In Depth: When Outsourcing Goes Bad

Companies have been burned by outsourcing. That has taught some hard lessons.

Lawsuits, recriminations, millions squandered on failed projects–and outsourcing is supposed to be a good thing for businesses?

It’s true that many companies benefit from turning over technology management, customer service, and back-office functions to third parties, and the outsourcing business is booming. But the stampede to outsource over the past few years has trampled more than one company. In the past six months alone, Sprint Nextel and Diebold have scrapped or renegotiated big outsourcing engagements. The growing list of deals that have backfired is raising fears in CIO offices and corporate boardrooms that outsourcing can be a high-risk, caveat emptor practice.

Outsourcing is like any other business initiative: It can be executed well or painfully botched. The secret is avoiding the pitfalls that can be seen in some of the more recent high-profile failures. Lack of awareness of IT’s true costs is a big one–many companies underestimate what their in-house IT departments do and the flexibility they offer, until they send work to a third party that wants to charge every time it lifts a finger. Other common traps are failure to plan for management transitions, inability to manage a team of vendors, overly ambitious projects, lukewarm executive buy-in, and failure to acknowledge the complexity of offshoring.

Precisely half of companies rate their outsourcing efforts a success in InformationWeek Research’s recent survey of 420 business IT pros. Yet, a third are neutral, and 17%–nearly one in six–call them disasters. That range should give pause to anyone looking to outsource IT or a business process for easy money. Companies also had better be prepared for the possibility of taking work back in-house, because it has become commonplace. Half of companies in our survey have done so, 23% on a major project.

For obvious reasons, most parties to a failed outsourcing engagement–if they’re still employed–don’t want to talk about the particulars. We tried with the companies that follow, and most turned us down. But in many cases, there’s a paper trail as more and more bungled deals end up in court or as the subject of a company’s Securities and Exchange Commission filings because they put such a dent in the bottom line.

By Paul McDougall
InformationWeek

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