Shifting gears on outsourcing

US auto giant General Motors' recent decision to bring back 90 per cent of its IT operations under its own roof within the next five years is certainly a significant shift in gear for a company that wrote the book on outsourcing.

Long before the global financial crisis and the ignominy of a tax-payer funded bailout GM was not only the largest automobile company in the world it was also the largest consumer of IT products and services. Almost all of GM's IT operations were fully outsourced, with a team of dedicated IT executives at the Information Systems and Services (IS&S) department keeping tabs on the array of outsourcers, to ensure that goals were met while keeping costs down. 

And the approach delivered results – GM's IT expenditure fell from about $5 billion a year in 1998 to about $3 billion a year in 2003. So why the change in heart and is GM's move a grim portent of what lies ahead for outsourcing?

GM's new CIO Randy Mott's decision to bring the IT jobs back home is as much about control as it is about saving money. In fact it is a theme that is brought up quite routinely, especially by companies, which feel that they have lost control over the final outcome,  and outsourcing has become an inhibitor to innovation.   

However, it would be premature to think that these considerations signal the end of the outsourcing era. If anything spending on outsourcing globally is only expected to tick higher. According to analyst firm Gartner, worldwide spending for IT outsourcing services is on pace to reach $US251.7 billion in 2012, a 2.1 per cent increase from 2011 spending of $246.6 billion.

Shifting attitudes to ‘Big IT'

What GM's decision does highlight, however, is a shift in attitudes both in the US and in Australia.

According to ASX-listed managed services firm SMS Management & Technology's (SMS M&T) clients & markets director, David Moodie, the key drivers for outsourcing in Australia (skills shortage, cost pressures) are still relevant but they are undergoing a change, with companies increasingly losing interest in old world ‘Big IT.'

 “While some financial institutions are still driving large outsourcing contracts you see many companies, which have been running outsourcing for longer, now feeling that the way they are working is inhibiting their capacity to innovate,” Moodie says.

“So they aren't driving the change program the supplier is, because now they are having to manage against performance levels on contracts. In essence, companies are aiming to innovate at a rate their current contracts and suppliers can't meet.”

With pricing concerns still paramount many companies are increasingly turning their attention to better priced options, especially the disruptive influence of the likes of Salesforce.com and QlikView.

The emergence of these companies and the value proposition that they offer to organisations, when compared to traditional channels, is encouraging many of them to look at IT differently.

“Some of the conversations we are having with our clients show that many are keen to migrate, they want to migrate, but instead of opting for the big IT transformation they are looking for something that is more agile,” Moodie says.

IT as a service

So what we have here is a scenario where mature organisations are starting to take a serious look at cloud sourcing. However, that doesn't mean that traditional outsourcing is on its way out just yet.

As Moodie points out there is continued interest within SMS' client base in BPO, whether it's call centres or accounts payable, but there is a growing move towards buying IT as a service.

.One example of this is the increase in the demand for dual shore capabilities which allow organisations to assert greater control with regards to investment and innovation. What it also does is allow the business to focus on agile development without worrying about whether the commodity end of things is outsourced traditionally or on the cloud.

The traditional outsourcing paradigm can effectively be broken into two cycles.  

There are those organisations which are driven by the imperative of reducing cost, gaining access to skilled resources, focusing on “core” activities. One unfortunate facet of this cycle is that all too often organisations handball the stuff that they are struggling to manage to external parties, often at their own detriment.

On the other side of the ledger are those organisations, with fairly mature outsource operations, which are now looking to optimise their outsource operations. These companies don't want to operate IT they want to buy a service outcome.

An example of this is the shift in a number of our larger banks, which five years ago where outsourcing to the likes of IBM and Electronic Data Systems (EDS) but are now choosing to engage with billing and payments platform providers.

Giving over-engineered IT delivery the flick

There is another significant factor in play that is causing many companies to rethink IT delivery, including outsourcing arrangements. According to Moodie, many companies are over serviced by current IT, where successive IT initiatives have led to more complex and less efficient operations.

With many companies keen to build new systems and not retire the old ones, GM's actions hold a pertinent lesson, especially when it comes to giving over-engineered solutions the flick.

Organisations are waking up to the significantly cheaper IT solutions available to them, either from re-licencing, moving to the cloud or through better tailoring IT to business needs. Outsourcing will continue to be an important part of the IT delivery landscape.

However, GM's move could be a significant signpost for a growing maturity within organisations that are seeking more flexibility and more importantly, unwilling to simply give the problem away.