Carlson vs. IBM: A strike against outsourcing

Outsourcing won't end with the Carlson-IBM lawsuit, but it should cause companies to rethink staffing strategies

Dear Bob ...

I'm not looking for advice -- more a reaction to the Carlson Companies lawsuit against IBM as it terminates its mega-outsource.

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This is, after all, in your backyard (Minneapolis). So what do you think -- is this a problem of concept or just bad execution?

- Stirring the Pot

Dear Stirring ...

I really should duck this question, on the theory that the best position from which to view every divorce is to change the subject. Certainly, there's no way to ever know what went wrong in the relationship, as those who know what happened aren't remotely objective, while those who are objective are entirely unencumbered by actual facts.

But a soapbox is a soapbox -- so what the heck.

Whatever the particulars of this deal, it's unlikely to have made more sense than any other mega-outsourcing deal. That's because the megadeals are signed by companies big enough to have access to all the economies of scale the outsourcer might bring to bear to help cut costs. So long as someone in the contracting food chain is a decent negotiator, there's nothing the outsourcer can provide at a low enough cost to cover their margins.

Financially, something usually smells in these deals, and the last time I looked it was usually in the financing: The contracts load the benefits on the front end and the costs on the back end. Somewhere in the middle, all the economic advantages run out.

Next issue: A lot of companies that outsource IT in particular do so because they've given up on their own ability to manage the function. The problem is that if someone isn't competent to manage IT when it's run and staffed by presumably loyal employees, they're even less competent to manage an outsourcing relationship, when everyone involved has a financial stake in upselling and overcharging.

If anyone reading this is considering an outsourcing deal, please take this to the bank: If you can't manage it now, you'll manage the outsource worse.

There is, I suppose, one advantage to outsourcing as an alternative to management competence: You can sue an outsourcer, but not your own employees. Congratulations.

Issue No. 3: Keep the core and outsource the rest. This is phenomenally stupid advice, no matter how often it's repeated. Outsource to gain economies of scale, to gain access to scarce expertise, or to gain competence in a discipline more quickly than you could achieve by building it internally. The keep-the-core theory assumes that when a company outsources a function, it no longer has to pay attention to it; instead, it can focus on its core.

To the extent Carlson's claims are legitimate, they demonstrate the fallacy -- in the end, whether outsourced or not, Carlson's management still was responsible for the results of the arrangment, which means it still had to keep an eye on the job.

Issue last: Loss of flexibility. Employees can do favors for other employees. An outsourcer's employees can't -- they can only, with approval through the contractual governance mechanism, agree to do extra work as an add-on.

Meanwhile, management can change priorities for an internal department more or less as it needs to. To change them for an outsourcer generally requires renegotiation of the contract or additional statements of work.

I know of one case where perfectly reasonable small projects never get started because the terms of the outsource require use of an outsourcer-provided project manager, at a cost roughly four times what the company would pay for an employee doing the same work. That price differential kills the business case for a lot of proposals that would otherwise make sound business sense.

Back to Carlson vs IBM. Whose fault is it? I have no idea. Blame the Outsourcer, like Blame the Consultant, is a popular game no matter what the facts of the matter. Some of Carlson's claims, on the other hand, seem pretty hard to chalk up to anything other than botched work (serious outages are bread-and-butter work and aren't in any way subjective).

Still, I'd say that whether or not IBM's execution was poor, Carlson's judgement in going this route in the first place was seriously flawed.

Its judgement in not giving me a call first to get my opinion was, of course, even more seriously flawed.

- Bob

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