Insourcing vs. Outsourcing: Five Principles to Define IT Sourcing Strategy

Tuesday, July 31, 2012 | comments (43)

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.
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