions or agency core functions. Outsourcing is a process which is undertaken following a conscious management decision to transfer a function to the commercial sector which has previously been performed by NASA or its contractors primarily through reliance on the agency's internal assets. The transference of risk and responsibility to the commercial sector, and the possible divestiture of agency assets, are primary goals intended to (1) improve the performance of any outsourced functions and (2) to enhance the performance of the Agency's core functions."
Berta, like CTS' D'Souza, sees outsourcing as a key component of his corporate strategy, making it almost a core competency in itself.
"Without doubt, outsourcing is an important part of our strategy, both in our commercial marketing and our government work. There is no question that more and more companies want to focus on their core. Up until now, though, people defined the core in a loose way, one which did not include IT and the infrastructure, says Berta.
But now companies are starting to get more specific, for instance, forming partnerships with outsourced companies. "Where once outsourcing IT was seen as a cost-cutting measure, it's now a strategic issue," observes Berta.
He is quick to pinpoint the issues that outsourcing raises as well as the ones it is intended to solve. While reduction of overhead and focus on core business are advantages, there are also side effects.
"The whole issue of outsourcing raises the question of how you do your business differently when all you focus on is the core. You have to look seriously at multiple aspects of outsourcing, for example, what happens to the in-situ people when the government outsources? You have to keep in mind that companies [that] outsource are making strategic decisions, looking for solutions and trying to develop strategic relationships," says Berta.
He makes his point by talking about what he liked in the ODIN procurement as an outsourcing opportunity. For him, it showed that NASA recognized it did not just want a commodity buy, but sought a firm that could offer care and quality, a company that knew NASA's business.
"One of the key questions is the value-add we can bring to the task, of the approach we take in solving a business problem. More and more that will be a critical issue that any outsourcing company must address," cautions Berta.
"It boils down to the fact that the most powerful things are simple things well done, trying to help the employee understand his or her value and giving them an opportunity to grow," says Berta.
In this competitive marketplace, he says, it is "more than just letting people come to work without a tie." Managers need to be thinking about the workplace as an environment, to build in flexibility. A good example is the health benefits plan. Even outsourcers are focusing on their core.
"Who knows, outsourcing may well be the ultimate extension of the virtual corporation."