The Dark Side of Outsourcing

Farming out the best work will hollow out your organization.

November 15, 2001 — CIO — Many organizations are a shell of what they once were or a shadow of what they could be, because they give the best work to outsiders. I don’t think anyone intentionally outsources the best work—that is, the most important projects and the critical business relationships—but it happens all too often.

Correctly applied, outsourcing is a lifesaver in navigating the changing seas of business and technology. Fortunately there seems to be an endless supply of contractors and consultants. My CIO clients have plenty of experience in outsourcing. In fact, about half of their personnel work for somebody else, on average.

That last thought always gives me a chill. At the end of the day, half of their people don’t work for them—they work for somebody else. Those employees are working to achieve another company’s long-term vision and are part of somebody else’s culture and career development plan. This reality hit home years ago when, as an executive at PepsiCo, I hired a consultancy to manage a PeopleSoft implementation. The software was new and the market demand for experienced project managers was high. At a critical point, one of the consultancy’s partners informed me that he needed to reassign the project manager to an apparently more important or better paying client. I pulled out my PepsiCo card, but the partner didn’t seem to care. In the end I won but only by hiring the contract project manager away from the consultancy.

The incident taught me that a leader’s success rides on the back of a few key employees. Those are the people who know your business and your systems, who have formed good relationships with your customers and vendors, and who are disciplined enough to see things through. To do outsourcing right, you had better know what you wouldn’t give away. You need to define an "insourcing" plan that identifies the work critical to your company’s strategic intent.

Insource the important work

Most of us would agree that subject to real-world constraints, the following roles and capabilities should not be outsourced:

Strategic applications and technology planning.
Investment, financial, HR, project and vendor management.
People with in-depth knowledge about existing business, applications and technology infrastructure.
Senior, customer-facing relationship managers.

The real-world constraints that force us to outsource more than we would like include missing skills, inadequate resources and a lack of organizational mass necessary to maintain a capability internally. The critical mass problem forces some companies to outsource virtually all IT functions. But in compensating for limited resources, many managers go further than is healthy for their organizations. Project work, which is variable by nature, goes to contractors, while internal people end up doing only support work. Since project work is generally the best work, in terms of strategic impact and creativity, employees who value this work will leave. Those who remain will do a good job running the day-to-day tasks but will be unable to lead a major change.