Painful lessons from IT outsourcing gone bad

As companies look to economize in a weak economy worsened by rising energy costs, it may be more tempting than ever to consider outsourcing your IT -- whether to a cloud-based provider, to a shop in your town, or to a provider in some far-off land. Certainly, outsourcing has worked well for many companies, but it can also lead to business-damaging nightmares, says Larry Harding, founder and president of High Street Partners, a global consultancy that advises company on how to expand overseas. After all, if outsourcers fail, you're left holding the bag without the resources to fix the problem.

In his consulting, Harding has seen many outsourcing horror stories, from corrupt general managers "with all sorts of conflicts of interest" (such as service providers getting kickbacks from landlords on the leased space) to projects torn apart by huge turnover rates. "You end up with project teams that are hugely inconsistent. You might have a good team in place, but a month later, three-quarters of the team has transitioned," Harding says.

"Only when executed well can it pull out hundreds of millions in cost and transform organizations," says Brian Keene, CEO of Dextrys, an outsourcing service provider that focuses mainly on China.

In the sometimes panicked desire to save money -- especially with the powerful lure of "half-price" workers in places like India, China, and the Philippines -- good execution flies out the window. And that's where the problems flock in. Outsourcing is not for the faint-hearted or the ill-prepared. It just doesn't "happen."

That's why understanding what can go wrong before you jump into outsourcing is a great way to reduce your risk, because then you can approach outsourcing with eyes wide open, Harding notes. The companies who've lived through outsourcing horrors have two things in common: lack of preparedness going into a new relationship and lack of communication once the projects gets under way. Other factors can make these worse, of course.

Outsourcing's biggest horror show

In the pantheon of outsourcing horror stories, the US$4 billion deal between the US Navy and global services provider EDS stands out as one of the most horrific. It started back in 2003 when the vendor beat out the likes of IBM and Accenture for the contract. The deal was to manage voice, video, networking, training, and desktops for 350,000 US Navy and Marine Corps users. But just one year later, EDS was writing off close to US$350 million due to its inability to come even close to fulfilling its obligations.

The reasons behind the failure are complex, but suffice it to say that one of the major causes behind the debacle was that EDS, perhaps anxious to win the prize, never realized that the US Navy and Marine Corps had tens of thousands of legacy and custom applications for which it was expected to either integrate or rip and replace. An EDS spokesperson said at the time the company's goal was to get the number of legacy apps down to a mere 10,000 to 12,000.

While there was plenty of blame to go around at EDS, the Navy took its share of blame as well. One of the major issues with the Navy was that the buck stopped nowhere. There was no single person or entity that could help EDS determine what legacy applications were needed and what applications could be excised. EDS, for example, found 11 different label-making applications, but there was no one who could say which 10 to eliminate.

Most companies will never face outsourcing problems on the scale of the Navy and EDS. But many will face their own horrors on systems and projects just as critical. Consider these four modern examples and what lessons the companies painfully learned.

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