Acknowledge the Outsourcing Threat

Many CIOs are also looking to outside sources of help in meeting IT demands - either for cost, skills, strategy or a combination of the three.

"CIOs faced with an already bare-bones staff are told to cut another 10 per cent, and the most promising thing for them is to look at the offshore outsourcing market where they can theoretically save 30 per cent to 50 per cent in hard costs," says Morello. "If I'm a CIO . . . and I'm being asked to continue to reduce costs after already extensive and radical cost-cutting, I have to justify why I'm not considering offshore."

But while using outside sourcing options can be a good way for CIOs to meet business needs with smaller budgets and fewer full-time staff, their introduction can increase in-house staff malaise. This is particularly the case with outsourcing. "People are very reticent and nervous," Morello explains. "If you are someone who has shown that you're a great technical person but that's all you have - you don't have any business process or management skills - your role is at risk because that work is moving overseas, and chances are you aren't moving to India with it."

Electronic Arts' West understood this issue when he began outsourcing 15 per cent of the company's development work to two middle-tier Indian software companies, iEnergizer in Noida and Cybage Software in Pune. "We originally started sending work over there because of the nonavailability of talented staffing in the US, but that's not the situation today. Now we use it as a cost-effective solution," West says. To help address concerns that Electronic Arts' in-house developers will become obsolete, West has tried to position the Indian play as an opportunity. While he's discontinued hiring junior developers, he's encouraging his existing stateside developers to learn systems analysis and gain more strategic skills, such as getting to know the business's order management processes to figure out what commercial software might be a good fit. "We're trying to make it an opportunity to develop skills around managing offshore projects and managing a distributed development environment," West explains. "There is always an underlying concern, and you can never take the full fear out of it. But we make sure it's seen as a way to get the job done better and faster, and not just cheaper."

The same people issues crop up with onshore outsourcing. George Brenckle, CIO of the University of Pennsylvania Health System (UPHS), outsourced the majority of his department to First Consulting Group, a health-care IT services company. First Consulting took over 170 of Brenckle's IT employees in 2001 just after the hospital system posted a loss of $US200 million, leaving just 30 employees in-house. "You can never 100 per cent relieve the anxiety of outsourcing, but we were very open so the employees knew who we were talking to and what we were finding," Brenckle says.

Brenckle was so concerned about employee reaction that in the end, 25 per cent of the contract with the outsourcer addressed staff issues, such as guaranteeing that the outsourcer would retain all UPHS employees for at least a year and ensuring that turnover would be less than 2 per cent. The pact kept some benefits, such as tuition reimbursement, that UPHS employees have. Still, the outsourcer saw two turnover peaks - one at the switchover and another 18 months later when some workers transferred off the UPHS account. But Brenckle knows it could have been worse. Remaining employees, whose stress levels skyrocketed initially, eventually got used to the idea of managing staff that actually worked for another employer. "Outsourcing is the kind of thing where you have to include your staff on the journey. You have to be very open," Brenckle says. "Because the reality of it is that you have an IT department to run before you outsource, and you're going to have an IT department to run after you outsource."