IBM, Outsourcing and the IT Profession

This is a reaction to Robert X. Cringely's "Pulpit" of 28-Dec-2007:

Leaner and Meaner Still: IBM's U.S. operations continue to shrivel.

There are 3 parts to my comments:
  1. Will IBM Survice?
  2. Outsourcing
  3. IT as a Profession

They are interlinked. Lou Gertsner set IBM on the road on "Services" and away from Mainframes. It looked promising.
IT Services look very appealing on the Balance Sheet - nearly no investment (no tangible assets) and what seem to be good profits from turnover. The ROA and ROI (Return on Assets and Return on Investment) look great - until you take some other factors into account.

  • Barriers to Entry for competitors are low.
    EDS under Ross Perrot came from nowhere to define and dominate the field - so can the next giant in the field.
    If your business model is "hire cattle and drive them till they drop" - you have no market differentiation.
    Same cattle, same drivers, same pay - same 'ol, same 'ol... The cattle aren't loyal, motivated or engaged.
    Writing new contracts is a matter of perception, influence and contacts.
    There is so much feeling against IT Outsourcers in business at the moment, the first company to come along and tell a better story will take the field.
    The change won't be overnight, but fast enough that the incumbents won't notice until too late.

  • Whilst only tangible assets appear on the Balance Sheet, IT Services are driven by your Human Capital and some Intellectual Capital embodied in your processes, branding and IP, such as trademarks and patents.
    What value is let in the offices when everybody has gone home? Very, very little.
    What is the business risk of a large, sudden exodus of your staff? A competitor may deliberately poach enough to put you in trouble.
    It's a failing of the Board not understand this and institute appropriate metrics, accounting and management rewards.

  • Profit based on Operations turnover are very fragile/volatile.
    Income and Expenses are very large numbers with a small difference. Expenses are mainly employees - which you may not be able to shed as quickly as service contracts expire.
    Tendering for new contracts implies you have, or can quickly get, the resources to fulfill the contract. That's an extreme business risk.
    The key figures-of-merit are Income/Employee and Profit/Employee.
    We don't see those reported or obviously managed.

  • IT Services work is Knowledge Work - it is mostly invisible and intangible.
    Driving IT staff like unskilled labourers with threats/punishment to lift performance is anti-productive.
    Unhappy staff withdraw and pushback. At best they aren't engaged or motivated. They 'do the minimum' - a grudging compliance.
    They stop caring about their work, the customer and their employer. And if you are lucky, it stops there.
    Hiring bright, capable people doing intangible work and treating them badly is not just a recipe for disaster, it is foolishness writ large.

  • IT is a cognitive amplifier and this can be leveraged both within the business and internally in IT.
    The only sustainable strategy to deliver improved profits is through investment.
    • Automating tasks.
      Applying our own technology to our jobs to make tasks, not jobs, redundant.
      Investing in tools and hardware to increase the both Quality of work
    • Building Human Capital.
      Investing in the people at the work-face to build their capability and performance.
      The SEI's Barry Boehem created COCOMO - a quantitative model for estimating Software costs.
      Experienced, competent practitioners not only produce better work, fewer defects, faster - they are cheaper.
    • Actively reducing Errors.
      Consciously reducing waste, rework and wrong work.
      Quality is not about 'doing the minimum', it's a mindset where Errors are allowed, but their repetition is anathema.
      High Quality performances are only achieved with deliberate, focussed intention. Not blaming and denial.
      Quality Systems only goal is to make it difficult for good people to make mistakes.
      Deming said it all with "Plan-Do-Check-Act", or in new-speak: "Preparation - Execution - Review & Evaluation - Improvement"
    • Learning is central to improving Quality, Performance, Security & Safety and Usability.
      Learning systems, processes and procedures takes an investment of time, tools and technology.
      Failing to build teams and their capability will decrease expenses in the short-run and will increase them in the long-run.

  • Resiling from the classic adversarial stance of IT Outsourcing.
    IT is a business enabler. It is now central to normal business operations. It is still where 80% of efficiency improvements arise.
    Every act that hurts the client will turn-around and hurt the provider, but more.
    The client is earning the income that pays for the IT.
    More income, more IT, more outsourcing revenue and profits. A simple equation that seems lost on Outsourcing managers.
    Outsourcing contracts need to align the internal management rewards with improving business outcomes for the Client.
    What's anathema to current management - reducing Client costs - must be aggressively pursued to create a long-term Outsourcing business.

Quality is not 'gold-plating' - it is central to improving productivity, reducing waste and fulfilling customer expectations. These are the drivers for growth, profitability and sustainability - not penny-pinching and cost-cutting.

IT Services companies cannot, and will not, pursue Excellence & Quality if they are not driven to it.
It is only their Clients who can hold them accountable and force a change.

Concurrently, IT has to evolve from an Industry to a Profession so that managers can realistically evaluate the performances of different practitioners. It's not hard to win new business and make good profits if your employees are 10 times more productive than your competitions.

Will IBM Survive?

Answering the poll question: Will IBM survive?

Lou Gertsner turned IBM around, starting 1993.
It took an outsider to do it - and the board knew that.

His legacy, after leaving in 2002, should've been a company with a solid future. Five years on, it appears not so - that can only be "Corporate Culture".

IBM is far too important to be let fail and broken up in a firesale.

But we have a perfect model for the future of Cringely's "lumbering giant": Unisys.

In 1986, Numbers 2&3 in the market (Burroughs & Sperry Univac) combined and produced a dud. It's still alive, but failing. Because enough people use their mainframes (2200's and A-series), they can't be allowed to die. Slowly withering on the vine seems to be fine.

Fujitsu is the perfect vacuum-cleaner to buy the hardware business in the final break-up.


IBM GSA and the other 'Tier 1' outsourcers operate from the same playbook - a version of 'bait and switch'. Also known as "The Value Prevention Society".

I've worked with and for all the major outsourcers in Australia. They all bid low to win contracts and adopt a dual strategy of "controlling costs" and price gouging for "variations".

'Controlling costs' is reducing staff, replacing competent staff with 'cheap and cheerful' newbies, not performing maintenance and avoiding capital investment.

What's wrong with a 5-10 year-old system? Nothing if you don't have to suffer the performance and other problems!

They routinely ignore contract provisions - like scheduled roll-outs of new desktops, upgrades and system performance targets.

The problems are at least three-fold:
- inequality of parties (Outsourcer vs Client)
- internal 'manager' performance has no upside, only downside
- no impartial umpire and effective 'stick' to enforce system performance targets

Every company that signs an IT Outsourcing agreement signs just one. The outsourcers has done this many, many times before.
Clients also don't factor in the increased staff and reporting costs - each side needs additional staff for 'contract management'.

The Client thinks it has stitched up an iron-clad contract and they forecast a bountiful harvest... Which doesn't happen.

Service degrades, minor works become hugely expensive, major works take forever and often don't get implemented.
The business people give-up and adapt around it.

In Australia, all the major EDS contracts let around 10 years ago are now being re-tendered - with EDS getting very little of the new work.
Are they the worst? Hard to say...

Aligning internal rewards with Client Needs
Outsourcer 'managers' can only be assessed on monetary performance. With fixed price contracts, base income is fixed.

If a manager reduces costs 5% one year, this becomes the expectation for every following year - it is not seen as a 'one-off'. Without significant staff training and capital expenditure, this quickly becomes impossible without sacrificing service quality. Commercial systems are quite reliable these days. For existing stable systems, 'Do nothing' is good for at least 3 years - then you are in deep trouble.

The only ways to increase profits are to reduce expenses or increase non-base income.

Every service request is deemed a 'change' and subject to the full, heavyweight, project evaluation methodology. No project, not even buying a simple standalone appliance, takes under 4 man-weeks ($20-50,000). For the client, this stifles change/innovation (or forces it underground) and these additional costs overshadow most systems costs.

Capital expenditures are worse. Payback has to be within 12-18 months - and it has to beat 'do nothing'.
Since the 2003 slowdown in Moores' Law for CPU speed, the problem has compounded.

Take a 5 year-old file server that is now close to saturated most of the day. It is not yet 'end of life' and maintenance costs still low.
Because file open/close, read/write performance is not specified and the system is "available" during work hours, the Client cannot complain.
The Operating System (O/S) may be old and need constant attention, updates and reboots - but they are part of the normal admin workload, so not an 'additional' cost. Salaried staff as 'professionals' must work any unpaid overtime that is demanded.

Any proposal to replace the server or upgrade it has to pass a simple, and reasonable, test:
How much extra revenue will we make? How long will the payback period be?

'Do nothing' is the benchmark - for zero capital expenditure and a few extra unpaid admin hours, a service is provided that brings in the service full revenue - and will continue to do so. That's a very tough argument to beat.

Only when the client funds the replacement, hardware maintenance costs are high enough, an O/S upgrade is required for security or compatibility or qualified admin staff move on will the system be upgraded. And then it will begin the same inevitable slide into entropy and uselessness.

Finding solutions that benefit the customer and reduce operating expenses are career suicide for outsourcing staff in a culture focussed on increasing billables.

For example: a major Australian bank replaced all the local file servers with small Network Appliance NAS's. These are the most expensive product per Gb available. The outsourcer had charged ~$2,500/month to 'administer' these systems. The bank paid for the change in under a year, increased availability and performance and solving many other issues to boot.

If the client gives all its IT staff to the outsourcer, who is going to seek out, design and implement new cost saving technology/systems?
Not the outsourcer - it's not in the contract and not in its (short term) interests.
The client has no IT staff - so it cannot and doesn't happen.

Audits and an Impartial Umpire

Who reports to the Client on the performance of their systems?
Who has the training/qualifications to check and asses the metrics and reports?
Who maintains & audits the basis of payments - the asset register?

Only the Outsourcer.

What are the downsides to the Outsourcer of a major failure in Prime Time?
A small number of 'service credits'.
Meanwhile, the Client suffers real costs and potentially large losses.

The Client wears all the business and financial risk with only minor penalties to the Outsourcer.
We are yet to see a corporate collapse due to an outsourcers IT failures - but it is only a matter of time.

There is a clear conflict of interest, or an real Agency Theory problem.
The outsourcer is Judge, Jury and Executioner...
There is no way to hold them to account or dispute their figures.

The Profession of IT

Contributors Michael Ellis, BJ, Kevin James, Richard Steven Hack,... started a thread about the 'value'/competency of individual IT practitioners.

The huge (100+:1) variability in individual competence and the inability to measure it is one of the worst problems in our industry.

IT is not a 'Profession'. It, like 'Management', fail a very simple test:

What are the personal and organisational consequences of repeating, or allowing to be repeated, a known error, fault or failure??
[Do your mistakes have clear 'consequences' professionally?']

Mostly it is "fire/blame the innocent, promote the guilty". The exact inverse of what you'd want.
People may trump technology and process, but Politics trumps everything...

And our Professional Bodies don't help.

The only real research into the causes of Project Failure are by consultancies - who are driven by the ability to sell their products, not what will benefit the Profession.

The ACM, IEEE, IFIP and friends have abrogated their responsibilities. We on the firing line, get to suffer their inaction.

Managers have to go with what they can quantify and inspect. Good managers will see through the B/S - but mostly too little, too late. Mostly, office politics, influence and self-promotion rule.

The adversarial nature of Outsourcing and the seemingly universal decline in code and service Quality stems from this failure of IT as a Profession.

Steve Jenkin 29-December-2007