IT outsourcing could be facing some stiff competition – from its own clients. Companies such as General Electric and General Motors have indicated they are moving away from IT outsourcing and hoping to bring those IT skills in-house. The CIO of GE Capital, Jim Fowler, told Information Week magazine in August last year that he is “pushing to significantly reduce the use of IT outsourcing at the business unit, which has $514 billion in assets. The group has been hiring IT employees to drive insourcing, including at tech centers in Detroit, New Orleans, and Bangalore, India.”
Predictions of a move away from outsourcing to an in-house approach to IT are not new. In 2012, GM announced plans to “move the company’s IT budget from 90% outsourced to 90% in house” over a three to five year period, and later in the year followed through by bringing 3,000 outsourced IT employees onto the GM payroll.
A 2012 report by Deloitte noted: “Though insourcing is a small trend as compared to the global outsourcing juggernaut, given the maturity of the outsourcing industry, we are seeing more and more clients wrestling with the question of whether an outsourcing deal that isn’t meeting expectations should be re-tendered or insourced.”
Opinion on whether insourcing is, in fact, a counter trend to IT outsourcing is divided. There is a case for insourcing, but there are a number of factors that must be considered.
David Lewis, Strategic Account Director at ISG, explained that there are two types of insourcing they are seeing in the marketplace. In some cases, he said, there is a shift from significant outsourcing to significant insourcing. “In other cases, companies are simply adjusting their sourced/retained mix, which is a much more common, evolutionary and less disruptive move,” he said.
Lewis added that while cost is always a criterion, the two primary reasons ISG are seeing companies insource are:
- Companies that are regulated and feel like they need to insource to gain and demonstrate the proper controls over their environment and
- Companies that feel like they are not able to innovate quickly enough to enable the business and react quickly to changing business requirements in an outsourced model.
He said that if the latter criterion is the motivation, then likely moving some Change the Business (CTB) functions, such as Development, Transformation and Project work to an insourced model could make sense. “However, in this case, insourcing your Run the Businesses (RTB) functions, where stability and efficiency are the key drivers, may not make sense as most companies cannot invest in the processes, tools and automation at the scale a best in class service provider can,” he added.
Yes and No: No Easy Answer
So are companies like GE and GM making the right move? As with most debates around insourcing, the answer seems to depend on whom you ask.
Frank Casale, Founder and CEO of The Outsourcing Institute and the Institute for Robotic Process Automation, said: “It really depends on their objectives. If they are looking to achieve cost reduction, then no, they’re not making a sound business decision as insourcing will pretty much guarantee that their costs will increase. Plus they will need to compete for talent, in a candidate driven market. Based in these two factors alone, this doesn’t seem like a smart move.”
His concerns are echoed by Carl Mazzanti, Founder and CEO of eMazzanti Technologies, who added that the success of the outsourcing decision depends on a company’s need for IT scalability and finding the right outsourcing firms with industry-specific subject matter experts.
He said: “If the business unit is predictable like some of GE’s and if they have not had a positive experience outsourcing, then insourcing might be the right move in that part of the business. However, in the current climate of hyper-paced digital transformation it’s a risky decision.”
The “yes” camp, on the other hand, believes that GE Capital’s decision is on the money. Josh Lindenmuth, Chief Information Officer at Payce, Inc, said that GE is “absolutely” making the right decision. “Outsourced IT works really well for short-term projects and when companies cannot find sufficient local staff, but I feel like companies lose the strategic advantage that IT can provide when they outsource long-term,” he said.
Matthew Strebe, CEO of Connetic, an IT managed services provider specializing in small and medium-sized business, explained that whether or not IT insourcing or outsourcing makes sense depends mostly on the size of the business considering it.
“For large businesses whose facilities typically have 1,000 or more employees, IT Insourcing always makes sense in my opinion. The costs are 20% to 50% lower to employ staff including burden than comparable outsourcing, and significant ‘lock-in’ exists with outsourcing because changing IT providers creates enormous disruption and loss of configuration knowledge—large slices of your IT staff are all swapped out at the same time,” he said.
Strebe added that IT outsourcers cannot provide business creative or generative value by sitting at the table with C-level staff to envision how the business can leverage IT to gain competitive advantage. “If the outsourcing is offshore, there is very little effective oversight that can be maintained, leading to poor quality and excessive billing,” he said.
“Many businesspeople are not adept with technology and would like to believe that IT is merely utility, and they’re willing to pay a premium to treat it that way. But ‘ignoring IT’ really is the only advantage to outsourcing for businesses of this size, which is why my company does not target large businesses.”
Strebe emphasized, though, that the situation for medium-sized businesses with between 100 and 1,000 employees is somewhat different. “Insourcing at this size may or may not make sense depending on the line of business and the geographic distribution of the company,” he said. Businesses in this size range would have between two and 30 IT employees depending on their need, which may or may not be enough to leverage generative IT representation in the executive forum.
“Without a large enough IT staff to guarantee complete skill coverage, employees might have significant gaps that outsourced firms could provide,” he said. “Companies of this size lack expertise in hiring IT staff, and generally have trouble discriminating good IT candidates from poor candidates, and with such a small staff, bad hires can be disastrous.”
Insourcing Can Be a Difficult Path
Others in industry believe that it depends on what GE and GM are trying to achieve. Mike Connolly, Vice President Americas, Enterprise Services at Dimension Data, explained that outsourcing on the scale of a GM or GE could be considered a full outsource, so choosing to move away from that model could be a sound move if the company can match the economies of scale of the current outsource provider.
“There have been several cycles of insource/outsource over the last 20 years of IT, which has shown that a balance of insource and outsource based on the value structure of the services provided would yield a more cost effective approach,” he said.
Lewis said: “The right answer depends on the company, the work and the current situation and target objectives – one must find an appropriate balance between work retained by a company and work they outsource. The balance is based on many factors (company type & size, strategic considerations, competencies, costs/value benefit analysis, services required & related quantities, regulatory requirements, etc.).”
Despite contrasting views, most of those Nearshore Americas spoke to agree that GE and other companies that choose to move from an outsourced to an insourced IT model will face significant challenges.
Lewis explained that the transition impact from an outsourced model is significant. “Unless a company already has a retained operation that can be scaled up, a company that insources must build facilities, organization, processes, tools, etc., which takes some time to build and even longer to reach a reasonable stage of maturity – the organizational change is significant to hire, train and assimilate a significant piece of your operation in a short period of time,” he said, adding that a period of reduced capability can be expected before the anticipated benefits are realized.
Lewis went on to say that companies often underestimate the change involved in an insourcing project from a financial, operational and organizational perspective.
“There are other unexpected impacts – for example companies often have lost touch with how their business operations function and are dependent upon service providers for knowledge, document and license transfers which can be less successful than desired resulting in loss function and/or performance,” he said.
Lewis added that it is not uncommon for companies to get into disputes with their service provider over ownership and use of intellectual property and work product developed and used during a relationship and this can have significant financial and business impact. “One should plan for a number of contingencies when executing an insource transition,” he said.
Lindenmuth said that moving dozens, or even hundreds, of positions from offshore to in-house is extremely difficult to do quickly. “In some cases, many of the business functions may have moved offshore as well (particularly functions like HR), so moving them back in house may require significant training,” he said.
For Mazzanti, the key challenges are acquiring the right skills, adapting or building the space, integrating new-hires with existing teams. “If not carefully managed this can be a huge drag on projects,” he said. “GE might consider that it makes more sense to create new teams for new projects. And where appropriate to team up these new teams with some outsourced component for key skills or oversight. In this way as they insource there is still access to skills that can continue to accelerate the firm’s growth and knowledge access.”
Computer scientist and software engineer, Trevor Ewen, added: “After several years of outsourcing IT work, it can be very difficult to transition back to an insourced model. Many engineers and support staff often feel like they were handed an inferior external product. They will typically respond by recommending dramatic solutions like ‘Let’s scrap it all and start over!’ The problem with this approach is that it ignores years of experience specific business cases built into existing systems and infrastructure.”
Ewen explained that the best motivation comes in the form of shared risk and reward for project deadlines and stability. “Make sure that IT employees feel valued and understand they are contributing to a company’s product line, not their own basement of technical imagination,” he said.
U.S. IT Talent Shortage Is the Biggest Challenge
The most significant perceived challenge, though, is the availability of qualified IT talent in the U.S. Casale said: “We are at a point in this industry where we need to ask the tough questions – can the US deliver the needed IT workers – and can it do so at the right price? While it might be possible, the climate today is still very tough. IT talent is at a premium.”
He explained that while there is concern in other areas of the economy of workers being displaced, in specialized areas of IT there is the opposite challenge: jobs looking for people.
“Companies in the US are having trouble finding the talent it needs in areas such as mobility, big data, analytics and automation – it’s a job seeker’s market,” Casale said. “If someone decide not to outsource that’s fine, but the problem they will have is trying to find the talent – and all indicators show that this problem is only going to get worse as we look at the next three to five years.”
Mazzanti said that there are a number of outsourcing firms with some impressive industry-specific skillsets in insurance, banking, retail and financial services for example. “So I know there is talent in the United States. Should the staff of these outsourcing firms make the move to insourcing, this will work but we might be on the cusp of a growth in IT jobs growth trend. Are there enough of those to go around? Only time will tell,” he said.
Lewis agrees that quantities of skilled resources are a challenge, as “the US certainly does not have the magnitude of resources in comparison to India, for example. However we do see companies building operational centers around key technology and academic centers as well as low cost locations to have a ready source of skilled and reasonably priced resources.”
He added: “Unfortunately, while these resources are very familiar with emerging technology and tools, they do not always have the experience in working in the vast amount of legacy operations that remain in any corporate environment or the industry and process specific domain knowledge that is required.”
A Mixed Model Seems Best
The answer then seems to be a hybrid model. “Smart companies go for an optimal mix of onshore/offshore and nearshore outsourcing that is unique to them,” said Casale.
Lindenmuth, who advocates for an insourced approach, admits that companies cannot insource everything. “By doing so, they remove a lot of the flexibility that outsource provides. Having a large labor pool to pull from for short-term projects is extremely beneficial in delivering early phases of projects quickly,” he said. “Companies should focus on a blend. Outsource lower priority projects, early phases of projects that have clearly defined requirements, or non-critical business functions.”
So where does that leave nearshore IT providers? Casale advised: “Nearshore players need to take a good look at where they can succeed – they need to specialize; and they need to place their focus on a small group of verticals as well as specific solutions within those verticals. In this case, less is more – the generalists will be gone in the next few years.”
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