The rise of IT insourcing
The results of the 2016 UK IT Outsourcing Study send a very clear message – insourcing is well and truly on the rise.
This might seem strange to those who champion the merits of outsourcing, but the study, conducted by Whitelane Research in collaboration with PA, reveals that despite satisfaction with suppliers remaining high (at 86%), the pace of outsourcing is slowing down. The research, which examined over 800 unique IT outsourcing contracts, held by more than 250 of the top IT spending organisations, found that 21% of organisations are now planning to outsource less and insource more – a 6% increase compared to last year.
It is clear that insourcing has its benefits. Global pharmaceutical AstraZeneca set (and are on track to deliver) ambitious goals to go from being 70% outsourced in 2013 to 30% outsourced by 2017. And through insourcing they have already reduced their operating costs by $350M per annum.¹
There are various factors at play here.
Ongoing pressure to cut costs
Organisations continue to cut costs, and support functions such as IT remain prime targets. Budgets are often being diverted towards new services and solutions rather than ‘keeping the lights on’. This is pushing IT functions to look at new avenues to cut costs. Offshore or nearshore insourcing can help them to achieve significant cost reduction, when compared to procuring similar services year-on-year from service providers.
Increasing maturity of the user organisations
The offshore industry has matured and so have the users. Various organisations have now been using third-party services located offshore for several years, and their retained organisation and operating models have been developed to facilitate multi-location delivery. As a result, they are now much more confident about taking back control of parts of their supply chain and setting up their own offshore units, which deliver an equivalent level of service while retaining intellectual property and skills development in-house.
The need for closer integration with the business
With digital transformation taking centre stage for many firms, integrating an organisation’s IT capability more closely with business colleagues is essential. Businesses are becoming increasingly dependent on technology solutions to compete and differentiate and they expect a certain degree of pace and flexibility from the IT organisation.
An insourced capability becomes a natural extension to the business and takes away the artificial boundaries of “them and us”. There are no contracts to address before enabling a change and they get to deal with the same resources who understand the business and offer incremental value.
From our regular reviews with the top 20 outsourcing suppliers and with clients, we know that their attempts to become more integrated into the strategic IT programmes of their clients have met with only partial success. Suppliers are tied to inflexible legacy contracts, are rightly driven by commercial models that limit the flexibility on offer or, in the words of Hargreaves Lansdown CIO David Davies, “bound by Service Level Agreements”² that have (in PA’s view) limited their ability to support strategic implementations.
Increasing adoption of Agile
As organisations move increasingly towards agile methods, closer coordination and greater trust between teams becomes essential. From the respondents we interviewed as part of the Whitelane research, it is obvious that they see in-house teams as much more suited to agile approaches. As one client said to PA recently while discussing their shift to insourcing: “We knew we could dramatically reduce project lead times through our simplified operating model and by having great internal technical capability.” This echoes the insourcing approach taken by Shell who plan to “take advantage of the talent we have [in our captive offshore capability in India] to improve the processes”³ for software development.
Most of the suppliers in the 2016 UK IT Outsourcing study have significant agile expertise, but for many customers, contracting for agile delivery is not their preferred option. This is because suppliers are often locked in to contracts which limit their ability to deliver in agile ways and success is hard to measure in commercial terms. And while we have successfully helped organisations build contracts for agile delivery, it remains the exception rather than the rule.
Insourcing is here to stay
The rise of insourcing is no longer a theory – it is now a hard fact. The reasons for insourcing vary, but CIOs facing continuously rising demand and shrinking budgets are eyeing the savings to be made by reclaiming the margin paid to their suppliers. Moreover, CIOs believe that delivering in newer and more agile ways is more effective than with suppliers bound to traditional contracts.