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A Reset in Outsourcing

Randy Mott, the CIO of General Motors made a powerful statement when he announced the end of IT outsourcing as GM knew it. A company just bank from the brink of bankruptcy now has the gumption to raise its headcount by thousands and in a non-core area. In many more ways than ever he also signalled the end of an era where multi-year, multi-billion outsourcing contracts which have dominated the world of IT service providers and have driven their businesses. The contours of outsourcing and the business model of IT service providers now looks vulnerable and hazy atleast for some years from now.

Perhaps its a case of an exceptionally strong willed CIO, the likes of whom have made a career by banishing outsourcing. Perhaps its a case of history turning full circle. In the last century organisations hardly knew outsourcing, their IT departments were bloated with hobby consultants who got bored from their run of the mill job descriptions and thought of IT as big plus on their CVs when IT departments asked for them from Finance, After Sales or Purchasing to be loaned for IT projects. 

The Y2K crisis, the dotcom bubble and the ensuing recession of 2001-3 first seeded the idea of outsourcing and offshoring as a game changer. Organisations needed to focus on their core business and generate massive savings by replacing headcounts with outsourcing spend. Sunil "Bharti" Mittal grabbed headlines when he was called "The man who sold his network away". Organisations around the world were doling big money like Airtel while 100 million accounts were and are still sashayed by IT service providers at analyst meets. The term CIO gained its clout when he started controlling billion dollar spends and was feted and lured all around by IT service providers.

Perhaps outsourcing comes in waves, the troughs and highs being inextricably intertwined. Nevertheless, it makes eminent sense to know why outsourcing is facing a trough in this moment. We are again staring at a prolonged slow growth if not complete recession. The capability and the maturity of the IT suppliers has grown by leaps and bounds. The situation should be ideal for another wave of outsourcing as it has been many times in the past!

But organisations are investing in developing in-house capabilities, building IT captives in low cost destinations and reducing the lock in period of outsourcing contracts to 2-3 years. The circle seems complete.

Is it the end of IT outsourcing as we know it? IT capabilities and knowledge that were once considered non-core, are now being seen as integral to sustenance and growth of business. The organisation wants to preserve this knowledge in house and reduce dependence on IT suppliers who have for better or for worse, led and dominated the way in which organisations manage their IT programs. There are stories which cannot be ignored, where organisations experienced a loss of control or high turnaround times on requested changes and enhancements which were vital for business, because the supplier drove the governance and content of the program.

The organisations now want to be ever more responsible for their architecture, to clearly define how disruptive technologies for cloud, mobility or big data fits their context and to build the IT strategy on their own terms. On the way, they are open to ideas and points of view from suppliers, but they may want to preclude the supplier from getting too integrated with what they increasingly believe is their task.

The organisations of yesterday were struggling to expand their footprint in emerging markets. The organisations of today find themselves comfortable running operations out of Bangalore, Manila or Shanghai. They want to integrate these destinations from a 360 degree perspective which includes local sales, material sourcing and talent acquisition. With this they are finally in step with IT service providers to provide the capabilities and advantage of augmenting their talent pool in developed markets with similar talent in low cost destinations. 

Of-course, this trend is also backed by business cases which have started mushrooming of late and which claim to save millions for the organisation when the outsourced work is brought in house and topped up with better quality, flexibility and governance.

But for how long will this trend continue? Is it just another wave where the spread of IT spend is being retracted and consolidated before giving it back to suppliers? It remains to be seen whether in the long run, the organisation trusts its HR department more to provide highly skilled manpower who sticks, or its Purchasing department which can negotiate with the best suppliers on service levels, quality or price.  There are pitfalls in searching for, hiring and retaining people with scarce IT skills which so far has been considered a non-core activity. Till now they have been saved from the pain of rapid ramp-ups and ramp-downs which needs to be addressed.

And where does this trend leave the the IT service providers? Its a continuous battle for value addition. Till the effects of increasing in-house capabilities become visible in a few years from now, the commodity end of IT services, prominently application support and enhancement and infrastructure management are very likely to move in house from suppliers. 

The relationship with the IT service provider has to be seen as strategic in order to sustain itself in future. The IT service providers run the risk of severe commoditisation and facing a dead end in case they restrict themselves to an old and dated transactional model. They would need to scale up to be able to assist the organisations in defining their vision for the future, in getting the pulse right on new disruptive technologies and ability to handle transformative programs in much shorter times and increasing constraints. The IT service providers would need to enable the organisations to take away the low-end IT business on side to in-house and handover high-end work on the other side.
Its a new beginning of IT outsourcing which we haven't seen yet.

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