Outsourcing

What's behind enterprise insourcing of IT?

Some U.S. companies are making moves towards bringing formerly insourced jobs back in house. What's behind this decision?

The annual salary of a software developer in the U.S. is $94,000. In India, it is $14,000, and in the Philippines it is $7,521 (Source: http://jobs.aol.com/articles/2012/07/09/gm-vows-to-insource-most-of-its-it-jobs-beginning-of-a-trend/.) Cloud-based tracking software gives companies immediate insights into the productivity of the offshore workers that they contract with-and the ability to provide true "follow the sun" resources for projects and IT support. All of this has made offshore IT markets extremely attractive to U.S. companies.

At the same time, there are U.S. companies that have or are making make countermoves toward insourcing.

One of them is General Motors, which announced in 2012 its plans to insource 90 percent of its IT jobs within three years. The goals are higher productivity from onshore staff, reduced travel, lower management burdens, better cultural fits and most importantly, the ability to directly command technology expertise for new product innovation and speed to market that will drive revenues and to also give the company a competitive edge since technology expertise is now a major defining competitive factor in most industries.

GM is not alone. Ford, Starbucks, Caterpillar, Google and GE all have made or are making insourcing moves. They cite factors like bringing products to market quicker, lower transportation and warehousing costs, better product and service quality, less rework, stronger intellectual property protection and a stronger "goodwill image" among Americans who are still struggling economically.

"A major reason large companies are considering insourcing IT is out of fear that their in-house IT skills bases are eroding with outsourcing and that they no longer have the technology "wherewithal" to support or to innovate with their own technology resources," confided one IT industry consultant who works with a major corporation  who is  moving to insourcing.

Is excessive outsourcing ultimately a threat to American companies?

Prognosticators like Paul Craig Roberts, who served as Assistant Secretary of the Treasury in the Reagan Administration, say "yes."  Robert described outsourcing as "fool's gold for companies." He went on to say that "Corporate America's short-term mentality, stemming from bonuses tied to quarterly results, is causing U.S. companies to lose not only their best employees--their human capital--but also the consumers who buy their products. Employees displaced by foreigners and left unemployed or in lower paid work have a reduced presence in the consumer market."

Not every company looking at insourcing has necessarily connected all of the dots to arrive at Roberts' conclusions about the consumer market.  But what more companies that are insourcing are concerned about is the steady erosion of intellectual capital within their four walls-and also the ability to protect their product and idea innovations amid loose or nonexistent patent laws abroad. When this happens, you can find yourself investing in and doing all the R&D work-and then losing the market to those who have made off with your ideas and marketed them under their own labels.

It is in this scenario that IT potentially becomes high risk--because so many of the innovations companies are making-not only in products but in speed to market and the ability to capture more revenue while cutting costs-come from technology innovation. This is the area that more companies are starting to churn into their strategic thinking. They are weighing insourcing against the simple mathematics of procuring commodity IT labor at cut-rate prices. Other important areas, like speed and quality of manufacturing and time to market, are also getting consideration.

The debate will continue as we move into a new year. But it's safe to say that in a majority of cases, we will continue to see a "mix" of outsourcing and insourcing practices, with a number of companies concluding that they have over-outsourced over the past few years to where they are now risking the long-term health of their internal intellectual capital.

About

Mary E. Shacklett is president of Transworld Data, a technology research and market development firm. Prior to founding the company, Mary was Senior Vice President of Marketing and Technology at TCCU, Inc., a financial services firm; Vice President o...

21 comments
thx-1138_
thx-1138_

[q]The annual salary of a software developer in the U.S. is $94,000. In India, it is $14,000, and in the Philippines it is $7,521.[/q] ... and it just confirms and reiterates what most of us have always suspected (actually believed) outsourcing to be - despite all the self serving and duplicitous arguments in favor of it. It only ever served the companies at a superficial level and has been to the overall detriment to service standards, quality and, above all, the displacement and redundancy of highly qualified, Western I.T professionals, for the most part. This many years down the track, with the U.S and most Western economies waning and flailing, it's clear the chicken truly has come home to roost. The old addage is true then - especially in the case of Outsourcing: [i]"You pay peanuts, you get monkeys."[/i]

OldHenry
OldHenry

It doesn't say anything about skill levels or costs of living. The USA is a more expensive place to live so people ask for more money. To put things in perspective, according to the CT Dept. of Commerce, in the town I live in, starting pay for a kindergarten teacher (the lowest paid teachers) is $39,500 a year excluding benefits. Starting pay for someone in IT or engineering with a similar level of eduction is $31,000 per year. Average benefits for the teacher are $0.75 for each dollar of salary. For the tech worker benefits are $0.32 per dollar. Maybe if we start insourcing and investing in tech jobs here, people will begin to be interested in them.

Dyalect
Dyalect

Just this morning I was on online chat with HP technical support. The experience was abysmal to say the least. Asking questions I had already outlined in the initial setup of chat. Chat window to Baglegdesh was closed quickly and I moved on to another solution. Pissed off customer walks away. Penny earned, penny saved. (i guess)

fhrivers
fhrivers

This is what happens when you put MBA's in charge of Technology. They do the only thing they know how to do: Cut, cut, cut, cut...

dinomutt
dinomutt

I've been in s/w development for more than 25 years, and to this day it is VERY difficult to communicate needs and requirements clearly when everyone is speaking the SAME language. Despite the best efforts of people and various technologies through the years, throwing a language barrier into the mix only makes a difficult situation worse. Then all of your savings go out the door in support and maintenance.

maxbuchler
maxbuchler

This is definitely a threat to all non-innovative ITO and Offshore providers. I'm pro outsourcing but I think we will see this change because of the lack of monitoring the market and customer needs. There are new roles to take: Orchestrator, Integrator, Broker etc. IT will be hybrid; someone has to co-ordinate and make it work. Either the in house IT dept. will or ITO's can try to innovate and change their role a bit. My post 'Doomed?' address the problem: ITO lack of innovation. http://www.outsourcemagazine.co.uk/articles/item/4848-doomed-thoughts-on-trends-in-the-ito-space @maxbuchler

msaifhussain
msaifhussain

The post above had a point within it. Major companies are pulling IT services back to US. Gives a hope to the Jobless People in US. But talking about Paying Americans, are these companies ready to Pay people $94K per year or is it just a Fluke, are they gonna spend that much on one Technician which could be equivalent to 7 Technicians or 14 technicians in the East? Are they expecting any Profit Hike hatching this idea.... They should be wide aware that 25-30% Profits to them are given by the Eastern Zone.

JCitizen
JCitizen

doing that very thing. One of my vendors is a huge online company, and they lost a LOT of customer base by outsourcing. Not only that, but their customers were getting ripped off because their web-based store security was abysmal. They've changed not only their payment system, but gone back to US based support personnel. This change was very refreshing to me - their sales force gets it, and I can finally do business with them again.

MyopicOne
MyopicOne

You mean the morons running companies [i]only now[/i] realized the long-term downsides to offshoring? In Japan they traditionally would off themselves; pretty sure some of our corporate execs should do the same. That paragon of virtue Henry Ford even understood his employees needed to be able to afford to buy his product.

Regulus
Regulus

There was a time when many consumer articles had a label saying "Union Made". I believe that the idea was to encourage the purchase of "Union Made" Products. One does occasionally see a " Made In USA" article. But really? And how much? Is there any vehicle that is truly 100% " Made In USA"? Even, maybe, a bit more than 50%? I think that a '%' rating would help at least a bit. I'd like to know how much I am supporting my neighbor.

sysdev
sysdev

The U.S. has been suffering from the short term vision of the Peter Principle violators since the mid 80s. Their vision only sees the short term bottom line and they do not realize (or care) what improving the short term bottom line can do to the long term bottom line. They focused on the short term bottom line (by cutting costs) to impress their superiors and it has had devastating effects on many companies. With 10,000 people retiring every day in the U.S. I hope it is not too late to get the necessary knowledge and expertise (expeience) back in sufficient numbers.

Tony Hopkinson
Tony Hopkinson

one. A lot of the time we use the same words in the same language but the underlying assumptions we both make are radically different. Leaving out esoteric ones like bloom, rod, billet, wap, concepts such as event or order are open to all sorts of semantic freight. In fact knowing you are talking to someone from a different culture witha different native tongue, might make you think through those assumptions. So you donlt foollishly think a list of windows events and their delegates is something to do with a double glazing promotion....

Tony Hopkinson
Tony Hopkinson

Really? You think? This was not crashingly obvious? Your point is at best disengenuous, outsourcing was chosen for short term cheap. Hiring and paying people capable of managing such an effort was never on the radar, in hoiuse, in shore or off.

keith
keith

Might I inquire to why exactly you are "Pro Outsourcing"? Just curious as to why you feel that jobs that could go to USA workers should go overseas, is it merely a "more / equal for less" matter or do you feel that the USA simply doesn't offer the same cost per performance value?

Tony Hopkinson
Tony Hopkinson

Now you are chosing suppliers based on cost, they have to make money too, so whatt do they ditch, quality. It doesn't matter that they are cheaper than US workers, they aren't competing with them, they are competing with other outsource providers. Lose too much quality, people won't pay for your product and you are pardon the vernaculat f'ed. Doesn't matter how dedicated and brilliant, the people you are hiring are, the market is for cheap, and you get what you pay for. But the real killer, is even if it was well thought out,l well resourced, that quality was the prime reason, and it was well managed. It kills your domestic economy! It's self perpetuating and will be horribly expensive to undo. You are off shoring, that means your business and a substantial proportion of uouyr customers are here, not there. Thay arenlt buying your product anymore, it's either crap, or they are on welfare or have taken a drop in come and they can't afford it. I have no argument about you arguing from your own self interest, the incompetent who outsources no matter what is arguing from the same point of view. Just don't try and make out you are not, it's irritating. And yes I'm arguing from mine. So have a + 1 from a guy who says what he means and means what he says.

arthur_edisbury
arthur_edisbury

I have been involved in outsourcing for many years, here's how it works, you get your bottom line real low at a cost, outsourcing company has 12 tech's only 1 is sort of up to speed the rest read crab sheets and p*ss off your clients, hours spent on the phones trying to fix things, I've been their many times and another problem thats not taken into account is a language barrier, There is one period Outsourcing does not work, it damages companies image and can lead to security problems as you are handing all your network to a company you hardly know, so be warned people.

ceso_softdev
ceso_softdev

He may be "pro outsourcing" because he didn't have to pay the price for it. By paying the price I mean having to talk for hours with a bunch of script jockies who had no clue about how to fix a server; who barely speak any english at all, without sense of urgency and who couldn't care less about your problems because they are half way across the world.

Tony Hopkinson
Tony Hopkinson

He's currently making money hand over fist selling it to the people with a big button on their foreheads marked "Press for Greed". It's the deluxe one with the automatic blinkers and myopia as custom made extras.

lgarlick
lgarlick

Companies are in the business of producing as efficiently as possible. Even here in the states there is a market for labor. I believe many companies were overzealous in outsourcing in past years. Cheap doesn't always mean efficient. I believe using outsourcing for specific, well-defined projects, can pay off. Moving your whole development center overseas would probably be a big mistake. Remember, company executives are accountable to their stockholders. If outsourcing raises the value of the company, then it is a good move. They just need to make sure they don't kill the goose laying the golden eggs.

HAL 9000
HAL 9000

Telling me to delete all of the E Mails on a End Users NB who they knew was a Surgeon and had work emails there to get the E Mail Client working again. 3 hours latter when the Hardware of the ISP was fixed and their E Mail Server started to be able to send stored emails again the NB worked without any intervention at all. I had rung their support line to see if there was a Service Outage at the time and the Local ISP who had outsourced their Help Desk didn't inform the Help Desk who then proceeded to insist that it had to be on the NB as it wasn't anything to do with their service. Or maybe the ISP had told them but those answering the phones had not been told or whatever. None the less their proposed course of action would have been detrimental to the ISP Customer if it had of been followed. They also got very uptight when I simply said I couldn't delete all of the Stored E Mail but I would move it to another location and not destroy it. That apparently wasn't good enough they wanted it deleted. The Telco in that case got exactly what they wanted cheaper Support and complete rubbish for their customers. The one in question has since changed ISP's to one with a Local Support Desk not an overseas Support Center. It only took me 20 minutes or so to have that confirmed to myself but he had spent 4 hours on an International Phone call to be told that his NB was broken and couldn't be fixed when all that was required was to change the outgoing Mail Server. At the time he was away from home and making an International Call from his location to the ISP's help desk. And it wasn't the first problem he had with them but it was the last as he changed ISP's directly after that incident. He also refused to deal with the ISP's Help Desk because from his past experiences he had got no successful remedy of the problems he had had with them. He did however dump it in my lap to solve the problem and I did have to agree with him that the ISP's Help Desk was completely useless. Col

mdwalls
mdwalls

Many SMEs outsource some or all of their IT functions to service firms down the road. The trick is (1) identify a set of your business functions that someone else can do better/cheaper than you can, then (2) set up a good contract to procure those services rather than DIY, then (3) have a reversal plan just in case it doesn't work out. No silver bullets here, just good management (sadly, as always a scarce commodity).

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