Outsource IT

At the Center for the Management of Information Technology (CMIT) at the University of Virginia conference March 11 on the Consumerization of IT and Enterprise Innovation a lot of the discussion in the afternoon session was built upon the foundation of outsourcing as much as possible. I think it was Professor Austin who had the line, something like, 'Document it, Standardize it, Outsource it and Retire it.' Something like that, I'm probably messing up the line, but it was catchy and nobody even bothered to question it.

The quote I do remember was that outsourcing IT will have a positive effect on G & A (general and administrative expenses on a balance sheet).

And that my friends is what I would like to discuss today.

I agree with that statement 100%. If you outsource IT functions you will see (especially for a listed company) an impact on the balance sheet and that will likely translate into an upward shift in the stock price. But there is a problem with that scenario.

Let's outsource something like servers. We'll put everything in the cloud. We won't have to worry about babysitting those servers anymore. In the short-term and mid-term this works out. We don't have to worry about the servers and whoever we outsourced to has an economy of scale and scope and can deliver that service at a lower price than we were paying our own people. But this short and mid-term benefit will likely lead to long-term issues.

The people who performed that work will either leave or transition to other activities. After 5 or 6 years we will have nobody with the skills to effectively monitor the delivery of that service. This exposes a risk in the quality of that service.

Additionally the vendor will presumably know that we don't have people with the technical knowledge to effectively monitor and they will do things to increase their profitability at our expense. Just like the analogy of the frog and a pot of boiling water, the vendor won't drop us (the frog) in a pot of boiling water. Instead they will put us into a pot of water and slowly bring up the heat. We won't know what is happening until we are already cooked. But eventually they will have us.

When I say that they will have us, what I mean is that we will be locked in to that vendor. They have increased the switching costs, or provided us with a type of service that makes it painful to switch to a different vendor or bring that service back in-house. But by this time, bringing it in-house is nearly impossible because we don't have the expertise to even monitor the effectiveness of this service, let alone perform it ourselves.

So yes, I think that outsourcing IT provides a positive effect on near-term G&A but the long-term consequences can be crippling. But some outsourcing is necessary. I'm not just against outsourcing in general. The problem is that organizations need to be strategic in what is outsourced and figure out a way of retaining the expertise needed to effectively monitor and innovate and decide when the situation has changed enough that the question of outsourcing a particular service needs to be reconsidered.