The competence of IT outsourcing

March 1st, 2006

Posted by John Carroll @ 12:20 pm

Paul Murphy argued in a blog post today that outsourcing mission-critical IT functions is a sign of management-level incompetence.  Quoting from that post:

…outsourcing is a solution to internal incompetence at either, or both, the business and IT levels. Thus it’s quite true that very few CEOs or CFOs credit any part of their organization’s competitive advantage to IT, but that says a lot about them and nothing at all about whether IT should be handled internally or externally.

…

"passing information control to a third party is a lot like putting somebody else in charge of regulating your heart beat: useful in the short term if your heart is failing, but not a recipe for Olympic success"; is the right one because the question isn’t whether the patient walks or jogs now, it’s how fast that patient could go with a properly functioning heart of his own.

Let’s follow that line of reasoning to it’s logical conclusion. GM is dependent on a steady supply of steel plate. That is a "mission critical" resource, as without it, GM can’t make cars. Therefore, they should buy a steel mill and "in-source" production of steel. Same goes for parts, such as rubber for wheels, glass for windows, and plastic for the inside of a car.  These are just as essential to GM’s operations as steel. Therefore, GM should get into glass manufacturing, rubber production and buy up a few oil wells as inputs to a growing plastic-making operation within an ever expanding GM. Soon, GM will become maker of all things and master of nothing.

I exaggerated the situation to demonstrate a point. Division of labor often dictates that you outsource operations to external experts. Small to medium sized companies may not have the resources to throw at maintenance of their own server farm, backup coordination, or even keeping up with updates that are critical in today’s networked world. Heck, I might even argue that large companies with the resources to do that for themselves may benefit from outsourcing parts of their operations, as specialist companies tend to hire lots of domain experts in quantities that large enterprises operating in markets unrelated to to IT may have zero interest in matching. They may end up with MORE expertise applied to the problem if they had to make do with whatever team they could afford to hire in-house.

IT outsourcing isn’t a sign of incompetence. It’s a sign of competence, and deciding where to concentrate limited resources. CEOs can spend their time doing the things CEOs do, or they can type up their own meeting reports, perform data entry tasks, and do other things which are better OUTSOURCED (or just offloaded) to someone else. In fact, "offloading" may be a better word than "outsourcing" given the hackles it raises among IT professionals convinced that Indian programmers will eat their lunch (they won’t, but that’s a subject for another blog).

That isn’t to say that in-sourcing doesn’t make sense in certain situations. It would be fairly ridiculous for Microsoft not to maintain most of their own sites, as doing so gives them lots of flexibility not to mention real-world experience with their own products. On the other hand, Microsoft didn’t build its own fabrication plants for the creation of the XBox. They outsourced that work to fabrication companies that act as hired guns for the creation of custom hardware.

If that approach works for hardware, then it surely works for IT infrastructure.

http://blogs.zdnet.com/carroll/index.php?p=1545