The outsourcing industry took quite a severe beating in the run up to the recent US presidential election, with the issue of American jobs being lost to lower-cost countries high on the agenda. The debate confused outsourcing with offshoring, and saw China portrayed as the evil nation stealing jobs and intellectual property, and violating US trade rules. Some commentators described it as the battle of “who-outsources-least”, with Mitt Romney being referred to by President Barack Obama (and not in a good way) as an “outsourcing pioneer”. Whilst the sector has begun to fight back (with, for example, the UK’s National Outsourcing Association launching its “Outsourcing Works” campaign), news of General Motors’ plans to discontinue the majority of its IT outsourcing arrangements and bring 90% of its IT work back in-house puts outsourcing, and its polar opposite, insourcing, under fresh scrutiny.
Start of a trend?
General Motors’ insourcing plans are significant. As reported by ComputerWorld[1], Randy Mott, GM’s newly appointed CIO, announced that GM will open several “innovation centers” in the US (the first two reported being in Austin, Texas and Warren, Michigan) and hire 10,000 IT professionals worldwide over the next three to five years. GM had previously relied heavily on outsourcing providers to run its global IT functions and had, before the September announcement, been at the forefront of the IT outsourcing industry; it acquired Electronic Data Systems (EDS) from Perot in 1984 before spinning it off in 1996. It is not the first time that a major outsourcing user has reversed its strategy. In 2004, JPMorgan rehired approximately 4,000 workers from IBM as it cancelled a $5billion IT outsourcing contract following its merger with Bank One Corp. It is perhaps too early to call a trend; however, as GM was a bellwether of outsourcing, this is a significant reversal.
A turning tide
A survey earlier this year[2] showed that whilst insourcing is not as popular as outsourcing, more customers are now contemplating insourcing due to vendor non-performance or changes in business strategy. 48% of respondents had terminated an outsourcing contract, with quality of service being cited as the single biggest reason for termination. Insourcing was reported as the exit strategy for 34% of respondents, with improving customer service as the most important factor in the decision to insource. Improved controls and reduced operating costs were also factors. That insourcing is afforded such high prominence is surprising, particularly given the growing adoption of disruptive technologies such as virtualisation, cloud computing and innovations in mobility. However, it does coincide with the emergence of a multiplicity of alternative sourcing models (such as multi-sourced and outcome focussed commercial models) which are starting to challenge the previously dominant monolithic lift and shift approach of traditional outsourcing.
In our experience, pressures on existing outsourcing arrangements include: rising labour costs in offshore countries; high staff attrition; outdated pricing models especially where there is a focus on inputs over outcomes; service performance which has fallen below market norms; scope creep; misalignment with changing business objectives; change in customer leadership and direction; and cultural and language issues.
Bring it back in-house
The decision to exit from an outsourcing arrangement needs careful attention in terms of both planning and execution. It is not as simple as terminating the outsourcing arrangement and hiring staff to do the job in-house. Alongside insourcing, the customer should examine a range of options including renegotiating the incumbent supplier’s agreement, migrating the services to incumbent providers of related services, retendering the services, or transitioning to an alternative outsourced solution, eg cloud services.
Programme plan
If insourcing is the preferred option, key tasks and activities to be considered as part of the development of an overall programme plan for insourcing include:
Ø Stakeholder Management. Key stakeholders within the customer organisation must be appropriately informed of the steps required for considering insourcing, the timings and likely cost involved. A robust communication strategy is needed to ensure that key stakeholders are kept up-to-date, the project is managed to the agreed timetable, and both budget and risks are mitigated appropriately.
Ø Business Objectives. Business objectives should be clarified and updated, both near-term and longer-term. For example, if the business is planning to expand into new territories, how will the services be able to cater for the business as it grows and changes?
Ø Data Gathering and Analysis. Relevant data needs to be gathered such as financial and service performance data. Are the technologies being used up-to-date and do they take advantage of recent productivity improvements and innovations? Is benchmark data comparing current market prices and service standards for similar services available?
Ø Target Operating Model. In designing the target operating model, the team should assess how the existing outsourcing relationship is contributing to or impeding the realisation of the business objectives. In other words, what successes and lessons learnt should the customer mimic in its in-house environment? And how can it restructure or replace what is not working well?
Ø Business Case. The business case should assess existing costs, service, quality, process efficiency and personnel requirements against the cost of being able to provide something similar in-house. Additional costs to be considered include the cost of filling service gaps identified, implementation and transition costs, legal and consulting costs, contractual termination charges, the cost of hiring and onboarding the new service team, hardware and software procurement costs, the cost of acquiring and building out facilities and third-party contracts where the entire service is not brought back in-house (eg hosting facilities, network providers). Ongoing running and maintenance costs also need to be factored in.
Ø Cost/Benefit Analysis. As part of the business case, a cost/benefit Analysis should be prepared. A key question to be answered is whether insourcing presents significant switching costs and/or business risks that far outweigh the potential benefits.
Project plan
The customer’s insourcing team should prepare a detailed Project Plan. It is important to plan early and track all critical deadlines, leaving sufficient time to terminate the incumbent’s agreement in accordance with its terms, transition the work in-house and negotiate supporting agreements. The availability (and cost) of exit assistance from the incumbent should also be considered. A simple checklist of key topics includes:
Ø People. What roles and skills are needed to provide the services in-house? Are there paid-for roles within the incumbent provider which would be redundant in-house? Does the Acquired Rights Directive (TUPE in the UK) apply? What employee-related contract terms apply on exit?
Ø Processes. How will processes change once they are brought in-house? Are there service descriptions and standard operating procedures for the current processes and is the incumbent provider obliged to update them and hand them over on exit? What documentation exists to ensure the transferring processes can be re-established in-house and then managed on an on-going basis?
Ø Technology. What technology will be required to support the services? Is the incumbent provider obliged to hand over the hardware or software (and related third-party contacts) which it used to deliver the services? And if so, at what cost? If not, consider issues relating to the procurement and support of the technology to support the services.
Ø Data and Knowledge Transfer. How extensive are the incumbent provider’s contract obligations to provide exit or termination assistance? What does the supplier have to help with and when? How will customer and service related data be handed back and in what format and on what media? Bear in mind that the supplier will need to continue to have access to data until the final transition of the services back in-house, whereas the customer is likely to need access long before then in order to ensure the systems are in place and have passed any testing procedures.
Ø Exit Plan. Does the incumbent’s contract require it to maintain an exit plan and has it been tested recently? Is it up-to-date?
Other key issues to be considered when bringing a service back in-house will include disaster recovery planning and data security requirements, as well as regulatory and legal compliance issues such as ensuring that Data Protection notifications are adequate and comply with sector-specific regulations.
Concluding Thoughts
Not surprisingly, considering the extensive list of issues to be investigated by a customer, the costs and risks of a material insourcing project may prove to be a significant barrier to bringing back services which have been outsourced. Large corporates such as General Motors and JPMorgan Chase have deep pockets and can assemble large teams combining procurement, legal, HR, tax, treasury, risk and other professionals and leverage their considerable purchasing power with suppliers of services, whereas small and mid-sized outsourcing buyers may look at alternative strategies where their outsourcing contracts are seen to be failing to deliver against business requirements. In the meantime, industry commentators will be watching to see how the General Motors plan develops.
Tim Wright is Managing Partner of Pillsbury’s London office. As the leader of the firm’s Global Sourcing practice in London, he also advises regularly on a range of outsourcing and technology related issues.
Tania Williams is a senior associate in the London office of Pillsbury, and is a member of the firm’s Global Sourcing group. Tania represents multinational clients in the areas of information technology outsourcing and business process outsourcing.
[1] http://www.computerworld.com/s/article/9231519/GM_insources_set_to_hire_10_000_IT_pros
[2] Survey by Deloitte Consulting LLP dated February 2012: 2012 Global Outsourcing and Insourcing Survey Executive Summary.
