19 March 2015
This article first appeared on Outsource.
Over the last decade, outsourcing IT has become an increasingly routine decision about which provider to use and how. The outsourcing industry has seen enviable growth rates and its outlook remains bright. Yet, a trend is emerging where a number of organisations are considering whether to insource. This seems odd when the merits of outsourcing are proven, and providers have developed significant skills, offer reasonable flexibility, and deliver globally at a competitive price. So why would organisations want to make their own bread, when there are bakeries all around, offering various types of loaf, with various ingredients at a reasonable-looking price?
The answer is that there are some contexts where there may be good reasons to consider insourcing.
To support closer collaboration between the business and IT. Today’s IT organisations need to be increasingly intertwined with the business but inevitably outsourced providers can struggle to get close enough to the business to engage effectively. This can reflect a lack of vision or competencies in both providers and buyers. Equally, it may reflect an inability to define a contractual and commercial model that facilitates closer collaboration.
Insourcing solves this problem by removing the “them and us” mentality. The business can then openly take the lead and be led, where required, without necessarily feeling commercially exposed.
To get the right “type” of innovation. All organisations agree they need innovation, even if they may have different views as to what it means for them. They also expect IT, as an enabling function, to play a critical role in helping them innovate. While many service providers have made significant investments in innovation, their clients often fail to see the direct benefit. Most innovations still seem to be restricted to improving the processes in delivering outsourced services. While that is certainly useful, it doesn’t help the client. In contrast, insourced providers can play a more direct role in supporting innovation that benefits the business.
To reduce the real cost of ownership of outsourcing. Wisdom on the street is that outsourcing is cheaper but, for some, the reality is more nuanced. Where IT outsourcing contracts run to hundreds of million pounds a year, and there are ongoing IT needs, insourcing may be cost competitive over a longer period of time. Captive units offer the opportunity to take out the third-party margins, invest in their own capability, streamline various organisational roles, increase productivity and cut costs.
So, do all these arguments mean that insourcing is inherently a good idea?
Not necessarily, as DIY IT is not for the faint-hearted. It needs hard work. The minimum requirements are a long-term vision, a water-tight business case, buy-in from various business units, availability of skills and a very high dose of determination. Equally, insourcing should not be chosen just because of frustrations with the current supply arrangements. More often than not, if the outsourcing relationships fail to deliver the intended results, the problem may lie equally with client and the provider.
Secondly, the reasons behind pursuing insourcing should be robustly tested – both from the perspective of need, feasibility and long-term sustainability. So, for example, organisations that choose insourcing because they want more control need to ask themselves why do they need it and what impact does lack of control have on their business?
Thirdly, organisations need to be sure they can deliver quality solutions through an insourced outfit. Outsourced relationships offer the convenience of blaming the suppliers, but it is not always easy to deliver and improve IT with limited external support.
And, last but not least, the sustainability of the insourced operation and the career aspirations of employees working in it should not be underestimated. An outsourced organisation offers a range of opportunities to its employees but insourced IT units could be seen as providing dead-end jobs for employees.
So sometimes, the right answer is in buying a loaf from the bakery and having it with home-made butter and marmalade.
Manish Khandelwal is a sourcing expert at PA Consulting Group