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March 25, 2003

The Sure Thing Not only

The Sure Thing

Not only is outsourcing a company's IT projects a security risk, half the time it's a complete waste of money, delivering a application seen as essentially useless by the very executives overseeing the project to begin with.

Half. In 2002, over $550 billion was spent in outsourcing projects, which means that at least $275 billion of that was pissed away, wasted on the tech equivalent of plastic trinkets and beads. Magic Server Dust, if you like. The real total is likely even higher, given the predilection most people, especially executives, have for playing CYA. Even if one cuts the current estimates in half, the amount of money wasted on outsourced projects last year alone is still over 100 billion dollars.

I've talked about outsourcing before, here and here, emphasizing that outsourcing an IT project was not only insecure, but slow and inefficient to boot. Outsourcing is short term cheap and long term expensive. IT staffs are the opposite, short term expensive and long term cheap. Most executives either don't plan for the long term or feel that they cannot, that the pressure to keep stock prices high prevents them. It's a remnant of 90's bubble thinking, and one that will eventually be as harshly punished as the rest of that era's philosophy was.

Back in the days when literacy wasn't widespread, a person would pay a clerk or scribe to read and write for them. Compared to reading and writing one's own messages, it was slow, inefficient and insecure. After all, the scribe could write or read whatever he felt like, and the customer had no way of telling. As literacy grew more widespread, those jobs vanished. Companies who outsource IT now are in the same position as a merchant who depended on a scribe would have been then, and increasingly they are going to have to compete against companies with an in-house IT staff, companies that know how to read and write their own code. Computing skills are the new literacy, and the percentage of people with skills in that area is only going to increase.

The billions of dollars wasted in 2002 are more than a symptom of inefficiency, they are evidence of a huge Darwinian vulnerability, the fiscal equivalent of a mammoth in the rainforest. Outsourcing is a practice that the marketplace will eventually punish, suddenly and severely. Given the speed at which changes ripple through the market, that punishment will happen sooner rather than later. It's time to actively bet against companies with large outsourcing budgets, especially if they compete directly against a rival using in-house resources. They simply will not be able to react as fast to changes in the economic environment.

Say Yahoo decided to compete against Google again, and hired an outsourcing company to build a search engine. Give the project a year. At the end of that year, assume that the product was delivered on time and without major bugs, which in itself would be a first for the outsourcing industry. It still wouldn't matter. It wouldn't matter because the product was built for the environment that existed a year ago, when it was ordered. The in-house staff at Google, on the other hand, has spent that year tweaking their app, so that they are still more or less in tune with the current environment, and more importantly, a year ahead of Yahoo. On the other hand, had Yahoo hired internal staff to build a search engine, it would still be behind Google, but not as far behind. The project would have been completed faster, and could have implemented reactions to changes in market conditions as it was built. That's a much harder than it sounds, even with an internal staff, but it's essentially impossible when using an outsourcing company. Not in the contact, so sorry. Upon delivery of the new app, Yahoo would also posses a staff thoroughly acquainted with search engines, one able to deploy changes to the code much more quickly, as they were the ones that wrote it in the first place.

Paradoxically, the recession has probably benefited companies with a large investment in outsourcing, as a slower market protects them from the consequences of outsourcing by temporarily devaluing IT skills. Once the market turns and IT skills are more in demand, the companies with a higher direct investment in IT skills are going to move much faster, more nimbly and above all more efficiently than companies where half of the IT dollars spent might as well have been burned as a sacrifice to the gods at the beginning of each fiscal year.

Once the market turns, though, the payoff will be much less. The time to place your bets is now, beforehand. Who to bet on/against should be fairly easy. Most outsource providers have a list somewhere on their site of major clients. Find out who competes with those clients, ascertain which ones have a large IT staffs, and bet on them. They'll be the winners in the next growth economy. Also, bet on the outsourcers. They won't begoing anywhere. There will always be companies looking for a tech shortcut, as well as clients whom market forces do not affect. Efficient use of money and a quick turnaround isn't nearly as much of an issue with governmental and educational organizations, and a lot of those types of institutions will lose knowledgeable staff back to private industry as the economy picks up, forcing them to increasingly rely on outsourcers to do the work that must be done.

Outsourcing won't be going away, but the types of clients on the list will increasingly be ones that can indulge in long software development cycles without worrying about the consequences. For-profit enterprises won't be among them.

Posted by Bigwig at March 25, 2003 04:13 PM | TrackBack
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