Why Outsource?

If you're picking partners just to slash costs, then you're not thinking long term. Nor are you improving your business.

October 8, 2004

3 Min Read
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With the Internet revolution, however, it became much cheaper and easier to collaborate with (rather than control) far-flung suppliers and partners. Enron, among other leaders of the day, argued that companies spend way too much time and money on things in which they lack expertise and that render little competitive advantage. Enron showed the way by creating Web-based markets for buyers and sellers of everything from natural gas to telecom bandwidth. As the trusted middleman, the company ensured market liquidity but owned minimal assets. But then Enron fell apart at its thin seams, and companies started to re-evaluate which parts of their businesses are truly "strategic"--and, to some extent, off-limits to third parties.

Although few companies advocate a return to industrial-style vertical integration, two camps have emerged on whether to rely on outsiders for key IT and business operations.

One camp, led by IBM, argues that the maturation of business-technology standards (Web services, industry-specific XML schema, grid computing) makes it increasingly practical for companies to outsource their SG&A and R&D functions, not just their IT functions. In fact, IBM recently identified the "business performance transformation services" market as a $500 billion opportunity beyond the $1.2 trillion IT market it already occupies. IBM has assembled an army of business consultants and researchers, petaflops of computer processing power, and a portfolio of data-integration products and expertise to attack this front. Everything from HR to payroll, engineering to customer service, data-center operation to application development can be ceded to third parties under IBM's vision of the extended enterprise.

Holding their business and IT cards much closer to the vest are companies like Wal-Mart, which has long maintained that its financial planning, inventory, logistics, customer service and other in-house experts--along with the developers, network architects, data-warehouse administrators and other tech pros who support them--can roll out world-class processes much faster and at much lower cost than any outsourcer or partner could hope to. Wal-Mart's world-beating revenue and cost structure validate its "invented here" philosophy.

So who's right? Even IBM and Wal-Mart would agree that there's no definitive answer. Circumstances vary considerably from company to company and industry to industry.On the IT front, however, studies have shown that half of all companies that outsource end up bringing those functions back in-house. JPMorgan Chase, for instance, last month said it will reintegrate data centers, helpdesks and networks it had outsourced to IBM two years ago. CIO Austin Adams, who came to JPMorgan Chase from the acquired Bank One, said the move will "give us competitive advantages, accelerate innovation and enable us to become more streamlined and efficient." Adams, who has "insourced" IT several times at other companies, thinks his tech pros can do a better job for the bank because they know the business more intimately and are held accountable more readily.

While it would be simplistic to view JPMorgan Chase's decision as an insourcing trend, it is a reaffirmation of outsourcing's true value: business improvement. If you're picking partners just to slash costs, you're not thinking long term. On that point, leaders like IBM and Wal-Mart must agree.

Rob Preston is editor in chief of Network Computing. Write to him at [email protected].

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