The Hard Road To OutsourcingThe Hard Road To Outsourcing

There was no shortage of advice last week at Gartner's outsourcing conference about what it takes to make outsourcing work. Northwestern Mutual Life is providing customer data to offshore developers to get more from those resources, but it's taking extensive steps to protect the data. A Boeing executive says preplanning is critical for outsourcing efforts to be successful--and provided details about successful and failed outsourcing deals to prove it. General Electric, meanwhile, may enlist an application outsourcer if it tries to deploy a single enterprise-resource-planning system to link all of its business units.

Insurer Protects Data

Concerns over privacy and security have kept many financial-services companies from moving customer data files offshore, limiting their ability to reap costs savings offered by outsourcing vendors in low-cost countries. Executives at Northwestern Mutual Life Insurance Co. believe they've solved the problem.

For about six months, the diversified insurance and financial-services company has given IT workers at Infosys Technologies Ltd. in India access to applications containing sensitive customer data, including Social Security numbers. The employees use dumb terminals that limit users' ability to alter, record, or print the data. "The machines don't even have hard drives," Northwestern Mutual CIO Barbara Piehler said in an interview at the Gartner outsourcing conference last week. The terminals are linked via secure, high-speed phone lines to Northwestern Mutual's servers in Milwaukee. Infosys staffers use them to test and maintain a number of the company's business applications.

Northwestern Mutual executives came up with the plan after deciding they weren't getting the most out of their offshore contractors, Piehler said. The company previously sent to India only the IT applications that didn't involve customer data. "But that limits what you can do offshore," she said.

Financial-services companies have a lot to gain by moving IT work offshore. They can cut the cost of IT work by 39% by outsourcing it abroad, Deloitte Consulting estimates.

But some federal regulators believe the practice carries privacy risks. In a study released last year, the Federal Deposit Insurance Corp. noted that "background checks of [services firms'] employees involving credit-bureau information, criminal records, or even drug-testing results are standard requirements in the United States. The ability to obtain the same types of reviews in many other countries is questionable." For now, the government hasn't imposed any significant restrictions on offshoring personal data, though lawmakers in some states, such as California, have proposed them.

Northwestern Mutual's safeguards are more than adequate to protect customer data, Piehler said. Beyond secure lines and dumb terminals, the company insisted that Infosys put additional physical security measures in place. A guard is posted on the floor of the Infosys facility where Northwestern Mutual's work is performed, and employees aren't allowed to take any documents or media with them after they clock out. "Nobody cares about protecting our customers more than I do," Piehler said.

Northwestern Mutual doesn't inform its 3 million policyholders that their personal data is, in some cases, viewed by offshore workers. "It's just the way we do business now," Piehler said. Some analysts, however, say that it's good business practice for companies to inform customers if their personal data is accessed offshore. "Beyond any ethical responsibility, you don't want your customers to have a nasty surprise if something goes wrong," says Phil Fersht, research VP at the Yankee Group.

Under the Gramm-Leach-Bliley Act of 1999, financial-services companies must explain their privacy policies to customers. However, the law doesn't prevent financial-services companies from transferring customer data to offshore third parties for processing. It also doesn't provide customers with the right to opt out of such activity.

Beyond privacy issues, opponents of moving data offshore say the practice threatens U.S. jobs. Piehler said Northwestern Mutual, which employs about 1,000 technology workers, hasn't cut any domestic IT staff since it began sending work to India.

--Paul McDougall

GE Mulls Companywide ERP

There could be a $1 billion sale out there for a lucky enterprise-software vendor and perhaps an outsourcing-services partner. General Electric Co. would like to implement a massive enterprise-resource-planning system to tie together its 11 business units and countless divisions, a company official said last week. "We have looked at it, and we'll continue to look at it," said Richard Dobbs, financial-services leader at the diversified consumer and business-to-business manufacturing and services company.

GE uses ERP applications from PeopleSoft, SAP, and a number of other vendors. The company ideally would like to "rationalize" its ERP systems, Dobbs said, and he put the cost of such an effort "north of $1 billion."

However, integrating the entire company's operations through a single ERP system could ultimately prove too expensive and complicated an effort to undertake, Dobbs said. "It would be hard to get our hands around that," he acknowledged. As an alternative, Dobbs said he would like to see a major outsourcing company pair up with a major ERP vendor to provide GE with a "wing-to-wing" ERP offering on an outsourced basis.

GE is embracing outsourcing in a big way. It was one of the first major companies to employ IT staff in low-cost countries such as India using so-called captive operations--facilities located abroad but company-owned and operated. Now GE has come full circle to embrace outsourcing as the best means to access low-cost labor and efficient IT and business-process services.

"Outsourcing is the way of business now," Dobbs said. Last year, GE spun off its India-based business-process-outsourcing arm, General Electric Capital International Services, for about $500 million to private investors. The company also last year sold to Affiliated Computer Services Inc. a number of other BPO facilities, which that company now operates on behalf of GE under a 10-year outsourcing contract.

--Paul McDougall

Boeing's Outsourcing Trials

Executives at Boeing Co. are telling a tale of two outsourcing projects that show the importance of preparation to the success of an IT-services engagement.

The company's decision in 2003 to outsource a range of technology operations to several vendors is returning greater savings than expected because Boeing IT executives followed a meticulous transition plan, Philip Harris, the aerospace company's director of IT sourcing and benchmarking, said last week.

By contrast, the company's rushed effort to turn over IT operations to a single vendor in 1998 following its merger with McDonnell Douglas resulted in numerous foul-ups. "There were a lot of bumps," Harris said.

In 2003, Boeing outsourced the bulk of its IT operations to Computer Sciences Corp., Dell, and IBM. The move has since helped the company keep IT costs in check and operate more efficiently. "The best-of-breed model has delivered the anticipated savings, plus more," Harris said. He didn't provide specifics, but even a small percentage of extra savings could yield big dollars for Boeing, which spends more than $1 billion annually on IT.

Boeing awarded CSC two six-year contracts worth a total of $150 million to manage its servers and mainframes. IBM received a three-year, $160 million deal to run Boeing's voice network, and Dell won a five-year contract to operate the company's desktop systems for an undisclosed sum.

The success of the deals is in large part because of the extensive preparatory work that Boeing undertook before signing, Harris said. Among other things, the company formed a transition committee, led by Harris, charged with ensuring that even the smallest details of the handover--such as sending the right contractors to the right buildings--were planned. Boeing also insisted that vendors competing for the contracts include detailed plans for transitioning the company's employees to the outsourcing company in their bids. Harris said his job depended on a smooth transfer.

"If it wasn't a seamless transition, then I would have been explaining to my successor why it wasn't successful," he said.

Boeing's low-turbulence IT-outsourcing engagements in 2003 stand in stark contrast to its effort to hand over technology operations to IBM in 1998 following the merger with McDonnell Douglas. IBM had previously signed a groundbreaking 10-year, $3 billion outsourcing deal with McDonnell Douglas that Boeing inherited. But Boeing didn't take enough time to prepare for the transition, which went badly, Harris said. "There were help-desk tickets piling up on the floor," he said.

Harris doesn't blame IBM for the problems, which also included an executive secretary losing all communication with her boss. Rather, Boeing's lack of preparation was at fault, he said. Boeing ultimately let the IBM contract expire before bidding out the new agreements in 2003.

--Paul McDougall