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You hear it time and again, outsourcing strategies that backfire or hinder a company’s ability to remain competitive in a fast-paced marketplace. Needs change, and yesterday’s strategic panacea becomes tomorrow’s roadblock to innovation.
Count General Motors among the companies reassessing — and in the automaker’s case, actually reversing — its sourcing strategy. That’s right, one of the biggest consumers of outsourcing services is in the process of shifting away from IT outsourcing and bringing much of its technology work back in-house.
In light of such a dramatic reversal in IT strategy, anyone who relies on outsourcing providers to fulfill IT functions should at least think about their sourcing strategies and how they might be changed for the better.
And there are indications that the growth of outsourcing is slowing. Research and advisory firm Everest Group in August 2012 reported that the global services market saw transaction volumes dip in the second quarter of this year, following a declining trend seen over the previous four quarters.
Whether it is to increase flexibility, deliver solutions faster, or improve quality of service, organizations seeking to break free of outsourcing dependency should keep in mind that weaning off service providers is no easy matter. It involves building up internal expertise and streamlining your IT operations; for lots of companies, the move to insource can be long and costly.
Here are five tips for making your insourcing endeavor a success.
Kick the outsourcing habit tip No. 1: Soul-search — with an eye on the long term
Insourcing versus outsourcing is too big a decision to make without deep corporate soul searching. This requires not only looking at current needs but also forecasting future requirements and IT’s role in addressing them. What impact would insourcing have on achieving those goals and delivering the best products and services to customers?
“We started by looking at GM today and then looking at where we see opportunities for change and for doing business differently,” says Randy Mott, CIO at GM. “Our leadership talked about opportunities to transition the way we do business in a lot of areas,” as part of the lead-in to the decision to insource much of IT.
The company hopes that the move to insource more IT functions will result in increased flexibility in meeting the needs of colleagues and customers, as well as expedite the delivery of technology services.
Assessing whether your current outsourcing strategy is meeting your long-term goals is another key component of this corporate soul searching. WarSocial.com, a company that provides an online social strategy game, outsourced the first iteration of its gameboard, as well as the design of its logo and website. But the company has decided to almost completely develop everything in-house.
“It’s really just a matter of quality. It will cost more to do it ourselves, but we aren’t willing to sacrifice quality,” says Dustin Hilgaertner, co-founder of the company. “We’ve also put a lot of effort into improving our own design skills and learning new technologies, so we can do the design and development ourselves.”
The company had a few issues with outsourcing, Hilgaertner says, including the time it was taking to vet potential partners, inconsistent quality of service, and high turnover at the service providers once the contract was signed.
Kick the outsourcing habit tip No. 2: Cold turkey is not on the insourcing menu
When it comes to moving off outsourcing, you can’t just quit. The transition toward internal IT should be gradual, and you need to build time and budget into the process, especially when the insourcing push affects multiple entities within the organization.
“Understand that by no means is this transition an overnight process,” says Andrew Schrage, founder and co-owner of Money Crashers Personal Finance, a provider of online educational services in areas such as credit and debt, investing, real estate, and insurance.
The company is in the process of bringing most of its outsourced technology projects back in-house because it feels much of the outsourced work has not been of high quality and has encountered numerous communication issues with its overseas provider.
“Our operation is small, and the transition is still taking us several months,” Schrage says. “For larger organizations, the insourcing of previously outsourced IT can take as much as a year or even more to complete.”
In many cases, the transition can be more expensive than the original move to outsourcing, Schrage adds. Cancellation fees, increased staffing costs, the expense of transferring software licenses — it all adds up.
“Thoroughly investigate all expenses associated with a return to insourced IT before moving forward,” Schrage advises. “Also, keep in mind that your soon-to-be former vendor is unlikely to provide much assistance in the transition. For this reason, be sure your organization is adequately staffed to handle the workload increase.”
Kick the outsourcing habit tip No. 3: Invest in expertise
Insourcing success rests on personnel. And while kicking the outsourcing habit certainly spells a vote of confidence for current IT staff, you are likely going to need new blood to get it done.
Application development, help desk operations, network management — any IT function brought in-house after relying on a service provider will require people prepared to support the same level of services. Ending an outsourcing relationship before having internal staff ready to take over invites disaster.
There are plenty of ways to find and attract qualified IT professionals who possess the skills you’re looking for — particularly via social media sites such as LinkedIn and Facebook. How long it takes to fill job roles and how much it will cost should factor into your insourcing plans. Coupled with your staff’s current skill sets and willingness to train, the makeup of IT candidates you budget to hire will have a significant impact on the types of IT projects that will prove easiest to insource.
GM plans to at least double the number of its in-house IT experts over the next three years. The company currently outsources about 90 percent of its IT services and provides 10 percent of the work through internal resources. Within the next three to five years, GM hopes to reverse the percentages in part by hiring software developers, database experts, and other IT staff worldwide.
But the company doesn’t just want technical expertise; it wants people who are proficient in technology and have a keen knowledge of business processes. “We’re looking for IT professionals who understand our business and how we can make it better,” Mott says.
One of the factors to consider when building up a skills base is which emerging technologies are most important to the organization. For example, if your company is looking to make a push into big data, what sort of business analytics skills will it need down the road? Or if you’re looking to develop more applications in the cloud, what kinds of programming skills will you need to target?
Sometimes a company that’s looking to move off outsourcing can find IT talent in its own backyard. Whit.li, a startup that provides relevance technology used by major brands for personalization and insights, tried offshore development of iPad and iPhone applications.
But the model didn’t work, says CEO Jack Holt, and the company soon realized a more agile approach with developers nearby would better serve its needs. “We’re a lean startup, meaning we release products with minimal functionality, get customer approval, then add more,” Holt says. “This strategy, which most young tech companies and even big companies have adopted, is incompatible with IT outsourcing.”
Whit.li didn’t have to look beyond its hometown of Austin, Texas, to find many of the IT skills it needed.
“It’s a strong second-tier city where Whit.li is perceived as the top of the list for cool tech companies to work for,” Holt says. “Financially speaking, you get more work, faster from in-house talent. So the cost per release is around 20 to 30 percent lower and 40 to 50 percent faster.”
Kick the outsourcing habit tip No. 4: Buy-in or bust
The decision to insource IT — like the decision to outsource IT in the first place — is a big step for any company. As with any significant IT initiative, if insourcing doesn’t have strong support from the CEO, CFO, and key senior executives, it is likely to fail. At GM, it was important that the entire executive team support the planned change in outsourcing strategy, Mott says.
“Anytime a company is embarking on change, it is [critical] that your senior leadership is leading that,” he says. “IT touches every element of the modern company; there’s not a part of the business that is not touched in some way in terms of systems used. When you are going to make a fundamental change, then everybody needs to be ready to embrace that change.”
The faster a company plans to make the change and the broader the impact of that change, the more vital it is that senior executives are on the same page as IT, Mott says.
In addition to having full executive support, IT needs to work closely with other areas of the organization, such as human resources, finance, product development, customer service, and sales and marketing, to determine how the move will effect those areas and to solicit input from non-IT representatives.
Kick the outsourcing habit tip No. 5: Simplify your IT environment
Companies looking to insource IT will greatly improve their chances for success by streamlining their IT environments. Here, reliance on virtualization and cloud computing will help.
Enterprises can also attain a more internally manageable infrastructure by retiring legacy systems and applications. This greater simplicity alone will likely reduce your need for service providers to help with day-to-day IT functions.
Mott says GM underwent a data center transformation, including increased use of virtualization, as well as the retirement of some applications, prior to the company’s decision to bring many IT functions back in-house. While the main goals of these efforts were to improve IT services and reduce costs, they’ve also led to a simpler IT environment that positions the company to bring more IT functions inside.
The IT transformation at GM will take several years to implement, Mott says. As part of the strategy, GM will cut its list of IT applications by at least 40 percent and shift to a more standardized platform. It will also move from 23 data centers worldwide to just two.
Not every company that’s outsourcing IT is going to follow GM’s lead and pull back in-house many of the technology services now being outsourced. But for many organizations, it might make sense to insource some functions currently under the domain of service providers — and this might be the time.
If your organization is in that group, it’s important to remember that changing sourcing strategies is no small deal — particularly when it comes to IT components that affect nearly every facet of the business. Be sure to take the necessary steps that can help make the transition a success.