Down and Out-sourced

Kind of like blogging, I never quite get around to executing various ideas for hedge funds so I’ll share one.  Big IT outsourcing deals are dead.  They just don’t pan out as advertised, end up being renegotiated and/or leave companies unable to adapt to a changing world.  The only customers with big outsourcing deals who seem to be even remotely happy are those who take solace in the fact their outsourcer had to take a big write-off on their deal.  Companies are splitting up their outsourcing into smaller pieces to get more expertise, focus and to play the vendors off against each other.  Some companies have realized elements of IT are critical to the business and are pulling them back in house.  Ultimately, people are realizing you can’t separate the business function from the technology that implements it, hence the shift to business process outsourcing.  Expect more deals that outsource say HR as opposed to IT.  The IT function goes wherever the business function goes.

 

Yet big outsourcing deals still happen.  Why?  It turns out they’re motivated by a more primal consideration – financial survival.  The investment thesis is you short any company that does a big (a billion dollars or more, but you can also look at relative size of the deal for smaller companies) outsourcing deal.  It is a great indicator of a deteriorating balance sheet.  You could have caught WorldCom, Enron, Adelphia amongst others.

 

Just look for this kind of gushing:

 

"Enron is one of the most innovative, fastest-moving companies we’ve seen in any industry," said Tom Cotney, vice president, Utility & Energy Services, IBM Global Services. "We are delighted to have the opportunity to work with Enron as it builds its information technology infrastructure for the future. IBM will deploy the people, technology, and skills Enron requires as one of America‘s leaders in the energy industry."

 

The “most innovative, fastest-moving” companies don’t elect to set their IT in concrete without a more pressing rationale.