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Costco shops for right outsourcing contract

Linda Tucci, Senior News Writer
When Don Burdick took over as senior vice president of information systems for Costco Wholesale Corp. in 2000, his department had 60 programmer spots to fill. Employees were struggling to keep up with routine work. Morale was low. "Every day you came in and were fixing stuff that was broken," said Burdick, estimating that less than 30% of the work focused on projects designed to add value to the company.

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That put IT badly out of sync with a company that has become the nation's largest wholesale club operator with 452 stores. Over the past five years alone, Costco has grown from $35 billion to $52 billion in sales. The fast-track discounter keeps its mantra simple. Give customers a carefully edited selection of high-quality goods at the lowest possible prices. Top-line driven, Costco operates on skinny margins and needs to keep expenses low, said Burdick, who presented his IT story at the recent Gartner Outsourcing Summit.

"The fact we walk on a concrete floor and sell goods from high-rack steel is not a gimmick, said Burdick, referring to the practical, no-frills shopping experience. "It was important that IT reflect the business."

Today, Burdick still has programmer spots to fill, but the IT outfit is humming along, rather than groaning.

Over the past five years, Burdick has developed a "hybrid model" partnership with US Technology Resources LLC, a Aliso Viejo, Calif.-based company that operates a large software company in Kerala, India. Costco employs about 100 people through UST, about 25 of them onshore at Costco headquarters in Issaquah, Wash., and 75 offshore.

Execution has been excellent, Burdick said. Of the 20,000 hours logged to date on the company's large joint projects, the difference between US Technology's estimated time and actual time is less than 400 hours.

"Best of all? The IT department really has done things they have talked about for at least five years before I got there and would still be talking about today," Burdick said.

The upside was not always so obvious.

For one, Burdick reminds people that Costco doesn't consider itself in the outsourcing business. "We don't outsource," Burdick said. "If you've shopped with us or been in our warehouses you know our own employees do everything, including cleaning our own restrooms."

Contracting with US Technology was pitched as a way to improve the quality of life for IT and make IT more valuable to Costco. "Our decision wasn't to stop hiring and outsource. It was to keep hiring and partner," Burdick said.

Our decision wasn't to stop hiring and outsource. It was to keep hiring and partner.
Don Burdick
senior vice president of information systemsCostco Wholesale Corp.
Faced with his share of skeptics, Burdick took several steps he believes were critical to making the partnership with US Technology a success. He made a list of projects that were not getting done, but he did not require any of his departments to outsource anything.

"I said, 'You can use US Technology, or hire more people. Do what you want. Here is the budget,'" Burdick said. Initially, acceptance of US Technology was very uneven. "Some teams figured it out really early and others did not. There are now UST people in every single department," he said.

The onshore ratio was initially 1:2 -- one Indian manager on Costco premises for every two employees in India. That changed to 1:3 and eventually Burdick hopes for a ratio of 1:5.

Over the years, the pool of Costco expertise in India has been growing, with more and more of the Indian workforce learning about Costco projects firsthand and bringing that knowledge home.

"Work that could never have been done in India, all of a sudden is being done in India. Why? Because they know us, they understand our system, they have worked side by side with our people and they have been oriented just like our own employees," Burdick explained.

The company has adapted programs used at Costco University for its Indian workforce, so they understand not just the IT but the warehouse club business and its culture. "The team that works for us refers to themselves as the 'Dream Team,' because they really want to work on the Costco account," Burdick said.

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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