Author: Barbara Schiffman
Last August, FYI Solutions published the blog “The Hidden Cost of Offshore Outsourcing”, highlighting many of the things that ultimately cost companies more than what they expected their offshore consulting contracts to cost. A recent article in Computerworld also reflected on this situation. After years of moving application development and support offshore, some companies are now re-thinking their decisions and are bringing select outsourced services back in-house. We think you would find interesting this article by Howard Baldwin, entitled “Outsourcing, adieu: Companies retake the reins on IT services”. The complete article can be found at ComputerWorld.com.
Here are some excerpts:
While it would be misleading to say that insourcing is a new phenomenon — companies have been cancelling major outsourcing deals as long as there have been major outsourcing deals — indications are there is a shift in thinking underway. Charles Green, a Forrester Research analyst focusing on sourcing and vendor management, sees “an ongoing level of dissatisfaction with outsourcing,” citing Forrester’s 2012 services survey of some 1,000 IT services professionals, where nearly half the respondents listed “poor service quality” as a challenge and 32% stated they were looking to bring work back in-house.
What is also changing, according to several sourcing consultants and IT executives who did agree to talk, are the deals themselves: their duration (shorter), their focus (narrower) and how they’re managed (more closely). Other issues — changing economic conditions, new technology and even the competency/incompetency of outsourcers — are also feeding the insourcing trend.
Whether they’re ready to cut the cord or not, companies should take heed of these converging forces as their outsourcing deals come up for renewal.
The problem(s) with outsourcing
Lopsided decision-making. Kevin Chase, CIO of Energy Future Holdings (EFH), is in the process of what he calls “right sourcing” (details below) one of the biggest outsourcing deals ever dating back to 2004 when Chase’s company was known as TXU Corp. The goal of such outsourcing agreements at the time, Chase explains, “was to hold a single outsourcer accountable for delivering all IT services — as well as many business functions — while achieving cost reductions through operating efficiencies and economies of scale.”
The problem with this approach was “the amount of control and decision-making power that was put in the hands of the outsourcer,” Chase says. “That makes it difficult to effectively manage risk and strategic opportunities over the long term.” The amount of decision-making power put in the hands of the outsourcer makes it difficult to manage risk and strategic opportunities over the long term.
Poor service quality. Steve Martin, founder and partner of Pace Harmon, a McLean, Va.-based outsourcing consultancy, has certainly heard the stories IT executives and others tell. While he prefaces his comments by saying he “hates to bash outsourcers,” Martin frankly admits that some outsourcers are “not doing a great job. If you talk to enterprises about their outsourcing providers, there’s a high level of dissatisfaction.”
Pace Harmon recently released a report on insourcing that echoes that observation: “Many outsourcing deals are failing to meet expectations from an overall service delivery value perspective,” the report says, specifically citing “escalating cost-of-quality issues” and “inconsistent quality during service transition and delivery” as concerns.
A lag in technology. Shouldn’t companies that set themselves up as technology experts be able to deliver that technology? As every CIO knows, it is hard to keep up with the pace of technology. Outsourcing firms have been ensnared by changes in technology just as other firms have.
These technology changes have driven some companies to insource and others to compress outsourcing deals from covering seven to ten years to covering three to five years, with one-year renewal options. Technology simply moves too fast for ten-year contracts, sources agree.
Staffing . When many outsourcing deals were first inked a decade ago, there was a huge gap between what companies could pay workers in India or the Philippines versus those same costs in the U.S., so there was a significant financial incentive to do business overseas. But now wage inflation in the U.S. hovers in single digits, while it is in double digits in India. “There’s still a significant differential between what you pay a database administrator here and there, but it’s compressing,” Martin observes.
Those rising costs, coupled with some customer complains about language difficulties while talking to offshore service representatives, have also spurred some companies to bring call centers back onshore.
A shift in mindset. Recently, a light has gone on over the heads of many business leaders regarding the importance of technology: It is a core competency. The last few years have convinced what were once considered non-tech companies in fields like automobile manufacturing, retail, hospitality and consumer packaged goods that technology plays a central role not only in what they build, but in how they interact with customers.
“As the economy starts to thaw, companies are moving out of maintenance mode,” observes Pace Harmon’s Martin. As that happens, IT “is becoming more critical to business operations, and that puts a higher premium on gaining control through insourcing,” he says.
At the same time, the business side is more involved in technology decisions, and “with the business side driving more of the discussion around technology investments, companies are forced to reevaluate their outsourcing deals,” says Forrester’s Green. Specifically, business executives are quite interested in any value to be gained by moving from a traditional outsourced model to a cloud service model, where the company manages and has control over its data but doesn’t necessarily own the software or hardware it uses.
How to re-grab the reins
EFH’s Kevin Chase epitomizes the trend of companies taking back control over their systems, as he has reconfigured his internal IT organization, increasing its numbers to 25% of the total IT staff (internal and external) and “giving it responsibility for strategy, governance, and operational and project leadership, architecture design and subject matter expertise,” Chase ticks off.
While shifting those capabilities back in-house, Chase at the same time brought in or maintained relationships with firms such as HCL, Accenture, PwC and Cap Gemini. HCL manages infrastructure, Accenture and PwC are currently leading strategic projects across the Enterprise and Cap Gemini manages applications. “This helps us get an optimal balance of cost, quality and control,” explains Chase.
Chase likens the new strategy to a hub-and-spoke system, where EFH is the hub and the spokes connect to multiple outsourcing vendors that then implement strategies developed under EFH’s control. “This model enables EFH to own all key decisions and drive the priorities most important to the business, while we leverage the strengths and scale of several global IT delivery organizations.”
So far, no one can argue with his results. “As a result of right sourcing to this ‘best-of-breed’ model, we’ve reduced our IT costs by 30% over the past four years. We’ve eliminated more than $50 million of recurring costs because we’ve taken more direct control over strategy and optimized day-to-day operations,” Chase explains.
Because internal people know better than outsourcers what the company really needs, they can “focus on gaining new efficiencies, automation and leveraging innovation for each business unit’s benefit,” Chase elaborates. What’s more, because IT has been able to gain more productivity from fewer people, “we have been able to reduce total staffing across IT by 25%,” he says.
You can still outsource routine functions. There is nothing sacred about having someone monitor your network devices or do tech support.
Pace Harmon’s Martin says this strategy makes sense. “You can still outsource routine functions. There’s nothing sacred about having someone monitor your network devices or do tech support,” he points out, reasoning that repeatable, routine activities are not central to a company’s strategy.
Consultant Stewart concurs that he is seeing Chase’s strategy becoming more popular. Companies have greater control, he says, by doing what he calls specialized “striping” of vertical business processes — that is, outsourcing specific activities, rather than wholesale responsibilities.
Key metric: Understanding IT costs
There is one more piece to the insourcing puzzle that companies need to nail down, practitioners agree, something that has always been difficult: understanding IT costs. ITNewcom‘s Stewart agrees that understanding costs is important, because it helps you determine what you are getting from an outsourcing agreement. “Ten million dollars a month sounds like a lot of money,” he says, “but it’s not the invoice that comes in every month, but understanding the true cost of IT and what level of IT you’re getting.”
Companies need to benchmark their costs and make an informed decision about the right sourcing model. “By going through that process, they can go to the market and ask outsourcers what they would charge, and compare [prices].”
Besides understanding what IT costs, the most important key to remember when considering insourcing is that the world has changed. IT is no longer something that can be surgically excised and transplanted to an outside firm. It is strategic, something that needs to be managed and even nurtured.
“It’s not always about the cost. It’s also about getting the business back to its core competency, retaining their agility in business processes, without owning the assets or managing the capital expenditures,” says Stewart.
For further information:
• Silicon Valley-based freelancer Howard Baldwin wrote most recently for Computerworld about CIOs in emerging economies.
• This article, Outsourcing, adieu: Companies retake the reins on IT services, was originally published at Computerworld.com.
• Read more about IT Outsourcing in Computerworld’s IT Outsourcing Topic Center.
And finally, contact FYI Solutions to learn more about how an onshore staffing model can effectively address your staffing needs.
