data center outsourcing - 1105 mediadownload.101com.com/pub/esj/files/outsourcingsurvey2006.pdf ·...

From what’s being outsourced to how much it costs and what makes it successful, our survey sheds light on current IT outsourcing practices.

PRESENTED BY

Data Center Outsourcing

Data Center Outsourcing

Gone are the days when a single ven-dor — typically, IBM or EDS — signeda decade-long, multi-million dollar out-sourcing contract, inherited 5,000 staff,took over the hardware and software,and turned around and resold the ITservices back to the client organization.Such engagements still take place, ofcourse, but they’re rare enough to makethe headlines. Just as often, it’s the dis-mantling of these initiatives (IBM andJPMorgan Chase, for example, or Searsand CSC) that we read about instead.

Nowadays, the GMs and ABN Amrosof the world are signing up multiple ven-dors, expecting they’ll build an IT or-ganization that competes and strives —

on a daily basis — to deliver best-of-breed service to its users. The contractterms are smaller and the contract peri-ods are shorter.

The largest corporations aren’t alonein taking this approach, which is why thisyear’s survey, co-developed by EnterpriseSystems and Sourcingmag.com, isn’t asbroad as the last survey on the topic. Theservice provider handling your applica-tion maintenance work is no longer nec-essarily the same vendor running your ITinfrastructure.

To derive more useful, applicable in-sights about the outsourcing endeavorsamong our readers, we invited peoplespecifically involved in data center out-

sourcing to tell us about their efforts. Inthe course of drilling down on respons-es to questions about the functions be-ing outsourced, costs and time consid-erations, greatest concerns, and othermatters, we learned many things.

For example, “cost savings” is nolonger the primary driver for outsourc-ing. It’s just as likely that companies areoutsourcing to access IT resources theydon’t have internally. (This may be be-cause they’ve whacked their IT budgetsdown so close to the bone that there’s lit-tle meat left when new projects requireIT attention.)

Furthermore, we discovered that ITisnot a dying profession in the U.S. andthat all the work is not heading overseas.Yes, India does attract a good amount ofIT work; but that has little to do withdata center operations. Most outsourc-ing remains on domestic soil. Likewise,

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ESJ.COM • 2006 OUTSOURCING • SOURCINGMAG.COM

BY DIAN SCHAFFHAUSER

DATA CENTER OUTSOURCING

THE CONCEPT OF OUTSOURCING, while far from passé, is becoming dated. That’s

not to say that organizations are no longer feeding IT or business process work to

third parties. They are — in ever greater numbers. But many companies now have

several years of outsourcing experience and have honed their skills in setting strat-

egy, selecting vendors, implementing governance policies, managing relationships,

negotiating contracts, and defining the business value of their efforts. It’s no longer

just outsourcing. They refer to what they do as “servicing,” “multi-sourcing,” or sim-

ply “sourcing.” They’re able to isolate processes, functions, or activities as well as re-

sources and determine with laser-beam focus which functions should be retained in-

house, which can be managed offshore, which should be assigned to a single vendor

(some functions may be handled domestically while others are handled offshore),

and which should be divvied up among service providers working together. Such is

the new face of sourcing.

We invited visitors and e-mail newsletter

subscribers on Sourcingmag.com,

Enterprise Systems, Application

Development Trends, Federal Computing

Week, and iSixSigma.com to take the 35-

question survey, which was available online.

Respondents from 463 companies or

organizations did so.

METHODOLOGY


more data center work is typically beinghandled in-house than out-of-house.

Organizations are getting smarterabout pricing outsourcing contracts,too. More report paying actual costs inline with what they expected.

Finally, we learned that data privacyand security concerns rank high amongcompanies doing outsourcing in the datacenter. The fact that many notable se-curity breaches reported in the last twoyears have involved simple thefts ofnotebooks or CDs containing customerdata left in insecure places says this isn’t

just something for service providers tofigure out; nor is it relevant only to com-panies doing outsourcing.

Use the following data from your fel-low IT and business managers and linestaff to formulate your thinking aboutthe sourcing your company is undertak-ing. Are you signing contracts that are toolong — at the behest of the vendor? Areyou handing over more than you should?Are you involved in the total lifecycle ofthe outsourcing initiative? If your team ismore accustomed to doing the work thanmanaging it, do you have a plan in place

for bringing their skill sets up to speedor filling in the staffing gaps? Finally, areyou constantly evaluating your approachto the data center work your organizationneeds? There is no longer any single rightanswer to that question.

WHAT’S BEING OUTSOURCEDThe most common data center functionscurrently being outsourced is troubleticket/help desk operations, as report-ed by four out of 10 respondents. As Fig-ure 1 shows, the next three most com-monly outsourced functions arehardware and network operations, end-user support, and disaster recovery andpower backups.

A quarter of respondents said they’represently outsourcing all IT functions.However, that’s a trend that’s showingsome pick-up; a third of respondents ex-pect to see all IT functions being out-sourced in the next 12 months.

The next most likely candidate for out-sourcing in the near future is in the areaof disaster recovery and backup; 28% ofrespondents report that their organiza-tions have taken it under consideration.

That said, overall, more work is stillbeing handled in-house than by a serviceprovider — the ratio is 55% to 45%.

HOW MUCH, HOW LONGIt’s common to read about “mega-deal”contracts that extend for a decade in thefuture. That’s actually less common thanit might appear. The average contractlength reported by our respondents forthe mostly commonly outsourced func-tions tends to be between four and sixyears. As Figure 2 shows, contracts en-compassing the outsourcing of all ITfunctions were, on average, five yearslong, as were trouble ticket- and helpdesk-related contracts.

Only 17% of the highest-value contractshad a duration longer than five years.

Running a data center — whether youdo it with internal resources or throughservice providers — is an expensive propo-

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0 5 10 15 20 25 30 35 40

Trouble ticket/help desk

Hardware & network operations

Operations/end user support

Disaster recovery/power backups

Storage management/tape backup

Monitoring mainframe/server performance

Equipment leases

Security

HVAC/Halon

All IT functions

Computer operator training

Server uptime

Job scheduling

Floor/space management

18% 40%

22% 36%

15% 36%

28% 35%

20% 31%

20% 30%

15% 29%

17% 28%

15% 26%

35% 25%

15% 24%

13% 22%

10% 19%

12% 15%

What data center work is being outsourced now and in the future?

FIGURE 1: OUTSOURCED WORK

SOURCE: 2006 DATA CENTER OUTSOURCING SURVEY BY ENTERPRISE SYSTEMS (ESJ.COM) AND SOURCINGMAG.COM.

NOTE: MULTIPLE ANSWERSWERE ALLOWED.

Now Future


sition. It comes as no surprise that the con-tracts of highest value were those that cov-ered the outsourcing of all IT functions.The median price tag on those contractsis about $4 million. Another similarlypricey proposition for outsourcing in thedata center — though less typical — areequipment leases, which register a medi-an of $4.3 million.

Aside from contracts encompassingall IT operations or equipment leases,the two most frequently cited out-sourced functions with the highest pricetag are 1) hardware and network opera-tions, and 2) operations and end-usersupport. On average, each costs aboutone million dollars per year.

Developing a contract with a pricing

structure you can count on often seemsmore like an art than a science. Howev-er, the largest percentage (45%) of re-spondents said their actual costs areabout the same as those stipulated intheir contract. When organizations werewrong, they were more often in the po-sition of spending more — not less —than the contract price. As Figure 4shows, three out of 10 respondents saidthe actual costs are higher than the con-tract costs. Half that number said theywere lower.

The largest group of people said theircontracts are structured with fixed pric-ing (45%). The next most common pric-

4


0

5

10

15

20

1year

2years

3years

4years

5years

Longer than 5years

16%

10%

12%

2%

14%

17%

For the highest-value outsourced function,how long is the contract?

FIGURE 2: CONTRACT LENGTH


Spotlight on Contract Length Mean MedianAll IT functions 5 years 4 yearsDisaster recovery/power backups 4 years 4 yearsHardware and network operations 4 years 3.5 yearsMonitoring mainframe/server performance6 years 6.5 yearsOperations/end user support 6 years 6 yearsStorage management/tape backup 6 years 7 yearsTrouble/help desk 5 years 5 years

Developing a contract with a pricingstructure you can count on often seemsmore like an art than a science.


5


0 5 10 15 20 25

ALL IT functions

Disaster recovery/power backups

Hardware and network operations

Operations/end user support

Equipment leases

Trouble/help desk

HVAC/Halon

Floor/space management

Storage management/tape backup

Computer operator training

Monitoring mainframe/server performance

Job scheduling

Security

Server uptime

21%

14%

12%

10%

8%

7%

6%

3%

3%

2%

2%

1%

1%

1%

FIGURE 3: CONTRACT VALUE


Spotlight on Annual Contract Value MedianALL IT functions . . . . . . . . . . . . . . . . . . .$4 millionDisaster recovery/power backups . . . . .$100,000 Equipment leases . . . . . . . . . . . . . . . . .$4.3 millionHardware and network operations . . . .$1 millionHVAC/Halon . . . . . . . . . . . . . . . . . . . . . .$50,000 Operations/end user support . . . . . . . .$1 millionTrouble/help desk . . . . . . . . . . . . . . . . .$200,000

Which outsourced function has the highest annual cost?

Pricing Schemes in OutsourcingActivity-based pricing: Clients agree to

pay a flat fee for the service provider’s fixedand variable costs — including hardware andsoftware, labor, infrastructure, administra-tion, and maintenance. Activity-based costingis often used when establishing an offshoredevelopment center (ODC) or putting togeth-er a build-operate-transfer model.

Cost-plus pricing: Also known as “open-book” pricing. In this model, the client paysthe service provider for the actual cost ofthe service plus a markup or profit margin.Popular with offshore development center(ODC) or build-operate-transfer models.Frequently used as an interim contractualmeasure. Appropriate for efficiency deals.

Fixed price: A model of pricing in which a project is undertaken by the serviceprovider for a pre-agreed-upon price. Oneadvantage is that it’s easy for the client tobudget for the project. Two disadvantagesare that the service provider may overesti-mate costs beforehand for possible unfore-seen conditions or cut corners during theproject to compensate for expenses thatare higher than anticipated. The serviceprovider will charge a premium for a fixedprice relative to the risks involved. Also, ifthe service requirements drop, there’s noreduction in price for the client. Appropri-ate for efficiency deals.

Gain-sharing: The service provider hassome form of incentive for constantlyimproving the business process. When theclient benefits (through reduced expenses,greater revenues, or improved efficiencies),so does the service provider.

Time and materials pricing: A pricingmodel in which the client pays set rates andrelated expenses for each worker providedby the service provider. Paying this way,while allowing more flexibility, may lead to aless disciplined approach to the project.

Transactional pricing: Also known as“unit pricing.” The client pays the serviceprovider a flat fee per unit of work (order tak-en, application processed, sales call made).

Developing a contract with a pricingstructure you can count on often seems

more like an art than a science.


ing structures were activity-based andtime and materials (both specified by19% of respondents). Cost-plus pricingcame in at 11% and gain-sharing andtransactional pricing were being used bya mere 2%.

WHY OUTSOURCING AND WHEREThe primary reason companies out-source their data center functions is whatyou’d expect: 44% cited “to reduce orcontrol costs,” as shown in Figure 5. Themotivation for outsourcing doesn’t endthere. A solid third of respondents also

said they do it to gain access to IT re-sources — people, processes, and equip-ment — that aren’t available internally.Three out of 10 also said their organiza-tions outsource to free internal resourcesor improve business or customer focus.

If you read most popular press on thesubject, you might conclude that out-

sourcing equates to offshoring. That is-n’t true of our survey respondents. Forthem, most outsourcing involves hiringa domestic company to handle functionsdomestically. Eight of 10 respondentstold us their primary service provider isa company with its headquarters locateddomestically.

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The primary reason companies outsource:to reduce or control costs.

4%3%

Abo

ut t

he s

ame

Up

to 2

5%

low

er

25%

- 50%

low

er

50%

- 75%

low

er

45%

15%

17%

9%

3%

1%3%

Higher-than-expected costs

Lower-than-expected costs

Low

er b

y 75%

or

mor

e

50%

- 75%

hig

her

25%

- 50%

hig

her

Up

to 2

5%

hig

her

78%

or

mor

e

How do actual annual costscompare to contracted costs?

FIGURE 4: ACTUAL COST



Of course, just because a company hasits headquarters in one country doesn’tmean the work is being done in thatsame country. So we asked a follow-upquestion about where the work was ac-tually being performed. In 73% of thecases, it was being performed in the U.S.Only 12% said it was being done in India.The remainder — 14% — said their workwas being handled in another country,though no single country dominated.

However, for one former director ofservice delivery for IT management at aglobal port company, going global makestoo much sense to ignore. He said:

My previous employer would al-ways do things on a small scale by

geographic region. I was part of theteam that came to the realizationthat there was power in numbers.We were underutilizing the powerthat we had. I was pushing with mypeers overseas to stop getting intodomestic agreements and lookwider scale — to get more into glob-al agreements because it would bemore financially advantageous tothe entire organization.

The decision was made easier by hav-ing HP, a global operation itself, as oneof its primary vendors. “You carry muchmore weight when you approach themas a global entity.”

MULTIPLE PROVIDERSThe days of working with a single serviceprovider to cover all IT needs are dimin-ishing. According to our results, only a thirdof organizations are working with one ven-dor in their data center work. On average,our respondents used three vendors.

In general, companies are satisfied orhighly satisfied with the serviceproviders they’re working with. Only14% report being dissatisfied or highlydissatisfied.

The shorter the contract length, thehigher the satisfaction: When compar-ing satisfaction with service providersthe organization works with, 62.5% ofthose with one-year contracts were sat-isfied or highly satisfied. Satisfaction

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0 10 20 30 40 50

Reduce or control costs 44%

Gain access to IT resources unavailable internally

Free up internal resources

Improve business or customer focus

Accelerate company reorganization/transformation

Accelerate project

Gain access to management expertise unavailable internally

Reduce time to market

34%

31%

28%

22%

15%

15%

9%

Why outsource?

FIGURE 5: WHY OUTSOURCE


NOTE: MULTIPLE ANSWERS WERE ALLOWED.

Eight of 10 respondents say their primary service provider is head-quartered domestically.


dropped to 43.8% for those with con-tracts longer than five years.

Satisfaction was also higher for thoseworking with fewer providers. For thoseworking with just one provider, 76% re-ported being satisfied or highly satisfied,while the figure fell to 53% for those withthree providers.

For future outsourcing work, firms ex-pect to invite bids from an average of sixvendors, but only expect to receive re-sponses from five of them.

Apreponderance of companies reportbeing neutral, satisfied, or highly satis-

fied with the number of vendors avail-able to provide the data center work theyneed performed.

Which primary service providerswere most frequently cited? The onesyou’d expect: IBM was referenced mostoften, followed closely by CSC, thenEDS and HP, and Sungard brought upthe rear of the top five pack. None of themajor India vendors — TCS, Infosys, orWipro — registered much in data centerwork; however, we would expect them tomake a bigger showing for application-oriented work.

SELECTION SUCCESS FACTORSWhen selecting a service provider, it’suseful to draw upon the experience ofthose with successful projects. Six in 10respondents said the most importantfactor was identifying a partner with acommitment to quality. That aspect wasclosely followed by price. About half ofrespondents cite scrutiny of a vendor’sproven competencies as important. Only37% specified technology fit as most vi-tal factor to success. Flexible contractterms, geographic location, and culturalfit were near the bottom of the rankings.

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Where is your primary service provider’s headquarters located?

From what country is your most recent outsourcing work being serviced?

India 12%

US73%

Other 14%

Domestically80%

In anothercountry

20%

CHART 6: LOCATION


Satisfaction

dropped to 43.8%

for those with

contracts longer

than five years.


One manager of IS for a large globalpublishing company, which signed a sev-en-year deal several years ago with IBMGlobal Services to take over data centeroperations, said it was obvious that IBMwas committed to quality. “The man-agement that came in brought in a seriesof processes and procedures, and theyworked with us to make sure the qualitywas there,” recalls the manager, who de-

clined to be named. “It was fairly simplefor them to do that — they hired all thepeople who were here. Then theybrought in a few people who took overthe management role. They’ve had a fewpeople leave and move and shufflearound. ... But the people they broughtin were nothing but quality.” When facedwith a new person from IBM who hadwhat he calls “the old internal IS atti-tude: It’ll get done when it gets done,”the company replaced that individualwith others who were more “customerservice oriented.”

The former port company managersuggested putting price — albeit impor-

tant — before other matters can be amistake. “It comes down to relationshipbuilding. You want to pay a fair price,” hesaid. “If you squeeze a vendor too hard,ultimately you’re squeezing yourself.They’re going to cut corners. They’re notgoing to be as free with their informa-tion. The trust factor is going to start totake a hit. If they feel they’re beingsqueezed into a corner, you are not goingto be given the attention that your en-gagement really does deserve.”

Although it was graded less importantoverall by survey respondents in identi-fying service provider fit, the managersaid references and reputation rankedhigh for him. To do vendor checks, hecalls on his network. “I’m a part of sev-eral associations — the Help Desk In-stitute, itSMF [IT Service ManagementForum]. I go to a lot of trade shows [and]focus groups. I get together with my net-work quarterly. It’s an active approach...If I look to do something in my organi-zation, there’s a pretty good chance thatsomebody in my network has done it al-ready. I want to know the pros and cons.

What am I getting myself into?”During the evaluation process, he ad-

vised spending a considerable amount oftime evaluating the likelihood that thevendor is going to “be around.” “Financialstability of the vendor is very important,”he noted. “Who their channel partnersare, who they are doing business with froma technology perspective, who are some oftheir short-term success stories in additionto their longer term success stories.”

OUTSOURCING SUCCESS FACTORS:COMMUNICATION IS KEYOnce you’ve chosen a vendor, what arethe most important factors in achieving

success with your outsourcing? Nothingreally overwhelms the discussion, but ac-cording to respondents, the top consid-eration was communication — both be-tween the client and service providermanagement and between the client andservice provider personnel.

The publishing company’s IS managersaid his operations group meets weeklywith IBM’s operations group to “reviewthe process and procedures.” He callscommunication “key to everything.”

One area of communication thatcould have used improvement, accord-ing to the manager, was what his groupwas told about the contract his compa-ny signed with the service provider.

I’m sitting in an applications po-sition where I have 50 or 60 peoplemaintaining these three or four sys-tems. I have a certain level of ex-pectation of what I was going to getout of the data centers. Over theyears, you develop relationships.People bend the rules a little oncein a while for you.

The contract goes into force. Wewere never told what was includedin the contract. We were going onour own merry way, expecting theservice we were getting before. Sud-denly, we were running into theselittle roadblocks. “Well, sorry, that’snot in the contract” or “It’s not inthe contract.” ...

That’s one of the more importantthings. You don’t have to tell peoplewhat the financial parts of the con-tract are, but you sure as hell shouldtell them, “Here’s what expected ofthe vendor and here’s what’s ex-pected of us.”

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About half of respondents cite scrutiny of a vendor’s proven competencies as important.

Table 1:

Factors in Identifying Service Provider Fit

Commitment to quality . . . . .60%Price . . . . . . . . . . . . . . . . . .57%Proven competencies . . . . . .53%Technology fit . . . . . . . . . . . .37%Flexible contract terms . . . . .26%Geographic location . . . . . . .23%Cultural fit . . . . . . . . . . . . . .21%Scope of resources . . . . . . .18%References and/or reputation . . .12%Note: Multiple responses allowed.



The former port director cited a dif-ferent aspect of communication: whatemployees are told as plans for out-sourcing unfold.

When an IT person hears out-sourcing, they think, ‘This is not agood thing. There is huge potentialfor job loss.’ If you’re not commu-nicating frequently and effectivelyas to what this means — I’m notsaying be fictitious; sometimes it’sgoing to be very difficult informa-tion that needs to be communicat-ed — [it’s] better to communicateit often and effectively than not tocommunicate at all.

Paying attention to ongoing manage-ment and governance and selecting theright vendor rode closely on the area ofcommunication as the most important as-pects of successful outsourcing. These ar-eas were specified by 41% of respondents.

The former port company directorpointed out that “governance is not aone-time effort.” Doing it well requireshaving in place metrics and KPIs — keyperformance indicators. Otherwise, hesaid, “How can you tell whether you wereadhering or not if you’re not measuring?”He advises making sure “that roles areclearly defined and understood...” Thatwill determine who gets what types ofmetrics and how frequently. “If you’re onthe front line in the network group, clear-

ly you want frequent information on yourmetrics, in comparison to being CIO,” hesaid. “Depending on who you ask andwhat role they play, you’re going to get adifferent answer. And you should!”

Having a properly structured contractor service level agreements were speci-fied by 38% and 33% of respondents re-spectively.

The former port director believes incalling on the experts as early as possiblewhen setting up contracts or agree-ments. That includes both the procure-ment group and the legal department.How does he prevent procurement peo-

ple from taking too much of a bottom-line perspective? “What you want to dois match your expertise — what you’retrying to accomplish — providing techservices to assist with your organizationto become more profitable — with theirexpertise on contract negotiation, onthings to look for in a contract that mayraise a flag. The more time you spendwith them upfront — [explaining] whatyou’re trying to accomplish — the moreeffective they’re going to be.”

There’s much to worry about when itcomes to outsourcing initiatives. Dataconfidentiality was the top concern, ref-erenced by 34% of respondents. Securi-ty risk and exposure was number two,and tied with the experience level ofservice provider employees, at 33%. Ris-ing expenses and employee turnover atthe service provider were cited by abouta quarter of respondents.

The publishing company manager cit-ed data confidentiality as his number oneconcern. Why? “The more this [work]goes overseas, the more chance you havefor data to be compromised. Othercountries don’t have the same rules, reg-ulations, laws, [and] protections set up.”

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Table 3: Major Areas of Concern with Outsourcing

Data confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34%Experience level of service provider employees . . . . . . . . . . . . . . . . . .33%Security risk/exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33%Rising expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27%Employee turnover at service provider . . . . . . . . . . . . . . . . . . . . . . . .24%Impact of outsourcing on internal staff . . . . . . . . . . . . . . . . . . . . . . . .21%Lack of management oversight by our organization . . . . . . . . . . . . . . .19%Inadequate or improper service-level-agreement metrics . . . . . . . . . . .18%Culture clash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17%Conformance to regulations/company policies . . . . . . . . . . . . . . . . . .16%Working attitude of service provider employees . . . . . . . . . . . . . . . . . .14%Lack of management oversight by service provider . . . . . . . . . . . . . . .11%Domain knowledge of service provider employees . . . . . . . . . . . . . . . . .9%Executive visibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7%Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7%Time zone difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6%Note: Multiple responses allowed.


Table 2: Factors in Successful Outsourcing Initiatives

Communication between client and service provider management . . . .44%Communication between client and service provider personnel . . . . . .42%On-going management/governance . . . . . . . . . . . . . . . . . . . . . . . . . .41%Selecting the right vendor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41%Having a properly structured contract/outsourcing agreement . . . . . . .38%Having a properly structured service level agreement . . . . . . . . . . . . .33%Understanding the business goals internally . . . . . . . . . . . . . . . . . . . .30%Strategic vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25%Having previous outsourcing experience . . . . . . . . . . . . . . . . . . . . . . .18%Note: Multiple responses allowed.



CONTRACT CANCELLATION ISN’T THE NORMRespondents contradicted a common re-frain from analysts, who often state thathalf of all outsourcing contracts are can-celed or renegotiated before their termi-nation date. Only 28% of organizationssaid they’ve canceled or renegotiated anoutsourcing contract.

Among respondents who knew thereason for term changes or termination,the most common reason cited (by 38%of respondents) was that the serviceprovider failed to meet the contractterms. A third said service quality waspoor, 28% said there was a change inbusiness strategy that mandated thechange in outsourcing, and 21% told usoutsourcing became more expensivethan expected. Amere 10% said their or-ganization found better terms with a dif-ferent service provider.

PERSONNEL MATTERSMost companies don’t displace anyonein an outsourcing engagement, accord-ing to 61% of respondents. Another 10%said only contractors were displaced,21% said both contractors and employ-ees were shifted, and 9% said only em-ployees were displaced. (The total ex-ceeds 100% due to rounding.)

What did that displacement looklike? It varied. About a quarter were laidoff permanently. A third were eitherhired by the service provider or were of-fered positions elsewhere in the client

company. In 42% of the situationswhere people were moved, the clientcompany employed a combination oflayoffs and transfers.

How many were affected? On averageabout 928 people, though the medianwas a much smaller 121, indicating howa few large projects overshadowed oth-ers (the largest number of companies dis-placed fewer than 50 people).

The IBM contract with the publish-ing company involved the transfer of be-tween 50 and 60 people. That, said themanager, exposed a weakness in the plan.“We cut way too deep... The tech peo-ple [IBM] brought in knew the product,knew SAP. They didn’t understand ourapplication of SAP; they didn’t under-stand our business process. We havesince been very fortunate. We have beenable to hire back several people and putthem into positions we call business sys-tems analyst.”

PARTICIPATION IN OUTSOURCINGThree-quarters of respondents work forU.S.-based companies. The average rev-enue of these organizations is $3.8 billion— a notch above mid-market size (whichwe peg at $3 billion per year in revenue)but not by much.

That said, the largest industry repre-sented in the survey is government (21%),followed by computer and IT services(18%), finance/banking/accounting (11%),non-computer manufacturing (9%), de-fense/military (8%), and transporta-tion/utilities (8%).

As shown in Table 4, 12% of respon-dents hold C-level or senior executivepositions. A fourth have technical orline-of-business staff job titles. One fifthare directors, VPs, or managers of a busi-ness function (such as accounting ormarketing), and a tenth have similar ti-tles on the IT side. Another 14% areproject managers with IT responsibili-ties and 9% are project managers withbusiness responsibilities.

Nearly two-thirds of respondents con-sider themselves part of the ITfunction-al group. The business or executive func-tional groups represent another 17%.

Personnel involvement in the entireoutsourcing lifecycle varies widely. Justunder a third have absolutely no in-volvement at all. Of the remainder,slightly more than half participate inevaluating responses from serviceproviders and slightly fewer than half

11


Only 28% of organi-zations said they’vecanceled or rene-gotiated an out-sourcing contract.

Table 4:Job Titles

CEO/CFO/COO/CIO/CTO/President/Owner . . . . . . . . . . . . . . . . . . . . .12%Technical or line of business staff . . . . . . . . . . . . . . . . . . . . . . . . . . .25%Director/VP/Manager of business function . . . . . . . . . . . . . . . . . . . . .21%Director/VP/Manager of an IT function . . . . . . . . . . . . . . . . . . . . . . . .11%Project Manager with IT responsibility . . . . . . . . . . . . . . . . . . . . . . . . .14%Project Manager with business responsibility . . . . . . . . . . . . . . . . . . . .9%Consultant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2%



help develop the strategy to outsourceand select potential service providers.

CONCLUSIONThe globalization of services will con-tinue, reaching beyond the IT core thathas defined outsourcing for the pastdecade. More companies have out-sourced human resources managementprocesses, finance and accounting, and,of late, legal services, product develop-ment, R&D, and training. The shock andawe experienced by IT rank and file —

as well as management — in witnessingthe shifting Tectonic plates of employ-ment will soon be felt by people in all di-visions of the corporation.

Those in IT have had plenty of timeto regain their sense of balance. Thatmeans they have the chance to play a roleas leaders in future outsourcing endeav-ors within their companies. They knowhow to work with vendors. They knowhow to define what the job consists of —apart from how it needs to be done. Theyknow that even if a function can be sent

down the wire to be performed some-where else in the country or the world,that doesn’t mean it should be or will be.

James E. Powell contributed to this article.

Dian Schaffhauser is the editor of Sourcing-mag.com, which provides practical advice aboutIT and business process outsourcing, insourcingand offshoring. Reach her at [email protected] or http://www.sourcingmag.com.

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Table 5: Involvement in Data Center Outsourcing Work

Develop strategy to outsource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45%Develop outsourcing budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31%Authorize the decision to outsource . . . . . . . . . . . . . . . . . . . . . . . . . .21%Develop RFI or RFP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41%Select potential service providers . . . . . . . . . . . . . . . . . . . . . . . . . . .48%Choose geographic location to outsource to . . . . . . . . . . . . . . . . . . . .17%Evaluate responses from service providers . . . . . . . . . . . . . . . . . . . . .51%Meet with service providers finalists . . . . . . . . . . . . . . . . . . . . . . . . .41%Perform due diligence on service provider finalists . . . . . . . . . . . . . . .32%Choose winning service provider(s) . . . . . . . . . . . . . . . . . . . . . . . . . .31%Develop outsourcing contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31%Provide legal guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9%Sign contract(s) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17%Benchmark internal service levels . . . . . . . . . . . . . . . . . . . . . . . . . . .32%Develop service levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32%Act as IT liaison to service provider . . . . . . . . . . . . . . . . . . . . . . . . . .41%Act as project management liaison to service provider . . . . . . . . . . . . .31%Act as business liaison to service provider . . . . . . . . . . . . . . . . . . . . .28%Perform project management or governance . . . . . . . . . . . . . . . . . . . .29%Renegotiate the outsourcing contract . . . . . . . . . . . . . . . . . . . . . . . . .16%No involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29%Note: Multiple responses allowed.


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