How not to outsource IT

Nic Harvard, in a message on ITtoolbox, called my attention to two articles giving diametrically opposing views regarding the IT outsourcing initiative at Sainsbury, a UK supermarket group.

First, this long breathless piece in Supply Chain Management Review, dated May 7, 2004, about Sainsbury's near completion of its $1.8 billion five year effort to transform its supply chain under leadership of its new CEO, Sir Peter Davis.

Realizing that many of the business initiatives he wanted to initiate were hampered by Sainsbury's IT systems, Davis authorized an end-to-end overhaul that led to outsourcing of the entire IT function to Accenture. The primary goals: halve IT operating costs and introduce powerful new applications that would ease introduction of crucial new business initiatives, such as loyalty programs, while producing accurate and timely business intelligence for senior management. "Sainsbury's is a business undergoing transformation," says supply chain development director Andy Banks. [emphasis mine]

Then read this article from The Register, just five months later.

Sainsbury's, the UK supermarket group, is blaming Accenture for the disastrous state of its new logistics system. It is recruiting 3,000 shelf stackers to fix the damage manually.

The new system is unable to track stock properly and Sainsbury's is taking a £550m charge to its profits. Writing off IT assets which are now useless will cost the supermarket £140m, writing off the cost off automated equipment in its distribution centres will add another £120m. The failed systems have also cost Sainsbury's £30m in stock lost or damaged by the new system.

The four-year "Business Transformation Programme" has cost £3bn was the pet project of previous chief executive Sir Peter Davis.

What went wrong? Although the outsourcing firm has to share responsibility, the ultimate blame should be placed on Sainsbury itself for believing that it could solve its IT problems by outsourcing them.

Under new CEO Justin King, Sainsbury is now rebuilding its internal IT staff and systems. It's not giving up on outsourcing, but it is renegotiating the contract to give its own personnel more input into system selection and implementation.

So far, the firm's move to "backsource" some IT functions appears to be successful. The most recent financial report from Sainsbury indicates that sales have grown for two successive quarters due to price-cutting and better availability of products.

IT outsourcing is no doubt the right strategy for many companies, but generally I see more success when companies selectively outsource specific IT functions rather than turning over the entire IS organization, top to bottom, to an outside service provider.

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