Insourcing is not the answer

one red arrow facing many blue arrowsThe Cabinet Office recently announced that it had saved 40% on its IT budget by replacing its contract with services provider Fujitsu with an in-house service. The Fujitsu contract, which was signed in 2007 and expired in January 2015, covered a diverse range of services including data centre/hosting, fully managed infrastructure, desktop hardware and software, applications support service desk, telephony, and security.

As well as the headline cost saving, the Cabinet Office has also stated that its new approach is more flexible than the services provided by Fujitsu as it allows “users to pick their own devices and giving them maximum flexibility over software tools.” In addition the department’s infrastructure has been moved to the cloud with CTO Tom Read commenting “if we aren’t happy with it, we can just move it to another supplier.”

It is not the first time we have seen headlines about organisations deciding to insource services that had previously been outsourced to external providers and neither is it the first that time factors such as cost reduction and better services have been cited as the main benefits of such decisions.

The problem with headlines claiming significant savings from insourcing decisions is that they do not necessarily tell the full story. For example, there is the assumption that the original deal represented value for money at the time it was signed and hence a straight comparison between the new arrangement and the outsourcing contract can be made. It also assumes a like-for-like comparison can be made on the needs of the organisation, and the scope and hence cost of the services under each model.

The Cabinet Office deal with Fujitsu was eight years old. So much has changed in that time. New and transformational technologies have appeared and matured since 2007. Devices such as smartphones and tablets have changed the face of personal computing and, along with apps and cloud services, have transformed the way in which organisations can meet their technology needs, and how and where people can work. The IT services market has also changed a lot in that time and new sourcing models have been successfully implemented by client organisations as a result. And it is fairly certain that what the Cabinet Office wants from its IT services has changed significantly in that time as well.

Comparing an eight year-old contract for a diverse range of outsourced services against an in-house service based on new needs and technologies is inherently misleading. It is a false comparison that some CIOs use to support what is often a personal preference to have everything in-house or to support a kneejerk reaction to bring services back from a poorly performing outsourcing contract. We also regularly hear CIOs claim that the contract with their outsourced provider was not flexible enough to deal with its changing needs and the introduction of new technologies. But that does not automatically mean the solution is to insource. How about implementing more flexible contracts with a range of specialist partners that can cope with changes in the organisation’s needs, and which allow for new technologies and hence cost reductions to be realised during the contract?

Fortunately the Cabinet Office has not decided to bring all of the services in-house. Instead it has moved to a model where many of the services are still outsourced but to multiple suppliers. In this model the IT function provides the management and service integration layer (something that was also previously outsourced).

Front cover advertHowever, this is not always the case. Some CIOs decide to bring the management and delivery of all services back in-house and hence they find themselves providing and managing services such as desktop support, network management, data centre, telephony, etc. Such activities are not part of the organisation’s core business and the IT function is not adding any value to the organisation by self-delivering them.

The decision as to whether to outsource or to provide services in-house has to be based on criteria that reflects what is important to the organisation and not on the preferences of the CIO, false comparisons of cost and services, or a poor outsourcing experience due to using the wrong vendor(s), inflexible contracts or poor implementation and management on behalf of either the client and/or the service providers.

In Disrupt IT I recommend assessing each service provided by the IT department to determine whether it is key to the organisation’s ability to differentiate, innovate or respond quickly to changes in its markets. Where a service is not deemed to meet this criteria then it should be outsourced so that the CIO and the IT function can concentrate on applying technology in the areas where they can add real value to the organisation. This is a key step in the transition of the IT department from a Technology and Service Provider to a Technology and Service Broker.

There may of course be the need for additional criteria to reflect business- or industry-specific needs, or to satisfy relevant regulatory or legislative requirements. And there may be some areas, such as legacy or old systems, where outsourcing may not be economic or could expose the organisation to unacceptable levels of risk compared to the benefits that would be realised.

But the principle remains that the IT function does not need to be a service provider any more. Instead, it needs to be working alongside the rest of the organisation, helping to solve business problems and identifying opportunities to use technology to create value, grow revenue and create competitive advantage. Insourcing decisions should not be taken lightly and neither should they be driven by personal preference, false comparisons or bad experiences in the past. They have to be based on the principle that the IT function should be focused on the areas where it can add value to the business.

If you are a CIO that wants to reposition your role or if you want to create an IT function that can meet the needs of a digital business then please contact me or visit my website, axin.co.uk.

Comments

  1. grigoriu says:

    No cost analysis is good enough to suffice in such decisions. Broader criteria must be considered, as stated in the article.
    As for instance, for outsourcing, while the business as usual IT management costs may be small, the cost of an exception, not included clearly in the contract, e.g. a simple business change may be disproportionately high. And there may be too many changes.
    Besides, to me, managing IT in house at today’s rapid pace of change and fine state of art looks like mission improbable for such a political outfit.
    In essence though, what was outsourced to private companies then can now be outsourced to public cloud infrastructure and applications, security permitting.
    Then an inhouse team can manage this smaller task of managing the cloud.
    Hence, I agree with the transition of the IT department from a Technology and Service Provider to a Technology and Service Broker.
    The IT function should have an architecture, integration, supervision and strategy function today.
    http://it.toolbox.com/blogs/ea-matters/

  2. I’m not sure I agree. Yes, at face value Cabinet Office have stated they have in-sourced, but this is far from the truth. The vast majority of services are still outsourced, but with one key difference. The customer, i.e., Cabinet Office, acts as the system integrator and sources strategic elements from service provider to build the end to end service. This is the experience we have made with large public sector organisations for hosting, infrastructure, network or integrated services such as Database as a Service.
    http://www.redcentricplc.com/blog/cloud-computing/database-as-a-service-learning-from-oracles-philosophy/
    This delivers the cost savings compared to complete outsourcing to a large SI.

    • Hi Stefan,

      Thanks for reading the blog and for your comment. My main point about the Cabinet Office was the headline about the level of savings and the false comparison on which this is based. Without further explanation it gives a negative view of outsourcing in general and the supplier in particular.

      The rest of the blog is really aimed at CIO/organisations (and there are many of the) that use such headlines/arguments to insource all services without fully understanding whether this is right for the business. The Cabinet Office story was just the prompt to make that more general point and not necessarily a direct criticism of the department.

      I am pleased to hear that the Cabinet Office has moved to a multiple supplier/integrator model – a model that has a lot of value in my opinion and something that I recommend to clients – and I have updated the post to reflect this.

      Ian

      • Hi Ian,
        thanks for taking my comments on board. You are right of course in that this type of headline is unhelpful and indeed misleading and that too many CIO use this as an argument for continuing their own insourcing strategies.
        Stefan

  3. Laura Dawson says:

    Dear Ian

    I completely agree. Currently we are looking at the core capabilities that the internal IS (not just T please) needs to have and interestingly supplier/vendor/contracts seems to be the one missing from many organisations. Most contact negs I have seen so far focus on finance and legal rather than service (the schedules are the important bits).

    I strongly believe suppliers don’t ‘go bad’, relationships do and that takes two. Sort of a wee tangent there but thanks for the article.

  4. So HMG now has capability in systems’ integration? That’s a huge leap forward for them.

    I’ve looked at various multi-sourced HMG contracts. They were universally stunningly expensive and gave poor service because the HMG had fallen into the trap of being the de facto integrator. The root cause was the purchasing processes’ poor capability with handling future opportunities and risks creating conflicting incentives between the parties.

    I’d be fascinated to understand what the CO has done differently this time.

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