Rehauling Citigroup's IT

Looks like I'll have to deliver on my promise of analyzing the financial value of outsourcing sooner than I expected.

Citigroup announced Wednesday its plans to create a more streamlined organization, reduce growth in expenses and drive future expansion as a result of a structural expense review conducted over the past three months as well as a previously announced IT optimization program in the company. The company will, it said:

Continue to rationalize operational spending on technology. Simplification and standardization of Citi's information technology platform will be critical to increase efficiency and drive lower costs as well as decrease time to market. Examples of this are: consolidation of data centers; improved capacity utilization of technical assets and optimizing global voice and data networks; standardizing how the company develops, deploys and runs applications; and maximizing value by limiting the number of software vendors to operate at scale.

Such rationalization is part of the company's campaign to cut $2.6 billion in expenses by 2008. Also included is the plan to cut 17,000 jobs - roughly 5% of its total employee base - and move an additional 9,500 positions to low-cost locations. Many of the 9,500 Citigroup jobs will be tech roles moving to India - where the company already maintains 19,000 workers who handle everything from call center support to number crunching for investment research.

Citigroup's outsourcing experience demonstrates that it's not merely outsourcing that creates value but rather, smart outsourcing. As shown in the stock chart, the company has consistently failed to meet the performance standards of competitors in its industry, including JP Morgan Chase, Bank of America or Merrill Lynch. And where it differs from its competitors may not be in the extent of outsourcing initiatives but in managing these initiatives and aligning them with an overall business vision. Citigroup lacks a clear long-term vision, aspiring to be the number one retail bank, the number one investment bank and the number one global bank. It's also plagued by operational inefficiencies. For example, the company's chief operating officer Bob Druskin has, on earlier occasion, mentioned that each of the different business segments in the company - consumer business, mortgages, car loans, etc. - has its own middle and back offices.

Outsourcing inefficient component business processes might reduce the cost of these inefficiencies but it does not make them go away.

So, before it externalizes IT functions to low cost service providers to rationalize IT spend, Citigroup might do well to address structural and operational inefficiencies and define the business strategy that dictates such externalization. Else, as this NPR broadcast voices, the company would have gone too fast too far without control.

I am shorting this one.