An outsourcing tale

It is becoming increasingly apparent that outsourcing and offshoring are not as great and/or necessary as they might have seemed. In the autumn of 2004, JP Morgan Chase management, after 21 months of running, decided to undo its 7-year/$5 billion outsourcing contract with IBM, stating that it came to realize IT was a strategic function in the organization. Austin Adams, JP Morgan Chase CIO, commented that "We believe managing our own technology infrastructure is best for the long-term growth and success of our company ... to become more efficient."
In fact, Mr. Adams got to be in charge of an enlarged IT infrastructure after the merger of JP Morgan Chase with Bank One. The latter bank had built a repute for consolidating data centers and streamlining computer infrastructures and applications. Mr. Adams reached a point where he could entertain a switch from IBM to self-sufficiency and borrow from BankOne's cost-cutting know-how. The following table briefly shows a comparison among few data points of the corporate IT spending equation:

MEDIAN VALUES, 1999-2003

I.T. spending per employee

Compensation per employee

Return on shareholder equity

Bank of America,Citicorp, Wells Fargo, Wachovia

$12,729

$55,057

15.79%

JP Morgan Chase

$28,297

$110,702

9.45%

Obviously, JP Morgan Chase did not get the most out of its IT-expenditures. One may infer that IBM could not deliver the same efficiency as a well done in house job would. There could be a couple of reasons: 1) IBM used JP Morgan Chase's numbers as baseline and it improved on it marginally at most, and 2) IBM might have as well pocketed the difference, after all this is their business rationale.

For the time being, the problem not if/how companies like IBM could leverage scale and make it worthwhile for all involved. It is rather the moral of the story. If a company wants more than window-dressing for the sake of some quarterly numbers, hard choices ought to be considered. In the beginning/evaluation stage, outsourcing, and especially offshoring, my seem very attractive. Yet companies should not think that deferred costs and/or cheap labor can mask their process and organizational inefficiencies. In other words, improving a company's own business should come first and outsourcing/offshoring only later in the strategic roadmap of a company leadership.

For a more detailed analysis of the steps one should consider when business-process outsourcing is an option, see: Reaping the benefits of business-process outsourcing (Bloch & Spang / McKinsey)

4 comments:

Anonymous said...

I don’t think IBM had a vested interest in trying to compete in this way…why should they. They were not called in to Chase to be concerned with return on stockholder equity…they were brought in to solve IT problems. Only an internal department is looking for ways to do thing more cost effectively.

fCh said...

You may also want to check:
Any lessons one may draw from outsourcing war?

passer by said...

12 Accused of Using Call Center in India to Cheat Citibank Clients

By THE ASSOCIATED PRESS

BANGALORE, India, April 8 (AP) - Police have arrested 12 men in western India on charges of cheating four Citibank customers out of nearly $350,000, a police officer said Friday.

Anonymous said...

True or False: Outsourcing Is a Crisis
By EDUARDO PORTER

IF you read only the headlines, the future of globalization may seem scary, indeed.

American jobs have already been heading abroad. And as telecommunications and more powerful computers enable companies to take even more jobs overseas, the service sector, which accounts for about 85 percent of the United States work force, will be increasingly vulnerable to competition from the cheap labor pools of the developing world.

So the question looms: Is America on the verge of losing oodles of white-collar jobs?

Probably not. The threat of global outsourcing is easily overstated.

The debate over the global competition for jobs is awash in dire projections. All those legal assistants in New York and Washington, for example, could be replaced with smart young graduates from Hyderabad. Office support occupations - jobs like data entry assistant, file clerk and the entire payroll department - could also be carried out in remote locations. "We are really at the beginning stages of this, and it is accelerating rapidly," said Ron Hira, assistant professor of public policy at the Rochester Institute of Technology.

In a study published this year, two economists at the Organization for Economic Cooperation and Development in Brussels estimated that 20 percent of the developed world's employment could be "potentially affected" by global outsourcing. That could include all American librarians, statisticians, chemical engineers and air traffic controllers, the study said.

What does "potentially affected" mean? Even if offshoring didn't drain away all these jobs, global competition for employment - including workers in developing countries who earn so little by comparison - could severely dent the livelihoods of American workers. "It isn't going to hurt in terms of jobs," said William J. Baumol, an economics professor at New York University who has studied the costs of globalization. "It is going to hurt in terms of wages."

But even if millions of tasks can be done by cheaper labor on the other side of the planet, businesses won't rush to move every job they can to wherever the cost is lowest. The labor market isn't quite that global, and it's unlikely to be anytime soon.

In a new set of reports, the McKinsey Global Institute, a research group known for its unabashedly favorable view of globalization, argued that 160 million service jobs - about 10 percent of total worldwide employment - could be moved to remote sites because these job functions don't require customer contact, local knowledge or complex interactions with the rest of a business.

Yet after surveying dozens of companies in eight sectors, from pharmaceutical companies to insurers, it concluded that only a small fraction of these jobs would actually be sent away.

The report estimates that by 2008, multinational companies in the entire developed world will have located only 4.1 million service jobs in low-wage countries, up from about 1.5 million in 2003. The figure is equivalent to only 1 percent of the total number of service jobs in developed countries.

Some sectors, like retail and health care, are likely to put very few jobs in poor countries. McKinsey estimated that less than 0.07 percent of health care jobs in 2008 would be outsourced to low-wage countries. But even designers of packaged software, whose work can easily be done abroad, will outsource only 18 percent of their jobs, the report said.

Moving tasks to faraway sites isn't simple. According to McKinsey's study, many business processes are difficult to separate into discrete chunks that can be sent away. Many insurance companies use information technology systems that have been cobbled together over time and would be difficult to manage remotely. Managers can be unwilling or unprepared to work overseas. And sometimes the tasks that can be sent offshore are too small to make the move worthwhile.

To top it off, there aren't that many suitable cheap workers available. Human-resources managers interviewed for the McKinsey study said that for reasons ranging from poor language skills to second-rate education systems, only about 13 percent of the young, college-educated professionals in the big developing countries are suitable to work for multinationals. And competition from local companies reduces this pool.

Sure, there are a billion Indians, but only a tiny percentage of the Indian work force have the appropriate qualifications. "Only a fraction have English as a medium of instruction, and only a fraction of those speak English that you or I can understand," said Jagdish N. Bhagwati, a professor of economics at Columbia University.

Of course, many of these obstacles can be overcome with time. The pool of adequate workers in poorer countries will grow, and companies will eventually iron out many of the logistical complications.

But that is likely to take a while. "The rate at which companies are willing and able is much slower than you would realize," said Diana Farrell, director of the McKinsey Global Institute. "We see this as being evolutionary, continuous but measured change."