How to Effectively Manage the Shifting Tides of Insourcing and Outsourcing

If you’re concerned about whether to focus on insourcing or outsourcing, I have some advice for you: don’t get too hung up it!

Regardless of what you choose, it need not be a permanent decision. In fact, your choice and direction may continuously change over time as your business strategy evolves, regardless of whether the enterprise or function is growing, pivoting, or throttling back.

Internal vs. External

There are many important factors that make it good to execute certain tasks internally: secret sauce, intellectual property, or just a gut feeling are all valid reasons.

Keeping those tasks internal will more likely align with keeping things the way they are, because generally there is very little you need to change or consider in order to maintain the status-quo.

Conversely, there are many great reasons to engage with resources that are external to your organization.

Once you have determined which tasks are better executed externally (the ‘what’), you are then faced with the decisions on what models to be used (the ‘how’) and where the work should be done (the ‘where’).

These decisions, too, will change over time, as other factors beyond your control may dictate. Politics, for example, seem to be playing a significant role in these choices these days. Will offshore continue to be a viable option for getting requirements fulfilled, or will politics change the luster of such models that we have enjoyed for so many years? Perhaps new countries will emerge as viable alternatives or maybe doing work domestically will prevail.

Shifting Strategies

Let’s reflect on some of the decisions GE has made over time in the outsourcing arena.

Starting in the mid 90’s there was an aggressive push to move upwards of 70% of the IT roles to externally resourced models. This was a bold move at the time and although most aligned to it, there was a lot of doubt as to whether it was the best approach, mainly because it impacted many internal roles and the lack of experience caused conservative alignment.

It was thought that this 70% designation was made up of IT work that did not involve any secret sauce or intellectual property, which led to the decision to go external.

On one hand, it was considered commodity work, which was thought best done by flexible and available resources in locations where it could be completed more efficiently and cost effectively.

On the other hand, some of the external resourcing was done where internal employees were simply not prepared or experienced in the technologies that the enterprise was moving toward.

The maturity of external resourcing models, alongside a focus on tasks over bodies, allowed GE to utilize these external resourcing models while maintaining the appropriate amount of intellectual property and secret sauce delineation within their walls.

Consider GE today, however. The company is changing its models due to goal to be a digital company while maintaining their manufacturing heritage. This desire is changing the amount of intellectual property they have throughout the company, which in turn is changing their insourcing and outsourcing ratios. The days of the 70% ratio have been replaced with much lower percentages.

The point is that this large company recognizes that the change in its business plan, products, and position in the market are, in turn, changing its insourcing and outsourcing strategies. Other companies will – or at least should – do the same as they evolve.

Factors That Change The Internal/external Sourcing Strategy

Even if a company’s product are not changing, there could be factors that will change its external resourcing strategies.

If President Trump succeeds in changing the cost of landed resources in the US, companies like TCS, Infosys, Wipro, and the like, will be compelled to make appropriate adjustments to how they serve their customers.

Some research companies have suggested that the Big 5 consulting companies are better positioned to absorb these changes since they have a higher abundance of project and technical leaders as part of their US-based sourcing strategies.

While that may be true, I think other forward-thinking consulting companies will make the proper adjustments to ensure their market share is not impacted by politics and regulatory changes. Things have been changing one way or another for decades in this industry. As those changes are implemented, so too will consulting companies react and adjust.

H-1B visas have been capped at various levels over time, sometimes increasing and then decreasing year after year. Minimum salaries are potentially changing with current regulations, while L1 visa rules have also changed over time. Skill availability and client alignment have always been the goal of consulting companies to stay one step ahead of their demanding clients.

How to React when Change is Needed

I can see companies like TCS, Wipro, Infosys, and others making changes to their proposals to incorporate more in-country resources, utilizing local hiring or modified onshore and offshore models with different ratios. Rural outsourcing could really take off as a solid, albeit moderately more expensive, alternative to offshore. I can see offsite centers springing up domestically in rural centers or perhaps co-located with specific client alignment.

The ‘what’ to outsource decision clearly belongs to the client as they decide what work needs to get done to satisfy the need and speed of business. The ‘where’ and the ‘how’ are often viewed by clients as something they need to figure out.

In reality, consulting vendors are really the experts in those two areas and letting them make, or at least influence, those decisions will result in better models, cheaper contracts, and higher quality results. As such, I expect vendors to spend the appropriate time monitoring political changes and making the right adjustments to their processes. This is vital to ensure that requirements will continue to be fulfilled with the best possible solution.

If H-1B visas are limited in number or more expensive to attain, you should expect the vendors to determine and implement appropriate changes and alternatives in your environment.

Change is Inevitable

Allow change to happen and use the talent and resources at your disposal – namely your vendors – to move in the right direction. If a change to insourcing/outsourcing ratios is required due to changes in the business, expect the vendors to fully align, regardless of whether it means positive or negative growth to them – those that don’t are not the vendors you want to stay with long term.

Together, clients and vendors should maintain awareness of political and environmental changes in the industry. Work closely with your vendors and enable them to make appropriate changes to their business models to accommodate not only your business direction, but changes in the global external resourcing market as well.