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Outsourcing has been around for decades, with its promise of lower costs and broader skill sets. But companies are now adopting a mix of strategies that include cloud and a return to insourcing.
Over the past 40 years, companies have gone back and forth on outsourcing. The proverbial wisdom hasn't changed much. The allure of outsourcing is the promise of cheap labor and in some cases, access to skills your company might not have internally. The attraction of insourcing is capturing your intellectual property as a strategic resource and putting it to competitive use for your business. Given today's rapid and often unpredictable pace of business, there is still a place for both strategies. The key is knowing how to use both for best advantage.
Recent history — and the surprising resurgence of insourcing
For manufacturing, engineering, and IT professionals who saw their jobs disappear in the 1980s, with a continuous trend toward even more job outsourcing in the 1990s and early 2000s, it seems surprising to see a return to insourcing. However, that is exactly what started to happen in 2011 and 2012, and it's continuing to occur today.
Why are companies changing their minds?
1: Disruptions overseas
Labor disputes, tsunamis, political unrest, and other factors have rendered outsourcing riskier than in the past, especially when companies must assure that their production keeps going. In China, the 2012 Apple-Foxconn labor dispute was a prime example. Not only did it disrupt production, but it also created publicity problems for Apple in some of its largest consumer markets, including the United States. In another example, the 2011 floods in Thailand affected PC production in factories, delaying shipments to consumers and costing companies millions in lost revenue.
2: More attractive onshore options
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The major objection to maintaining IT and other skilled jobs onshore has been cost. But now labor costs in traditional "low cost" outsource markets like China and India are rising. These price increases for outsourced labor are making an onshore option for IT, engineering, and manufacturing personnel in the U.S. more competitive. Companies also have the advantage of a workforce that is located on-premise, and is therefore easier to manage.
3: Concerns over corporate intellectual property leaks
The software, algorithms, IT deployments, and business process development that corporate IT creates are, and should remain, corporate intellectual property. When software development and the business know-how behind it are outsourced, there is greater risk that the ideas given to the outsource company will be appropriated for others. Companies are experiencing a change of heart today when it comes to outsourcing business know-how and innovations — and risking the competitive advantages they gain from their own IT.
4: Improved ability to capture business requirements in IT
When an IT department is on premises and in the same building, it is easy to walk down the hall and call a meeting to discuss a new business requirement and organize the IT that will be needed to support it. There are no long distance conference calls, language barriers, or time zone obstacles to battle through, and there is better assurance that companies will be able to keep their innovative ideas inside the building. Today's agile business practices require agile IT. Being able to trigger instantaneous in-person collaboration on a business problem or initiative enhances this.
Recent use cases support this, as major enterprises like Walmart and General Electric are insourcing jobs. In GE's case, there is also a conscious effort to re-insource IT that was once outsourced—out of an interest to maintain direct control over new innovation and intellectual property.
Meeting the needs of a dynamic business environment
Even for companies committed to insourcing, there is a realization that it is almost impossible for IT to keep up with business needs.
To illustrate, mobile initiatives are on every enterprise's list, but developing new applications and deployments for these devices is slowed by the IT required to get there. For example, in a recent survey, research firm IDC found that fewer than 50% of healthcare provider organizations are deploying mobile devices in a care setting — and fewer than 40% are deploying applications. When healthcare providers deploy mobile applications, the apps are often basic clones of legacy client applications that fail to take advantage of the unique qualities of mobile devices.
In other cases, businesses find that they can develop their IT faster if they enlist the help of offshore resources that work while the U.S. workforce is asleep or that augment IT in-house talent with unique capabilities that are in short supply internally.
"When I was working in the telecom industry, I found that we could complete our application development projects in much less time than we had originally estimated, with the help of offshore resources," said Kate Hanson, who now heads up a nutritional health company. "When we got to work in the morning, we found a well documented list of everything that had been programmed and completed overnight. It was a tremendous help."
Mark Little, CEO of cloud-based restaurant service startup MyMenu, is getting similar results. "We have an in-house resident IT staff, but we also complement this staff with a contract programming group in Vietnam," he said. "The turnaround on applications is excellent, and the skills of this group are very good." Little uses the group to program the software that his internal staff specifies, designs, installs, and runs.
For these and other reasons, outsourcing remains a viable option for companies that:
- See outsourcing as a means of augmenting their capabilities
- Believe that outsource resources will be less expensive
- Want to outsource "fringe IT" work so that internal IT can focus on higher corporate priorities
In all cases, it is important for IT to control the work and to monitor the results of these outsourced projects.
The disruptive force of the cloud
If there is transformation afoot in outsourcing, it is the emergence of cloud-based services that can slot into key areas where internal IT is looking for augmentation. There are three significant niches in cloud where enterprise are choosing to outsource:
IaaS (infrastructure as a service) — IaaS is the entire IT infrastructure, inclusive of hardware, software, networks, operating systems, etc., that is needed to run corporate systems. Many smaller companies wanting to focus on their core businesses choose to outsource most of their IT to an IaaS provider. They let the cloud provider run their IT, and they pay for only what they use. As their businesses expand, they scale their IT management to reflect that growth.
PaaS (platform as a service) — PaaS is a computing platform service that enables enterprises to create and test new software without having to conduct this iterative and often collaborative process inside the enterprise data center. One example is a major food and beverage company that opted to outsource all its application testing to a cloud services vendor. The company pays on a per-use basis and can scale services up or down as needed. There is also the option to plug the cloud's platform resources into internal infrastructure if high consumer demands warrant temporary resource augmentation.
Key advantages for the enterprise are that PaaS segregates application testing from production, thereby avoiding any crossover in resource utilization. By outsourcing to the cloud, the company pays only for what it needs, so it can avoid making major investments into new IT equipment that might even necessitate the building of a new data center. On the management side of cloud-based resources, the enterprise has the option of using the outsourcer's management or assigning internal IT employees to manage these resources.
SaaS (software as a service) — In a SaaS outsourcing model, companies choose to outsource software and workflows to a vendor that assumes responsibility for their daily support and development, thereby taking the applications off IT's plate. SaaS is most often employed in niche areas of software and business support where IT or the business decides that performance and return on investment can be improved by going outside for it.
A final world on outsourcing
After decades of outsourcing that was principally driven by perceived cost savings, organizations that must now function in a highly competitive global economy also recognize that they should more closely protect their IT intellectual property (IP) and know-how while optimizing their IT for speed to market of applications and other IT services.
Accordingly, there has been definite movement over the past 36 months toward onshoring IT as a strategic discipline, and more U.S.-based enterprises are either bringing back IT or investing in new IT jobs at home. An HsF research study reported that in 2012 alone, outsourcing contracts had dropped by 20% percent. Gartner followed with a report that predicted that outsourcing as a practice would diminish by 15% through 2016.
But these prognostications don't necessarily mean that outsourcing is falling out of favor. Rather, it is reinventing itself in the cloud.
If we look at business adoption of cloud services, North Bridge Venture Partners, in conjunction with GigaOM Research and 57 collaborating organizations, released the results of its Future of Cloud Computing Survey in 2013. The survey revealed that 75% of the 855 respondents said they were using some sort of cloud platform. That growth coincides with GigaOM Research forecasts predicting a worldwide market for cloud computing to reach $158.8B by 2014 — an increase of 126.5% from 2011.
As cloud continues to gain traction, it is likely to become the new outsource model that businesses will go to — and not entirely at the expense of shutting down their IT departments.