Can you afford to outsource your IT?

A few days ago I read of a major national IT outsource contract ending after five years.  In 2009 the service provider had acquired the incumbent vendor and most of the in house IT resources of the customer and signed an IT service contract to continue to deliver services.  The decision to end the contract will now affect thousands of IT professionals who now stand to lose their jobs.  Over the years I have known the customer quite well and observed many problems in the execution of their IT.  So it was no surprise that the contract was ending – misalignment between the client and service provider was evident on the ground, and a radical change was necessary,  even to an outside observer. The implications to the service provider are now significant.   This contract had been a significant contributor to their business and the termination now poses a real threat to their sustainability.  I hope they have a contingency plan.

Wrestle

When I was responsible for IT in a previous role, outsourcing was the norm.  At the time the emphasis was on focusing on core business capabilities – which in my company was the manufacturing of speciality chemicals.  IT was seen as a service function.  My job as CIO at the time included a constant review of the performance of service providers under SLA (service level agreements).

Several such contracts ended in the natural course of business, others had to be terminated because less and less value was being realised in the arrangement.

Fast forward about 15 years. What has changed in the world of IT, and how has this (and will this continue to) impact on outsourcing agreements?

To state the obvious,  the velocity of change has certainly increased.  Technology enablers such as cloud computing, software as a service and mobile devices have developed to the point where IT has to be able to deliver solutions rapidly on these new platforms, or become irrelevant.

Align IT and business where it really matters – your applications and information

 

Alignment between business and IT in this environment of rapid change has to be closer than ever before.  The necessity to guarantee that IT resources are invested to create business value is now amplified – no longer can IT hide underneath an invisibility cloak claiming that it is just a small percentage of the overall costs of any enterprise.

In the face of rapidly evolving requirements, new software development models have evolved – for example we have seen the evolution of Agile development that promises shorter development cycles that are more closely aligned with and responsive to business changes.

Sophisticated infrastructure and server platforms are now available on demand through the cloud, allowing for ubiquitous computing at low cost.  Reducing IT infrastructure costs is not rocket science anymore – the price of commodity IT is dropping all the time.

Why did we outsource?

 

Back in 2000 the drivers of full IT outsourcing included:

  1. Reduced costs (at least initially)
  2. Access to specialised skills
  3. Strategy to focus only on core capabilities (and not IT)
  4. Lack of internal capacity to recruit, manage and retain IT professionals
  5. Lack of internal service management capacity
  6. Increased geographical reach through partnering with global service providers allowing for standardised processes
  7. Reduced risk

Have these outsourcing drivers changed sufficiently over 15 years that businesses should now seriously re-evaluate their outsourcing strategy in favour of in-sourced or partial outsourced models?

Why should you now consider to insource IT?

 

The need for business to embrace technology in support of strategic business initiatives is now stronger than ever before.  Collaboration between business stakeholders and creators of the solutions they use has to be very close.  The “I” in IT is now more important than the “T” which is increasingly seen as a commodity.

Four factors that are driving companies to consider in-sourcing as part of their IT:

  1. The need for software development to be very closely aligned to business needs.  This might best be achieved through agile development in co-located teams.  Testing might also be best done internally – integrating actual end users into the process.
  2. Business intelligence and analytics projects require close collaboration between developers of BI solutions and the business owners.  This is most effectively done using internal resources working in your offices.
  3. Risk increases over time as an outsourced relationship becomes “cozy”.  Revenue contributions of “anchor clients” are taken for granted by the service provider who can then become bloated with high overheads that would not be justified in an in-sourced environment.  When the contract is then reviewed and terminated to reduce costs,  the service provider faces a significant set back or even collapse with loss of skills.  No outsource contract is ultimately sustainable – the trick is to know when to pull the plug.
  4. Companies are realising that access to IT skills is less of a consideration than access to technology savvy industry experts who understand their business.  IT service providers that do not have deep vertical industry focus on customer segments lose that intimate connection and understanding with a client’s business.  Very few large IT organisations are organised along a vertical focus;  (but many smaller ones certainly are).  All the big IT provider can offer is commodity skills or specialised technology skills (which are in any case rapidly being surpassed by infrastructure alternatives in the cloud).
  5. Managed services is not really a competitive differentiator anymore – it simply takes strategic intent and appropriate structures and this too can be in-sourced.

When a customer concludes that they can save money, cut overheads, increase alignment between business and IT service providers by in-sourcing IT then it is inevitable that this will happen soon.

IT service providers, in order to avoid losing these contracts really need to look hard at their strategy and customer relationships to ensure that they remain focused on fundamentals.  It is tempting perhaps for IT Service providers to chase the next shiny object or acquisition, but this must never ever be at the expense of your existing business.  Increasingly shareholders will start asking these questions as high profile failure after failure of IT service contracts become more prevalent.

Time to separate the “I” and the “T” in IT

 

Outsourcing strategy looks very different now than the models that prevailed 15 years ago.  I believe that many companies will increasingly insource certain IT functions.

Insourcing will prevail in the areas of in-house application development and analytics  (The “I” in “IT”).

The areas that might remain outsourced are the “T” – in other words the technology platforms.

In my view, the larger successful outsourced partners will primarily provide infrastructure and some platform related services.   With several dominant cloud providers of “T” (technology) the role of the small infrastructure partner is no longer assured.

On the other hand smaller specialised industry  providers who focus on the “I” (information) can be in a good position to thrive in this new environment.

A combined model between outsourced infrastructure providers, small niche players who have specialised industry knowledge and in-house IT will probably suit many organisations as we enter the next 15 years.

Additional reading:

10 IT Outsourcing Trends to watch in 2014

http://www.cio.com/article/2378979/outsourcing/10-it-outsourcing-trends-to-watch-in-2014.html

Outsourcing vs insourcing – you need both

http://www.informationweek.com/it-strategy/outsourcing-vs-insourcing-you-need-both/d/d-id/1111613?page_number=1