Insourcing vs. Outsourcing: Five Principles to Define IT
Sourcing Strategy
PEARL
ZHU
One of LinkedIn CIO discussions about the survey:
"outsourcing takes big turn back in last two years and insourcing
increased 35%. What are you seeing?” spur many quality comments about IT
sourcing strategy, the other IT survey also shows: now most of customers, large
or small, prefer to have more flexibility, do not like to tie into multi-year
contract, on the other side, vendors may attract customers to mega-deal via
pricing discount., etc.
The world becomes more complex, change is accelerated, the
present shift to insourcing those functions once again is an indicator that
organizations are realizing they need greater flexibility and agility, which is
a little more difficult to achieve when functions are outsourced.. Bsiness and
IT also have more sourcing choices than ever, insourcing, outsourcing, on
shore, near shore, off shore, and public/hybrid/private cloud sourcing, with
all these, how to craft a good IT sourcing strategy?
1. IT Sourcing is Critical Element of Business/IT Strategy
IT sourcing is crucial for IT strategy –to decide what kind
of IT organization you need become and climb IT maturity, IT strategy is integral part of business
strategy, that’s why IT sourcing will directly impact business’s strategy,
innovation and vendor relationship for long term:
Business/IT Strategy: Business strategy is about diagnosing
business problems, making a set of choices, following the guideline to take
actions in order to compete for the future. IT as business enablers, is the
means to the end, not the end, the end should be business agility, elasticity,
flexibility and resilience. Many of times, business can’t articulate what they
need, so centralized IT should collaborate with business to become value
center. IT also need categorize its services into competitive necessities and
competitive uniqueness, differentiate core from chore, focus on value delivery,
taking continuous journey on consolidation, rationalization, integration,
modernization and optimization via leveraging effective IT sourcing solutions.
Culture of Innovation:
Fully outsourcing IT services may present a challenge to creating a
culture of innovation, achieving speed to market, and providing superior
customer service/quality for companies in a dynamic and competitive market
within the context of emerging mobile, social, and cloud computing
technologies.
Vendor Evaluation/ Relationship Management: Sourcing can no
long just consider cost, it's also about evaluating vendor's innovation
capability, leverage expertise, add alternative brainpower & talent pool,
and appreciate "take extra mile" attitude, to build up solid partner
relationship for long term. First of all, business & IT need understand how
to create value proposition in innovative service/products, customer experience
and operational excellence, in which internal IT can do great job to
orchestrate business capabilities; then IT may leverage vendors' strength, to
complement the skills and strength. Also take consideration of vendor's soft
competency such as take extra miles attitude, innovation capability and niche
point, etc
2. You Can’t Outsourcing What you Don’t Understand
Outsourcing and
offshoring were never silver bullets for process inefficiencies or bad
organizational design. There was too much of "my mess for less". Add
in the cultural and communication issues,
the turnover and cost inflation in available resource pools, there was
always going to be a point at which the reality overcame the theory. The business also should no longer talk about
outsource jobs to take political pressure, they are looking at both technical
value and BUSINESS value a provider can put on the table of long term strategy.
That said, first,
business may still need "shoot the tangle, in order to see from different
angle" internally, then make systematic decisions on your sourcing
strategy/solutions, both methods have their place. Organizations need to take a
hard look at what they are trying to achieve and determine which method works
best, as insourcing vs.outsourcing vs. offshoring success depends on objective
why it is done and what is required to be:
Insourcing is better for critical Domain Knowledge centric
activities; business innovation driven project, to create competitive
uniqueness for business growth.
Outsourcing is better if niche knowledge requirement for
specific duration, repeatable transaction based, freeing internal resources for
more value added area, and flexibility of Ramp-up and Ramp-down;
Nearshoring/Offshoring: could be where there is a large
knowledge pool available, budgets are
very tight while a demand for services remains high, follow the sun model,
taking advantage of 24 hour clock and lower cost as added benefit, tap into a global talent pool or the right
"local" partners to expand.
Cloud Sourcing: The latest trend provides business more
choices via vary of flavors : public, private and hybrid Cloud,
SAAS/PAAS/IAAS/BPAAS, to help customer leverage
IT value, running IT as business, Cloud also provides better agility and
elasticity via faster provisioning, Opex service model.
3. SLA & KPIs Driven Hybrid Model
After being through decade long of outsourcing, it reaches
the point where the private and public sectors are finally realizing that
outsourcing is not as "simple" as they originally thought. When done
right, yes, it can have benefits, but it requires hard work to manage and
ensure that it is done correctly. You can’t manage what you don’t measure.
The environment has become so competitive that SLAs/KPIs are
continuously being driven up, thus, driving the costs higher that, in many
cases, the cost-saving potentials are being watered down and questioned. And it
still makes sense to find a sourcing partner for the necessary activities of a
business that are not core to how you go to market and make money, no matter
where you choose to have the work done. Balancing cost, quality and location in
a 24 x 7 world isn't easy - we need all the sourcing strategies and options we
can find to make this work effectively, especially with the quality going down
and costs going up in the outsourcing model.
The outsourcing pitfall may also include miscommunication:
the companies give lip service to "yes, we'll support increased
communication and increased touch points", but most of the time they don't
adjust project timelines and they treat their offshore counterparts as if they
were just down the street. Then, they can't understand why the project is behind
The other problem is most companies swing to one extreme or
another. There should be an optimum multi-sourcing strategy that is based on
TCO and the total value.
4. Don’t Forget Hidden Cost or Shade of Grey
A valid analysis lies in examining the motives and
objectives that drove the outsourcing strategies of those companies in the
first place.
Pay Cost later without careful analysis: Some companies
follow the trend to offshore, without fully consideration about service levels,
support, customer service and focus solely on the cost, until they realize that
the hidden cost is that all of those things you give up, cost you time,
efficiency, agility, frustration, retention.
Investigate beyond the Surface: The other angle to evaluate
vendor and sourcing strategy is about investigating "hidden cost" or
grey area, some reasonable, some not, and customers surely dislike to see such
surprise too frequently, that said, selecting vendors or solutions, not only
look at the surface, dig through and understand the pros and cons more
objectively
5. Cloud Sourcing –Emerging Trend
Though outsourcing training is slowing, businesses now have
more choices to fly in the cloud, the emergence of Cloud computing also
provides business more choices to manage IT, particularly, as cloud has vary of
flavors : public, private and hybrid to help customer leverage IT value,
running IT as business, and focus on innovation & core activity, with the
ability of IT department leadership to inspire the work force and increase the
quality of the final product or service, Cloud also provide alternatives for
faster provision, transform CapEx to Opex, to improve business’s cash
flow.
Flexibility and the ability to be drive radical business
changes in pursuit of competitive advantage will define successful businesses
in the future. The constant shift in corporate preference for sourcing models
merely indicates that few have the right blend, and perhaps more importantly,
the technology provision is increasingly perceived as a constraint to growth.
Companies need become more creative with their sourcing models
and not committing 100% to outsourcing or insourcing. Outsourcing, whose
effectiveness is predicated on operational excellence to provide the low costs,
is the antithesis of agile changes and unique approaches required to keep up
with the IT implications of business innovation. Posted in: CIO Debate,Vendor Relationship
