Outsourcing isn't what it used to be, and that could be good news for CIOs. A recent study suggests more IT leaders are ending unsuitable outsourcing contracts. The study, conducted by Deloitte LLP, indicates a small but still significant number of companies are now insourcing -- bringing their outsourced IT functions back in-house.
The main drivers of the trend, as indicated by respondents from 22 global companies in more than a dozen industries, are customer satisfaction, control and cost. Nearly half (48%) of the 111 professionals who participated in the survey reported terminating an outsourcing agreement early for cause or convenience. Of those early terminators, 34% said they brought the outsourced function in-house.
That number, while small, is indicative of how the outsourcing market has matured and evolved over the last 20 years , said Deloitte consulting principal John Tweardy, who co-authored the report From Bangalore to Boston: The Trend of Bringing IT Back In-House.
"We’re seeing an increase in the amount of outsourcing options available and buyers moving away from the “one size fits all” deals. Buyers are more likely to break up the scope of work into multiple functions and balance delivery with service integration models and complex vendor governance," Tweardy said. "You can now take very specific functions of scope and outsource those out to the right vendor, for the right reasons in the right location -- it's more of a buyer's market."
IT insourcing viable, best option for Texas company
The findings of the study would come as no surprise to William Floyd, CTO of Plano, Texas-based MB Trading. He was there at the beginning of the IT outsourcing trend and has been involved in outsourcing IT operations at four different companies over the past 20 years.
U.S. costs and skill sets are much more in line with any outsourcing country at this time.
CTO, MB Trading
He experienced widely varying degrees of quality over the years, he told SearchCIO-Midmarket in a recent interview. His first few experiences with outsourcing vendors were relatively positive; in one instance, the work exceeded expectations. That changed, however, with his latest engagement -- software product maintenance, development and quality assurance work outsourced to India. When the work went sour, he brought those outsourced jobs in-house.
"We overestimated the abilities of the outsourcing company and they oversold their capabilities," Floyd said.
He said he was confident his in-house team could perform better than the outsourcing company and, moreover, at a similar cost, because of the state of the U.S. economy.
CIOs don't need to settle
Shoddy work and poor communication are reasons for terminating a contract, but they aren't the only ones pushing the IT insourcing trend, Tweardy said in an interview about the study. Outsourcing today is much more fluid; 10-year contracts have been replaced by two- or three- year contracts with flexible termination options.
CIOs know that in order to keep up with the pace of fast-moving technology demands like mobilization, they must utilize an operating model that allows them to leverage multiple sources in an optimized fashion, Tweardy said. The best models are becoming hybrids that leverage in-house sources such as centers of excellence or shared services, external sources like cloud and traditional managed services both onshore and offshore.
"That number -- 48 % choose to terminate -- really is a function of having so many more options out there," Tweardy said. "That aspect of terminating for convenience doesn't mean the work being done isn't good, but that it's not right for me in the context of my original guideposts and service requirements."
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The economics of outsourcing are also changing, including a prime mover for shipping work offshore -- labor arbitrage. For years, outsourcing was driven primarily by a desire to save money, Tweardy said, but that trend appears to be turning on itself. Among the study respondents bringing IT functions back in-house, 77% said they were doing so to cut costs. Over the years, a combination of factors including foreign inflation, a U.S. workforce surplus, increased visibility into the true end-to-end cost of the outsourcing transaction and renewed focus on service quality have all eroded the traditional offshoring value proposition.
Today, it's less about cost and more about capabilities, Tweardy said. "Buyers are not really giving any passes when the outsourcing company doesn't bring best of breed solutions," he said.
And while the companies bringing IT back in-house are relatively few in number, they are an important indicator of a tip in the balance of control -- one Tweardy expects will continue.
"The number is relatively small, but I do see it as a tool in the CIO's toolkit that will increase over time," he said.
MB Trading's Floyd agrees. "U.S. costs and skill sets are much more in line with any outsourcing country at this time," he said.
Let us know what you think about the story; email Karen Goulart, Features Writer.
This was first published in April 2013