With the news that General Motors is planning to make dramatic changes to how much of its IT services is outsourced some people are beginning to question whether this indicates a trend towards insourcing. GM’s announcement that it will be moving from a model where 90% of its IT is outsourced to one where 90% is provided in-house follows similar announcements by other companies that they will be moving services back in-house, albeit none have been quite as drastic as the GM decision.
So are we seeing a fundamental shift in the market, a structural change that will see an increasing number of organisations moving to a self-delivery model for services that had previously been outsourced? In May, Darrell Stein, IT Director at Marks & Spencer, revealed that the company was in the process of bringing a number of activities back in-house from outsourced providers (see Bucking the trend). Whilst part of the M&S decision was driven by commercial sensitivity, its e-commerce platform was being hosted by Amazon, a potential competitor; ability to innovate and time-to-market were also key drivers.
And that’s also something that GM CIO, Randy Mott, has cited as being a driver behind his decision to insource almost every aspect of IT. Mott has described how Dan Akerson, GM CEO, wanted to make the organisation more agile and quicker on its feet and that this required transformation within IT. Mott’s view is that GM can’t be creative or quick to react with its IT outsourced, as new solutions are delayed by the need to negotiate contracts before the real delivery work can be started.
So rather than witnessing a structural change in the market we are seeing organisations taking a more strategic approach to insourcing and outsourcing, one which recognises the ever-increasing importance of technology in the modern enterprise. Since the original large-scale outsourcing deals were struck IT has emerged from a back-office support function to being part of the frontline, alongside departments such as sales and marketing, product development and operations; helping the organisation to get ahead through innovative customer-facing solutions, enabling and driving transformation of products and services, and in some cases entire business models.
As a result some aspects of IT are now considered to be core capabilities that organisations need to develop and retain in-house. Being creative requires time, ways of working and attitudes that do not fit well within a commercial outsourcing arrangement. You also need to be close to the business, familiar with its vision, strategy, culture, markets, products and services, customers and competitors, and so on. Even the most successful outsourcing contracts will struggle to achieve this level of knowledge, which can only really be achieved with in-house resources. And to be quick to respond to opportunities, to get new solutions from initial concept to implementation quickly means being able to change priorities, reallocate resources and delay or cancel projects whilst accelerating others without incurring increased costs or penalties, or going through a contract variation process.
Outsourcing still has its place in most organisations but CIOs need to take a more selective approach when deciding which services can be provided by partners and which should be kept in-house. The exact combination will vary by organisation and will be driven by the organisation’s strategy, business model and how it believes it can differentiate itself and gain competitive advantage. CIOs need to identify the skills and resources that form part their organisations core capabilities and look to retain, develop and enhance these areas whilst outsourcing any non-core activities.
That’s not to say that service providers and vendors won’t be involved in these core areas, just that the organisation needs to be able to control and lead these activities with their own resources and with a commercial arrangement that is flexible, allowing changes in volume, scope and priorities without penalty.
So CIOs need to develop a sourcing model that identifies the core IT capabilities needed by their organisation and nurture these in-house. But this isn’t a one-off exercise; the sourcing model needs to be reviewed over time as the business strategy evolves and core capabilities change.
The recent spate of announcements about insourcing is not the beginning of the end of outsourcing per se. But it is probably the beginning of the end to the wholesale outsourcing of entire IT functions, particularly in organisations where technology can be used to create a competitive advantage and where creativity, flexibility and agility in IT is necessary.