Don't Outsource to Save
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
"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,"
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
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
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
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
Jack Vaughan is former Editor-at-Large at Application Development Trends magazine.
Rich Seeley is Web Editor for Campus Technology.