When International Steel Group Inc. (ISG) was launched in April 2002, outsourcing was at the top of its agenda.
ISG was formed after acquiring the assets of another steel manufacturer that had gone bankrupt. Those assets included a large mainframe. The company immediately hired Hudson Global Services, a large consulting firm, to design, plan and implement its enterprise infrastructure and application architecture.
Hudson Global, part of the Hudson Highland Group, took over ownership of ISG's information technology assets. The mainframe was replaced with a client-server environment, with special software used to offload critical IT functions. Hudson also mapped out ISG's networking and e-mail systems, and it designed an enterprise resource planning system used on the shop floor.
ISG is now a Unix shop, running a Hewlett-Packard 7410 server at its headquarters in central Ohio. Powering the environment is a special software application, known as Axiom, which is designed for use by the steel industry. The company's desktops, which number in the hundreds, run a standardized stamp of Windows 2000 software, with a migration to Windows Server 2003 in the works. Hudson Global has dedicated 17 IT professionals to getting ISG's systems integrated and providing technical support for its production environment.
Although most startups don't immediately ink outsourcing deals, ISG's arrangement made sense from a management perspective, says Dennis Stefani, director of IT. The company wanted to focus solely on what it does best: running steel manufacturing facilities. ISG operates 11 such plants in the Midwest and eastern U.S., including a half-dozen that were recently added through a series of acquisitions. The 13,000-employee firm serves large manufacturing customers, ranging from appliance makers to automotive companies.
Outsourcing usually involves farming out nonessential duties to companies that specialize in those areas. Although outsourcing is often associated with lowering costs, Stefani says that was not a prime consideration for ISG. "I don't think you [outsource] to save money. It's more about being able to bring in skilled resources that it would otherwise take a long time to get myself," he says.
This was especially true in startup mode, he says: "I would have had to immediately run out and find people" skilled in IT.
Companies have been turning over certain aspects of their businesses to specialists for years. Law firms, advertising agencies and other professional services generally fall into the "outsourcing" rubric. But analysts note that the concept has widened in scope, prompted mostly by a growing emphasis on productivity-driven tasks.
"The new management mantra is that companies should be heavily investing only in their core competencies. If something is not strategic, there's no reason to invest in it. But you may still need it to run your business. One alternative is to outsource it," says Craig Symons, a research analyst with Giga Information Group, a subsidiary of Forrester Research.
As the economy begins to percolate, more companies will turn to outsourcing. So says Jane Linder, a research fellow with the Accenture Institute for Strategic Change in Cambridge, Mass. "As the economy continues to turn upward, [companies] will start to shift their focus from 'Give me more dollars' to 'Give me things like productivity or efficiency,'" Linder says.
She says there are usually two main reasons why companies outsource. "One reason is that the function may not be that important to the business. The other reason is that it's really important, but the company's not very good at it," Linder says.
This can mean turning over functions like human resources or even management of factories, she says. In fact, Accenture's research suggests that companies are doing far more than turning over selected functions to outside providers. In a recent white paper, Accenture examined the changing trends in what has become known as business process outsourcing (BPO) –- a phrase that describes outsourcing as a partnership between companies, rather than a mere contract expense.
While some companies are content to cut costs, other firms "are using it to drive consistent management practices through global operations, to start up new operations quickly, to tap new sources of revenue, and to catalyze organizational change," according to Accenture researchers.
It's not just startups like ISG that are embracing this change, either. Proctor & Gamble, the consumer products giant based in Cincinnati, this summer announced a $400 million, 10-year deal with IBM's global human resources arm. Aside from taking over HR management for Proctor & Gamble's work force of 98,000, IBM is providing application development, implementation and management of HR systems.
Choosing to outsource is generally not a snap decision. ISG's example aside, most companies choose an outsourcing strategy over time. Usually it's done to relieve themselves of burdensome tasks that provide little or no bottom-line value (such as payroll), but which still need to be managed. "You'll want to outsource all the mundane stuff, anything that's not strategic," Symons says.
Linder cautions companies to be diligent in their approach. "Evaluate what you have to do, explore what [kinds of services] are on the market, and rigorously examine each vendor's capabilities," she says.
The market for BPO services will grow to nearly $150 billion by 2008, according to Forrester Research. The Cambridge, Mass.-based company says that one problem for companies exploring outsourcing will be screening out vendor hype and determining actual capabilities.
