In-Depth

Don't Outsource to Save

• By Jack Vaughan, Rich Seeley
• May 31, 2001

Sun's Henderson said his firm's reason for outsourcing application development is similar to that of Ford's -- it wants to concentrate on the company's core business.

"What we're doing at Sun is launching a major initiative toward application outsourcing, application hosting, Web outsourcing and hosting for a couple of reasons," said Henderson. "One reason is that it lets us respond much more quickly to new markets; for example, if we want to start using a new program or a new service, we don't have to train our inside people. We go outside to the experts who already know how to do it and are experienced with it. It's a way to be very nimble. The [other reason] is that it's a great way to reduce overhead.

"What we see is that outsiders, because they have economy of scale, can provide more efficient services, particularly administrative types of services for hosting the machines," Henderson explained. "They can also provide, in general, programmers that are more skilled with particular technologies and don't need the training costs."

While Meta Group's Lepeak does not fully agree that outsourcing is more economical, he does indicate that, in a tight labor market where certain skills are very hard to find, it may be the most practical solution.

"It depends on what you are doing," he said. "In some cases, outsourcers may have certain economies of scale where they can do things more inexpensively. But again, I think what you are looking for is to get a quality deliverable, not necessarily the cheapest deliverable."

In data center outsourcing, which was the great benefactor of outsourcers in the 1980s, there are some economies of scale, said Lepeak. But, by and large, he said, if you go into outsourcing to save money, you are likely going to be disappointed.

"It may or may not be cheaper," said Lepeak. But there is an additional point to be aware of. "If you go into [outsourcing] to save money, what we typically see is [that people] don't put enough money into the management process," noted Lepeak.

"In such cases, you may not be adequately dedicating people to make sure work gets done," he said. "You must remember, you're outsourcing the work to get the task done, you're not outsourcing the responsibility to make sure that task gets done correctly.

"And if you look at it as, 'Let's do this on the cheap,' you're probably not going to spend enough time or money to make sure it gets done well," he added.

Short on labor?

But whatever the economics, Lepeak agrees that the well-publicized shortage of programming talent in a tight labor market is driving application outsourcing.

"It is a function of scarcity of staff [and] scarcity of staff with current skills, particularly when you start looking at something like electronic commerce," he said. "There's just not a lot of people around who have the skills in those areas. And the people who do have the skills are hard to find.

"Typically, a third-party group is more able than an end user to attract that talent," said Lepeak. "Because they can pay more, they typically have more appeal from a career standpoint."

It is more fun to work for a consultant than to work for a utility in Iowa, said Lepeak. "In many cases, they have other perks like travel and stock options, so in terms of the food chain, it's typically end users that are at the end of it in terms of getting new talent," he added. "Often, users just can't find the people they need, so they need to turn to outside firms."

The hunt for skills will affect outsourcers as well. At this year's San Diego ITXPO 99, GartnerGroup analyst Linda Cohen indicated that, for outsourcing service providers, the shortage of skilled labor and the difficulty of training programmers will be the No. 1 inhibitor to growth in outsourcing business. Outsourcers, too, will struggle to find enough skilled people to meet the growing demand.

At least some of the Web outsourcers will soon be more closely scrutinized in this regard. Many are issuing IPOs -- perhaps, at least in part, to attract talent. As a result, their books will be more open, while their need to deliver large returns will be ever greater.

In a recent edition of the Hurwitz Group's Hurwitz Trend Watch, the Framingham, Mass.-based analyst firm noted that the strong demand for Web integrators has allowed some top-notch firms to pick and choose from an endless stream of potential engagements. But there is peril. "Emphasis on rapid growth, high margins and ever higher stock price poses danger for customers if service firms become too obsessed with maximizing current operating margins," writes Hurwitz, which adds to the general admonition (to look behind "the buzz" factor) advice to evaluate Web application development service partners' prospects for sustainable growth.

On the contrary

Asked if the trend to application outsourcing is a response to the shortage of programmers, Sun's Henderson offers a contrarian view. "It's not that," he said. "It's a response to needing to move faster and better in the market."

So, perhaps not surprisingly, Sun up until last year actually hosted all of its own Web sites. The company clearly has a lot of experience with hardware and software.

"What we've seen," said Henderson, "is that as the markets get more complex, we don't want to be in the position of maintaining all of that equipment. It would be as if we owned our own printing press. Up until recently, we had to do that because there weren't the types of application outsourcers that we wanted, and Sun happened to be very good at it. [Now,] application outsourcing allows us to focus on our core business, which is building things like the Solaris operating system and the Java programming language."

Meta Group's Lepeak also agrees that outsourcing IT functions allows corporations to focus on their core business. "It is the recognition of the benefit of specialization," he said. "I'm an end-user company. I'm a manufacturer. I'm an insurance company. What I really need to do is worry about writing insurance, doing manufacturing or whatever. As I become more specialized, I should rely on partners to do things that they can do better than I can."

Lepeak offers the Internet as an example. The need to be on the Internet does not automatically translate into the need to host a Web site or build the Web application. Recalled Lepeak: "One client of ours said that when they run television ads they don't set up a television station. Why should they set up and run their own Web site?" The client does not do that because it views that primarily as an advertising medium. "Maybe they're wrong," chided Lepeak. "Maybe there's more you should do with the Internet than run an ad, but it's a good point. In other areas you don't feel you should own everything, so why should you feel that way with technology?"

Overall, Lepeak is cautiously optimistic about the upward trend in application outsourcing. However, he believes there may still be a rocky road ahead for some companies that turn to the outside for IT help.

"I think while many organizations have problems when they take the outsourcing route that, in general, it is becoming more prevalent across the board, but certainly in application development," he said. "In general, firms are getting better about selecting and managing outsourcers, while at the same time the people who provide outsourcing services are getting better and there is a broader selection from which to choose."

This is not to say there are still not a lot of potential problems if you do not carry out the appropriate due diligence, said Lepeak. And this is not to say there are still not a lot of firms out there that cannot live up to their promises. Is the trend generally upward? That is hard to say. But outsourcing is a fact of IT business today, and it is an increasingly influential fact.