Coke ovens over computers.

• Author: Bargeron, Walter N.
• Position: Bethlehem Steel Corp.'s outsourcing of its information management function - Information Management

How do you pick the perfect outsourcer to take over your MIS and let you concentrate on your strengths? Step by step, Bethlehem Steel guides you through the painstaking evaluation process that led to its choice.

At Bethlehem Steel, it's painful to tear away money slated for rebuilding a coke oven to buy more computers. The steel industry is a very competitive, very capital-intensive business, and a couple of years ago we were beginning to realize that we needed to focus on what gives our company its competitive edge -- our expertise in steel-making.

So, in late 1991, I met with Bethlehem Steel's senior vice president of operations (he's now our president and COO) to discuss a big concern of ours: the company's inability to leverage information technology (IT). We knew that many companies, especially manufacturers, find keeping up with technology very difficult, and we were among them. But we also knew that that's how a firm makes its technology investment cost effective. You simply can't install costly information systems that aren't contributing to your business. We decided that outsourcing our management information systems (MIS) function may be the answer for us.

THE STARTING GATE

But first we needed to educate ourselves about the capabilities of an outsourcing vendor. To do this, in December of 1991 our chief counsel (and ultimately our new CEO) arranged for a confidential meeting between a leading outsourcing firm and me. We realized that, at this stage, even the suggestion of outsourcing could have created serious employee morale problems within the lower levels of the firm, so we didn't openly pursue the project.

I subsequently informed the COO of what I had learned about the depth and scope of these services. He in turn discussed the opportunity with our CEO. (The CEO at the time has since retired.) Since the CEO was in favor of our continuing to explore the prospect of outsourcing, following that meeting the senior vice president of operations and I revisited the outsourcer for more education.

Finally, in March of 1992, having gathered sufficient information about the outsourcing business, we were ready to address the executive staff at Bethlehem Steel. Our proposal to the executives was straightforward: Based upon our understanding of the capabilities of outsourcing vendors, Bethlehem Steel should very seriously consider entering into a partnership with such a vendor whose core competency is IT.

We anticipated the primary question Bethlehem Steel executives would ask: Why should we outsource now? We were prepared to answer with four major reasons: First, we had outdated hardware. It wasn't junk, but it was old. We were two generations behind in a rapidly developing technological environment. Second, our software systems also were outdated, some developed as early as the 1970s. Third, technology is costly. We knew we could spend a lot of money on IT without having much to show for it. Fourth -- and our driving concern -- today's technology is so dynamic that we, as a steel company, can't hire and retain enough smart people to keep up with the changes, even to know what's available from month to month. We were totally at the mercy of our vendors to tell us what to do, and we didn't like being in that position.

From this list of problems we faced with our MIS function, we developed a list of objectives to guide us as we evaluated outsourcing candidates. Here's what we wanted:

* Access to all technologies -- With an outsourcer, we would be able to tap into any technology the vendor offers, no longer being limited to what Bethlehem Steel had in-house.

* Access to critical skills -- We'd also be able to make use of the outsourcer's skills bank, since a vendor typically employs thousands of IT experts.

* Capital avoidance -- Like many companies, we'd rather use our capital to improve areas other than IT. When you're in the steel business, spending money on rebuilding a coke oven always feels better than spending money on a computer system.

* Reduced costs -- We wanted to save money by no longer purchasing and maintaining hardware and software -- and no longer employing a staff of technology professionals, which typically makes up the biggest part of a company's MIS budget.

* Reduced training expenses -- The fewer IT responsibilities we have, the less training we'll need to provide to stay on the cutting edge.

* The opportunity to manage our business, not technology.

* Flexibility and incrementalism -- Although we had some flexibility in application development through the use of contractors, we weren't totally satisfied with the arrangements.

More important, we frequently faced situations in which a small, incremental requirement in data center service (for example, something involving the central processing unit or direct access storage device) would trigger a substantial capital requirement for something like a completely new computer or a controller.

* Predictable costs -- We wanted to be able to more easily project our IT expenses...