Putting Outsourcing Out To Pasture? Soup-To-Nuts Deals At Risk

Long-term IT outsourcing contracts, which essentially hand the keys to the information kingdom over to an independent organization, may be falling out of favor with a lot of large corporations.

Dissatisfied with poor performance and missed goals, many major companies are scrapping old and highly generalized deals in favor of smaller, more focused agreements, said a number of top IT consultants who gathered recently in Boston as part of the annual Cutter Consortium Summit '99 conference.

Last month, for example, American Express Bank canceled a 10-year outsourcing contract with EDS Corp. and inked a new decade-long deal focusing specifically on data center services. A major banking operation based in Australia also recently decided to cancel an outsourcing deal with IBM Global Services and bring its IT operations back in-house when the project failed, according to a consultant familiar with the project.

Other companies that have elected to forgo previous outsourcing deals include Xerox Corp. and CNA Financial.

"Unless an organization can already manage its IT, it should not outsource it," said Rob Thomsett, a consultant and director of The Thomsett Co. with offices in Europe and Australia. "You are not talking about controlling strategic directions, but losing control of it."

Professional service firms and consulting companies pulling together and managing seven- to 10-year deals also have zero chance of knowing what market conditions will be during the life of the contract, said many of the consultants at the three-day conference.

The best outsourcing agreements should be fluid, and changes should be triggered by events, not what is cast in legal stone, they said.

"Partnerships are renowned for disintegrating into contentious environments," said Roger Pressman, author of a widely used book on software engineering and frequent expert witness in outsourcing litigation.

Enterprise companies often turn to extensive strategic IT outsourcing as a way to control rising costs and squeeze value out of their programming dollars. However, most of these firms may be in for a rude and expensive awakening once the contract is signed and the outside players step in to run the show.

Robert Rosetta, a vice president with J.P. Morgan who previously spent 15 years with Nynex, said there are a fair degree of bumps on the outsourcing road. J.P. Morgan is presently involved in a multivendor, seven-year outsourcing agreement called the Pinnacle Alliance. It brings together a variety of companies and enterprise partners. These include Computer Sciences Corp., Andersen Consulting, Bell Atlantic Corp., AT&T Corp. and J.P. Morgan's own IT staff as a management partner.

While everything is working well for the most part, there are still a lot of smaller problems that exist that require a tweaking of the original plan. Luckily, J.P. Morgan is decentralized and did not opt for a "Big Bang" one-size-fits-all approach to its outsourcing deal, Rosetta said. Rosetta recommends outsourcing small "boxed services" within a corporation and also partnering with companies with a specific core competency.

In scouting out a consultant or outsourcing partner, IT managers would do best to look for someone who is not only experienced, but also willing to work closely with clients and accept responsibility should problems arise, he said.

"The implementation process should be very focused on the business process," said Kathy Pickering, newly appointed IT director for H&R Block in Kansas City, Mo.

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