The "outsource" strategy; Kodak gambles that IS is better left to others - Field Report

Software Magazine, Oct, 1989 by Steve Polilli

The "Outsource" Strategy

The contemplated movement of all or part of the applications development work of Eastman Kodak Co. to an independent provider would, according to observers, push the "outsourcing" of corporate data processing to a new extreme.

Kodak, under pressure to cut costs, recently farmed out personal computer procurement and support to Businessland Inc., and contracted with IBM for construction and management of a new centralized Rochester data center.

The new data center site will consolidate the operations of four existing Kodak data centers.

Arthur Andersen & Co., Chicago, and Computer Task Group, Buffalo, N.Y., are two of the candidates to take over the Rochester, N.Y.-based photography giant's programming activities. Kodak would not disclose the other contenders.

Details of the negotiations have been kept secret, but company sources indicated that a decision may be made this fall. Katherine Hudson, vice president and corporate information systems director, has led Kodak's drive to move data processing outside.

As the 18th largest U.S. corporation with annual revenue of $17 billion, Kodak is carrying about $10 billion in debt related to the 1988 acquisition of Sterling Drug. The company has taken a hard look at information services and decided that it could save between 40% and 50% of its computer expenditures through the outsourcing deals, Hudson said.

"for many smaller corporations, such an information systems move would not be considered radical. Among the larger Fortune 100 companies, the approach we are taking does tent to be a dramatic change from the norm," acknowledged Hudson.

While the degree of outsourcing might be considered extreme, Hudson said there was no difficulty in persuading senior management to go along with the plan as a cost-cutting measure.

"Our outsourcing deals so far have been supported by an excellent business case for Kodak," Hudson said. "Our primary interest in everything that we've done has been to enhance shareholder values."

Hudson, who started with Kodak as a system analyst in 1970, gained responsibility for about 2,000 staffers when she was named to head the information systems group 18 months ago. Now, the number of IS employees has been whittled down to about 1,500. Some of those workers have taken jobs in user departments at Kodak; others have been hired by IBM and Businessland to work on the Kodak projects.

The number of information systems employees at Kodak is expected to dwindle further after a vendor is selected for the applications development outsourcing project. During the early stages of the data center management negotiations with IBM, Kodak said it wanted to use the best technology, regardless of the vendor.

A committtee, comprising outside consultants and Kodak and IBM representatives, was formed to oversee the selection of technology used in the outside data center, Hudson said. Other Kodak groups were established to manage the transition.

"We have operated by forming action teams which have included membership from throughout the corporation," Hudson said.

"In addition, we formed a 15-member information systems executive council which has senior membership from the major Kodak operating units and the corporate information systems group," she said.

The executive council hammered out a vision for information technology for Eastman Kodak in the year 2000. "Now we're working on all the little steps it takes to get there," she said.

IBM MAINFRAMES TO FLOURISH

Some information systems executives who advocate outsourcing also support continuing an internal application development operation because they believe it gives their companies a strategic advantage.

Hudson, on the other hand, said off-loading some of the application development functions allows the company to focus more on business problems.

Hudson notes that the four Kodak data centers are currently IBM mainframe-oriented and that she expects those environments will continue to dominate.

However, she adds that the technology mix on the desktop will probably become more IBM-oriented in the future.

"On the PC side, we would like to become more monolithic because we have had a proliferation of hardware and software that has been difficult and costly to support," Hudson said.