The next year will bring many changes for the hundreds of employees directly impacted by State Farm’s IT outsourcing.
Some retired. A small number of people were let go. And the many who were offered and accepted jobs with the outside firm, HCLTech, are adjusting this spring to their new company, some with anxiety about their new duties, changes to their benefits, and their professional future.
“A lot of the work will change in nature. Even if you’re retained, the nature of this work will likely to be different with a vendor,” said Natalia Levina, a professor at New York University’s Stern School of Business who has studied outsourcing.
WGLT spoke with two experts on IT outsourcing to better understand why companies do this and what to be watching for in the coming year during the transition. The experts say that such outsourcing is very common – despite a few outliers that have reversed course and “insourced” certain IT functions – and that saving money is only part of their complex reasoning for doing so.
“What happens with IT operations is very complex. The demands of technology change at a very (rapid) pace. And there’s often not enough qualified people,” Levina said. “The reason that companies actually do outsource is that they know they’re not going to do as good of a job at managing those functions as specialized providers might.”
The transition begins
State Farm hired HCLTech to run its IT Help Desk and infrastructure services work, managing hardware, infrastructure software, and network connections.
“Our decision to work alongside HCLTech allows State Farm to focus on critical technology priorities, addresses recruiting and retention challenges, and delivers quick, efficient, and consistent tech support to customers, agents, and employees,” a spokesperson said.
State Farm said it’s “organized an in-house team to manage the relationship and work with HCLTech, and the majority of employees who were doing this work for State Farm joined HCLTech in similar roles supporting State Farm.” State Farm has declined to reveal how many employees transitioned to HCLTech, though it appears to be in the hundreds.
“We feel our relationship with HCLTech is progressing nicely,” a State Farm spokesperson said Friday.
“State Farm is a key customer for HCLTech, and we have had a great start to our relationship,” an HCLTech spokesperson told WGLT. “We have made significant progress in the last few months and have welcomed several colleagues from State Farm to HCLTech.”
Why it saves money
Cost-savings are generally cited as the No. 1 benefit of outsourcing. When asked in January whether outsourcing like this typically saves companies money, HCLTech said yes.
“People erroneously assume (those savings) are going to come from some sort of changes like hiring people for less money or cutting or something like that,” Levina said.
In reality, she said, those savings tend to come from hiring a vendor with legitimate know-how – and then letting them use it to improve the quality of your IT services.
“For them to be able to do that, at the very least they need to have some control over your operations, which means giving up some of the control you’re used to yourself. Before (outsourcing), you could say, ‘I need this done and customize everything right away.’ If you keep doing that once you engaged with a vendor, you’re not going to see those cost-savings. They won’t be able to use their know-how to manage your operations,” she said.
Outsourcing providers like HCLTech are doing this work for hundreds of clients, said Vijay Gurbaxani, an expert on outsourcing and professor at the University of California at Irvine.
“Your rate of learning and average productivity is typically much higher than your clients,” said Gurbaxani.
An outside firm can also impose discipline on the amount of work that gets done, he said.
“When you work for a company, and you go to Joe down in the IT department and say, ‘I need you to do this for me,’ and Joe’s known you for 10 years and in this case he’s likely to help you,” Gurbaxani said. “But when you have a more formal relationship with an outsourcing provider, you typically build in rules about the kind of work you can take on. There’s an approval process that’s a little more formal. You’re a little more hesitant to make an ask because you’re not making an ask of an internal organization.”
HCLTech will run State Farm’s Help Desk, an IT function that’s a problem for many large employers, Levina said. That’s because “you are almost never satisfied with your IT help desk,” and filling help desk jobs is not easy because “it’s not the most interesting job” for IT workers in high demand.
“You end up with this double problem of nobody really wants to do this job or stay there, and customers are always going to want more, faster, better. So it’s a very difficult area to manage,” Levina said.
The era of IT outsourcing
The era of IT outsourcing began in 1989, when Kodak hired IBM and two other companies to run its computer work stations and data centers.
“Those early deals were often not successful, because nobody knew what they were doing,” Levina said. “Over almost 35 years of companies doing this, there have been some learnings (and) companies are doing it better and smarter than those first movers were.”
Today, it’s an “extremely common” practice for large companies, she said.
“It’s been used very often. It’s been increasing in volume. It’s sort of a default way of managing IT operations for many companies,” she said. “That’s not to say it’s always successful. And we do have some examples of IT operations either coming back inside a firm, or companies saying this isn’t the right thing for us and at the end of the day they are still managing IT operations themselves.”
JPMorgan Chase famously canceled its $5 billion outsourcing contract with IBM in 2014 after a merger increased its in-house IT capabilities. General Electric (GE) launched an insourcing initiative in 2017 hoping it would allow the company respond to technology demands more quickly. The retailer Target started to insource after a new chief information officer came on board in 2015.
“There are much fewer of these stories than those big outsourcing deal announcements,” Levina said.
Risks and rewards
Whether State Farm’s outsourcing move works well in the long term remains to be seen. This is not the first shakeup of State Farm’s IT workforce.
In the short-term, State Farm faces the difficult challenge of managing and communicating the HCLTech transition to employees and related morale issues, said Levina.
“Explaining why to employees is one of the big issues. Why are we doing it? The answer of cost-savings is usually not a good one,” Levina said. “State Farm is a large firm. You have a significant scale and scope internally. … There’s this further justification that I think the management and leadership need to do as to why we’re doing it – what is it that we tried ourselves that we couldn’t achieve that this vendor will help us achieve?”
An HCLTech spokesperson said “successfully integrating our new State Farm colleagues into HCLTech” is one of its three main priorities.
“There are several measures that we have taken, and we continue to take, in order to make sure this transition and subsequent integration are as seamless as possible for transferred State Farm colleagues, including a high-touch leadership connect, including several employee Town Halls, Ask Me Anything (AMA) sessions, etc. (and) a dedicated team responsible for guiding the transferred colleagues.”
HCLTech is a $12 billion global tech company based in India that began as a “garage startup” in 1976. It’s grown 20-fold over the past two decades and, in the early 2000s, became a pioneer in remote infrastructure management. Only 11% of its 220,000 employees work in the U.S. prior to the State Farm deal. (HCLTech said it plans to establish a physical location in Bloomington over the next year.)
That could lead to some cultural friction, and not just meeting requests at odd hours because of time-zone differences.
“The cultural differences are there. You have to acknowledge them. They’re significant, especially when it comes to communication. People in different parts of the world communicate differently. They treat authority differently,” Levina said. “However, in my work, I find that a willingness and ability to overcome is typically there, when work needs to be done. Over time, if people act professionally and with respect, they end up overcoming those differences.”
HCLTech’s roots as an Indian company may also heighten employee anxiety, she said.
“That tends to be a scary thing for employees. They’re going to be facing a big cost differential for their salaries vs. salaries of people in India,” she said. “Potentially, even though they offered these retention bonuses, employees in the U.S. worry that they won’t be needed after the transition.”
In response to a WGLT question about how insurance and retirement benefits would be impacted for employees who transitioned, an HCLTech spokesperson said “specific details regarding compensation and benefits are proprietary.”
HCLTech has 550 customers, including 50% of the Fortune 500 companies. That “roster of prestigious clients” opens up opportunities for former State Farm employees looking for career advancement, said Srinivasan Seshadri, HCLTech’s corporate vice president and global head of financial services.
“There’s are opportunities (not otherwise) afforded them within the confines of one organization, that could suddenly be available to a lot more people,” Seshadri said.
Another possible career benefit is that in-house IT workers are valued but generally viewed as a “cost,” meaning they’re not revenue-producing, said Gurbaxani.
“When you work for a services provider, that same individual becomes a revenue-generator, because that person is being charged out to the client. And when you’re seen as a revenue-generator, your productivity, if you do well and you’re doing well for your company, you can rise up the ranks in a very different way because it’s like, ‘Hey, this person can make us a lot of money.’ We found that people, once they got used to the idea of working for a different company, if you were good at what you did, they would actually be more highly valued and could get a higher income,” he said.
