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Five of the biggest outsourcing failures

It was inevitable. The exponential growth of information technology during the last decade has created the need to deliver IT products and services through increasingly economical means.

While most major businesses are investing more in technology internally, their customers do not expect to pay more for the benefits technology offers a corporation. The inevitable result is the tendency for companies to seek ways run a leaner operation.

To the dismay of a growing number of IT professionals, a leaner operation often means IT and software outsourcing. Also inevitable is the failure of some of those outsourcing efforts. Let us look at some notable case studies of some of the biggest IT outsourcing failures, and see what we can learn from their examples.

IBM Mega Disaster

In December 2007, Queensland awarded a contract to IBM to develop an application to administer payroll for Queensland's health department. IBM proposed to complete the project by mid 2008 for $6 million. Shortly after beginning the project, IBM realised that it faced numerous and unforeseen technical challenges and announced to Queensland that the project would cost $27 million. The project dragged on for several years and the payroll platform never functioned properly. In the interim, thousands of staff failed to receive paychecks, while others were overpaid.

By the end of the project, costs had escalated to $1.2 billion, 16,000 per cent above projected cost. Queensland banned IBM from working on other government projects and sued IBM to recover its losses. Queensland had learned that a famous-name vendor might yield infamous results.

Both IBM and Queensland ultimately agreed that there was plenty of blame to go around. A report from the Queensland Health Payroll System Commission of Inquiry indicated that IBM employees had used unethical tactics to gain favourable consideration over other contenders, and that Queensland officials had neither communicated their full expectations to IBM, nor vetted contractor's properly.

J.P. Morgan and IBM

While Queensland's project represents IBM's worst debacle as an outsource vendor, it was not the first time IBM lost a major outsourcing client. In 2004, J.P. Morgan Chase & Co. cancelled the remainder of its seven-year, $5 billion IT contract with IBM and opted to bring its own IT talent back in house. The bank made the decision to terminate the contract, initiated in 2004, following its acquisition of Bank One Corp.

J.P. Morgan stated that, with its merger with Bank One, it would have the ability to manage its IT infrastructure internally and more efficiently then through outsourcing. "We believe managing our own technology infrastructure is best for the long-term growth and success of our company," said CEO Austin Adams.

Although J.P. Morgan did not accuse IBM of failing to meet its contractual obligations, IBM lost billions of dollars, and the decision to dismantle and later reassemble its IT team cost J.P. Morgan millions.

US Navy and EDS

Sometimes, it is a total breakdown in communications that causes an outsourcing disaster. Such was the case between IT contractor Electronic Data Systems (EDS) and the US Navy.

In 2000, the Navy and Marine Corps contracted EDS to provide voice, video, network, desktops, and system training for their personnel. By 2004, EDS had written off more than $500 million in lost assets because it was unable to fulfill its obligations.

In its fervor to win the contract, EDS failed to grasp the project's full scope. Only after starting work on the project did EDS realise that the Navy and Marine Corps expected EDS to integrate or replace tens of thousands of legacy applications - it had planed on 10,000. The Navy claimed its own share of responsibility, admitting that indecision among its personnel lead to EDS receiving poor direction.

Worse, still, EDS' contract with the Navy obligated EDS to absorb the costs for hardware changes, and there were plenty. Further, EDS was contractually bound to perform unplanned customisation of legacy software prior to installing new PCs. Loose contract language had left EDS vulnerable to some costly and unforeseen obligations.

EDS closed the third quarter of 2004 with a loss of $153 million.

Virgin Airlines Grounded by IT Provider Navitaire

Sometimes, its not the problem that creates an outsourcing disaster, it's the vendor's inability to correct it.

In September 2010, Virgin's Internet booking, reservation, check-in and boarding system, and other mission-critical applications abruptly crashed - for the second time in three months. IT provider Navitaire quickly traced the cause of the latest failure to a failed disk drive. Under its contract with Virgin Air, Navitaire was obligated to resolve mission-critical system failures within a "short period of time." It took nearly 24 hours, during which time the FAA grounded all Virgin flights, leaving more than 50,000 passengers stranded and frustrated.

In hindsight, Navitaire's decision to attempt repairs on the bad unit, rather than switching in backup hardware, was not the wisest use of time and resources.

The Virgin/Navitaire crisis highlights one of the key risk factors when using a Software-as-a- Service (SaaS) vendor: being subject to issues occurring on the vendor's hardware at remote locations. With Cloud-based outsourcing, the reason for your downtime could lay halfway around the world.

Royal Bank of Scotland

If there's anything worse than leaving customers stranded at an airport, it's keeping them from having access to their money. And that is just what an outsourcing disaster at the Royal Bank of Scotland (RBS) did.

In June 2012, a failed software update left millions of bank customers unable to access their bank accounts to withdraw funds or view their balances. The bank, itself, was unable to conduct transactions for either commercial or non-commercial customers. 30,000 social welfare recipients did not receive their payments, even though the funds were moved from government accounts. Also affected were customers of British bank NatWest and Ireland's Ulster Bank.

The failure of a computer that processes overnight transfers resulted in paralysis of critical banking systems. Customers' inability to either receive money or make payments had a ripple effect on local business, creating a backlog that took several days to clear up.

While RBC did not disclose details to the public concerning the IT vendor responsible for performing the software update that initiated the shutdown, it is clear that a backup plan for such contingencies was not sufficient, or did not exist.

The Bottom Line

Despite these examples, outsourcing is not necessarily a bad idea. Sometimes farming out certain jobs makes perfect business sense. Effective communications, meticulously detailed contracts, and careful vetting of contenders will prevent most unforeseen problems.

As long as the risk factors are mitigated, whatever problems surface should not rise to the level of an outsourcing disaster.

Photo Credit: Leszek Glasner/Shutterstock