Recent research by Deloitte shows a growing reversal of the outsourcing trend. In its 2012 Global Outsourcing and Insourcing survey released in March 2013, 48% of respondents said that they had terminated an outsourcing agreement early, either for cause or convenience. While the majority of those businesses subsequently chose to move their outsourcing contract to a different service provider, 34% said they decided to bring the work back in-house. According to Deloitte, the three main drivers were to improve customer service, to gain greater control over functions that were previously outsourced, and ironically perhaps, to reduce costs. These three elements comprise the hidden cost of outsourcing.
So what has precipitated this shift?
Fifteen years ago the market was very different. To start with, labour was in short supply and employment was high. It therefore made absolute sense to outsource and at the time it was pretty price competitive to do so. Today’s world is very different and there are four key reasons why companies should look to in-source and take control off their IT systems, bringing this back in-house:
- Today companies need to constantly innovate in order to remain relevant
- Many IT services can now be automated, which reduces the requirement to outsource
- Speed of change is phenomenal and challenging. In this environment, it is hard for outsourcers to deliver a competitive rate that keeps paces with the demands of the business
- Achieving efficiencies and cost savings is difficult when you have an inflexible fixed cost, long-term, service level agreement
When a company outsources, the main problem it faces is that the internal knowledge and understanding of its products or processes naturally fades over time. As a result companies face a loss of control. Organisations quickly realise that they are completely reliant on the outsourcer who built their applications, own their code, and can charge a premium for any maintenance or enhancements that need to be made. Going back to the Deloitte report, 77% of the survey respondents indicated that a key factor for insourcing was to get that control back, particularly over the strategic direction of IT. A loss of control means that many organisations lose the ability to innovate and or be productive.
As a result businesses are now much more cautious about outsourcing and with good reasons and those that do are being far more selective about what they outsource. Many organisations are now looking to retain the people and the resources that are differentiating them in the market. This enables them to innovate and provide competitive advantage. Enlightened organisations are looking to hold onto the ‘brain side’ of IT and only continue to outsource commodity IT. Don’t get me wrong, organisations should use external resources to fulfil their commodity IT where it makes sense. Here using the cloud for non-mission-critical functions is a good route and a very viable option.
Although it may sound counter intuitive, cost reduction was another key factor cited by 77% of survey respondents. Many stated that there was an increase in service delivery through scope ‘creep’ and excessive charge orders. The pace of change for organisations is now phenomenal and today technology is more complex, fast paced and challenging. Many IT departments are therefore being hit daily with either new application requests or change requests from the business. The cost/productivity benefits for an outsourcer to provide such services starts to become prohibitive and customers are finding that they need better economies of scale – particularly better cost and touch points around such projects. Additionally, in an outsourcing relationship, often costs and service levels are agreed over long-term contracts, which then make it hard to retrospectively change these to fit with new business demands.
So what’s the alternative?
The good news is that technology has moved on so much that many of these processes previously outsourced can now be delivered and managed internally through automation. In fact I would go as far to say that there are many cost effective and productive alternate technologies that will deliver many of the IT programmes an organisation might have previously outsourced, at a fraction of the cost. Today smart organisations are looking to automate wherever possible and they are seeking out more effective, agile and rapid ways to develop applications and bring projects to market faster. Automating processes, services and certain technology functions negates the need for the client to buy costly man-days from an IT outsourcer. This is where our high performance application development platform can really help by delivering web and mobile applications that are not only ‘built for change’ but create high productivity environments.
The ability to change applications quickly and easily without breaking anything is an imperative for any modern business. As is making sure you retain knowledge of your systems and processes internally so that you don’t become hostage to any outsourced relationship. If you lose control around this knowledge, you risk losing the ability to innovate. As we start to move out of recession, companies that cannot innovate, will certainly hamper their growth prospects and as a result won’t steal a march on their competitors. They may even be in danger of becoming irrelevant – don’t let that happen to you – think carefully about what you need and whether automating various functions is a more cost effective and productive way to deliver what the business needs.