April 2013 Archives

Insourcing + outsourcing - outsourcing = backsourcing - the academic's view

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There have been a few high profile examples of big businesses dumping their IT service partners to start doing it themselves. General Motors' decision to take work back  in-house from HP is a good example.

But if a service has gone from being in-house to being outsourced and then brought back in-house it is backsourcing which is a bit different to insourcing, which is the process of setting up a service in-house. Thumbnail image for ILAN OSHRI.jpg

Here in this guest blog post Professor Ilan Oshri at the Loughborough School of Business gioves us an academic view.

Backsourcing: can you do it right?

By Prof. Ilan Oshri

"The list is long, just to name a few: American Airlines brought back its IT infrastructure from IBM in 2007. JPMorgan Chase terminated a $5B contract with IBM in 2002 and Mutual of New York ended a 7-year contract with CSC in 1997. Sainsbury terminated an outsourcing contract with Accenture after 5 years of service. McDermott International Inc. dropped what was supposed to be a 10-year global IT outsourcing deal with AT&T's professional services and took back responsibility for design, implementation and management of its IT services. More recently both Santander and General Motors announced that they are bringing back offshored work from India to onshore. 

While there are high profile client firms and vendors involved in backsourcing, there is still very little known about the phenomenon. In many of the cases, it is simply because client firms avoid publicising backsourcing in order to not upset their outsourcing vendors. While we know a little about the reasons to backsource, I can safely say that we know nothing about the success criteria.

Backsourcing (also known as re-shoring or insourcing) is the act of bringing back in-house previously outsourced services as outsourcing contracts expire or have been terminated. This view of backsourcing implies an informed decision making to backsource in which firms evaluate a set of factors and arrived in a decision that is based on higher value or better control. Indeed in the vast majority of the cases, firms enanged in backsourcing because of their desire to improve control over services or escalating costs. In reality, firms do not always achieve such objectives through backsourcing simply because the act of backsourcing is often pursued as a remedy to a problem rather than a calculated sourcing model. In my view, some firms should have considered backsourcing simply because of improvements in their internal sourcing and retained organisation, while other firms should have re-considered their decision to backsource as their in-house service support function has not improved since they pursued outsourcing. In other words, success in backsourcing really depends on what you are trying to achieve in backsourcing and whether the act is a reaction to bad planning or a healthy evolution of the internal sourcing capabilities.

Backsourcing: The Drivers and Success

Basically there are three major categories of reasons for backsourcing: contract problems, opportunities from organizational changes, and opportunities from external environmental changes. Lets examine each driver and its success criteria.

-Contract Problems

Why are we still facing contract problems? There are quite a few reasons: The costs involved in outsourcing tend to be substantially higher than planned because of what has been coined as 'hidden costs'. Cost savings are not always as promised and tend to erode rather quickly in particular when the parties face challenges. There is also a sense of losing control by the client firm that may affect the client's strategic view of this outsourcing realtionship.
These drivers may make the client firms feel that they are locked-in in these outsourcing relationships, and the only way out is backsourcing. For example, In 1996, Continental Airlines ended collaboration with its outsourcing partner, EDS, after four years of successful work together. Continental wanted to improve their reservation system to enable more efficient fleet capacity usage and better ticket pricing. Since EDS was not familiar with the air flight industry, nor with Continental customers, Continental decided it was preferable to run these IT developments in-house.

The success criteria of such backsourcing depend on the client's ability to resolve conflict with the vendor in order to ensure an effective reverse knowledge transfer from the vendor to the client firm. The success of the backsourcing also depends on the absorption capacity of the client firm to take back knowledge and practices and re-integrate them rather rapidly at service levels on par or better than the vendor's. Considering these rather major challenges, my advise to the client firm is to think again their backsourcing intentions. In particular, if the key driver is losing control and running costs, I suspect that the 'retained' organisation is lacking the capabilities to effectively absorb knowledge and smoothly re-integrate the service.

-Internally Generated Opportunities

Changes in executive management within the outsourcing company are generally combined with shifts in power distribution. When companies introduce new executives, these new members are three times more likely to provoke changes. In particular, new CFOs and sometimes CIOs reconsider the value gained from the IT outsourcing contract. At JP Morgan Chase, for example, a new management team, including a new CIO, clearly influenced the decision to backsource services.

The key challenge for an organisation that is considering backsourcing following change in leadership is to realize whether the new leadership can align their sourcing vision with the breath and depth of the sourcing internal capabilities. New vision, which often means change in direction, can be a changing point for the organisation; however, can only materialize if the internal sourcing capabilities support such a new path. In addition to a strong retained organisation that can absorb knowledge and smoothly integrate new service, the success of this scenario depends on the alignment of the business and technical vision and actual operations. 

-Externally Generated Opportunities

Some firms pursue backsourcing following external changes such as mergers, divestures and acquisitions. The Halifax Building Society's merger with Bank of Scotland is an example of externally induced structural changes that led to Halifax Building Society cancelling a ten-year outsourcing contract with IBM. In such a scenario, the focus of the firm to assess threats following rapid changes in the environment and safeguard its competitiveness by securing access and ownership of critical resources, one of which is the repatriation of an outsourced function.  

Success of such backsourcing depends on the strategic value of the outsourced function to business operations and competitiveness and the strength of the retained organisation. Most firms fail to realize the strategic value of the outsourced function to business operations, therefore may properly understand the signals from the external environment as competition intensifies; however, the remedy for this strategic shift is not necessarily the backsourcing of a function, but possibly the extension of the partner networks to tap into innovation and value adding services.

Backsourcing: What should you do?

Based on this list nearly any client firm can be a candidate for backsourcing. However, some are going to be more successful than others if they pay close attention to the strength of the retained organisation, its ability to absorb knowledge, and re-integrate new services. Further, each scenario of backsourcing is different. Therefore, it is imperative to carefully analyse the driver (contract issues, internal change, external change) and seek advice regarding the factors affecting backsourcing success."

Has Outsourcing 2.0 arrived and is innovation built-in?

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I blogged last week about innovation in Financial services. One of the things that speakers spoke of was that it is very difficult to outsource innovation.

In this guest blog UK head at IT services firm Cognizant, Sanjiv Gossain, talks about the role iof IT services firms in support innovation within enterpreises.

Outsourcing 2.0, by Sanjiv Gossain

"Whilst outsourcing has traditionally been seen as a way of cutting costs, the pendulum is definitely swinging towards clients wanting more than savings, increasingly looking at ways to add value.
As a result of this shift, the majority of our client engagements are now driven by helping customers to make their operations as efficient and cost-effective as possible, whilst embracing and investing in innovative technologies and services to help them become more agile and flexible, while enabling growth.
Many businesses, regardless of their heritage or the products and services they provide, are starting to place increasing emphasis on innovation. And with more pressure than ever on budgets and resources, they are increasingly turning to trusted third parties to not only "cut the fat", but also to bring innovation to the table, using savings from operational improvements to fund investments in new opportunities.
Innovation can be enabled in two ways. Firstly it is about enabling businesses to tap into the wealth of creative talent within their own organisations. Promoting innovation and an entrepreneurial culture internally is imperative; from suggesting new product lines and innovative business ideas to identifying new niche markets to target or ways to foster greater teamwork, employees should be able to share and voice their opinions and work with the right people to develop them. Outsourcers are increasingly taking a role to provide frameworks and practical support to enable this.
Secondly, businesses are looking to outsourcing providers for insight on the best use of technology and ways of working that will help give their business a competitive edge. Many service providers are already one step ahead of the game having developed their own technologies and processes to improve efficiencies and customer service. It is this wisdom gained from their own experience that they can share with their customers. Social, mobile, analytics and cloud technologies (SMAC) are the front runners in disruptive technologies driving business innovation; however, service providers need to assess what will work specifically for each individual client and offer valuable advice in terms of what to invest in to drive innovation, whilst enhancing productivity.
Increasingly, customers are asking for innovation to be built into their contracts. Today's outsourcing contracts are smaller and more flexible in order to give customers the opportunity to adjust things on an ad hoc basis or as business needs change. The commercial concept of outsourcing has also altered a great deal and pricing is now becoming more outcome-based so businesses get exactly what they want and are paying for results rather than large numbers of consultants.
Helping clients run better, run differently means reducing costs and maximising efficiency whilst adding value and helping businesses stand out from the competition through the delivery of innovative technology and services. The run better concept of outsourcing is a given for customers - improve efficiency and save costs- they are increasingly looking to run differently, searching for value and/or innovation that, in conjunction with operational efficiency and effectiveness, and cost savings, truly adds something to their business and, in the long run, to their end clients.
Outsourcers need to help businesses become more flexible, agile and innovative, get them closer to delivering competitive advantage while providing high levels of customer service to their own clients. We expect this shift to continue, helping clients to build stronger businesses."

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Can you outsource innovation?

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I was at an interesting event the other night with IT executives within finance firms. The subject of the meeting was innovation.

The meeting was the first Computer Weekly CW500 in the City, a spin-off from the CW500 club where CIOs from all sectors get together to hear presentations on current issues and discuss them in depth.

It seems innovating in the finance sector is very challenging because companies are constantly afraid of breaking the regulatory rules.

Anyway there were some interesting outsourcing angles suggested by speakers and the audience during conversation. One that was that you cannot depend on consultants for innovation because they are not close enough to the company and don't understand it enough to be truly innovative. The fact that consultants are unable to provide innovation means businesses have to look internally for innovation. But this is really difficult. For example as soon as you make being innovative part of a job description you would put immense pressure on staff.

But there is hope for outsourcing innovation through small companies. Attendees at the event talked about how small companies are more able to innovate because they do not face the same regulatory requirements. These companies can be partnered of a big business wants innovation.

Big businesses could even acquire innovation by taking over small companies.
Wherever the business innovation comes from the IT departments in businesses must be ready to support it.

What are your thoughts on this? Can you outsource innovation?

Inside Outsourcing interview: The release automation software firm that emerged from Lloyds bank

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I have written quite extensively about automation software and its impact on the offshoring and outsourcing sector. I met up with Nick Mottershead, the CEO at a company called Midvision, today.

Midvision has software that automates software releases. The company was created in the late 1990's when an IT professional at Lloyds bank, who was deveping software to automate releases, bought the bank's software and offered to sell it back to them. The contractor took all the programmes that had been written to automate all new bits of code and offered it to Lloyds as a service.

It still serves Lloyds Bank today with software, support services and resources and has other customers across sectors including other banks, healthcare organisations, retailers and recently won its first UK government customer with a contract with the DWP.

Application release automation reduces time and the risks associated with making updates to applications. Organisations in heavily regulated sectors such as banking, healthcare and the public sector, have to ensure that updates to applications are done properly as mistakes can be very costly financially and can damage reputation.

These organisations also have very complex systems linked together and a single release, if done incorrectly, can cause serious problems. The recent trouble at RBS when a software glitch caused online banking to crash is an example.

Mottershead at Midvision said 5 years ago banks would probably only have done 50 software releases a month but now they do 4000, so automation makes sense from a resources point of view. But it is also critical to ensure that releases, from different parts of the business, are done correctly. The software provides a single point that standardizes releases across departments and regions to ensure that there is consultancy, which is critical in heavily regulated industries.

Because of the complexity of systems at banks massive amounts of software updates banks have to be made which is expensive and risky. It can take months for a release to go from build to being live because it has to be checked at lots of different phases, but the automation software removes the need for this and  releases can go from creation to being live in minutes.

More on automation software:

Is it time to ditch offshore services for automation for security sake?

Will software robots really decrease offshoring and increase UK jobs?

Machines are rising and they are offshore IT killers

Outsourcing deal restructuring exceeds new contracts in value

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The latest research from ISG has revealed that contract restructuring contributed more to the EMEA outsourcing sector than new deals, in the first three months of this year.

Renegotiations accounted for $0.97bn and new deals $0.94bn in the EMEA region in the first three months of this year. This compared to the global total where new deals were worth $2.1bn and renegotiations $1.8bn.

In the Americas the value of new deals in the quarter was $0,84bn compared to $0.73bn for new deals. And Asia pacific new deals reached $0.36bn and renegotiations $0.08bn.
So why is it so high in the EMEA? The EMEA is dominated by Europe.

There could be multiple reasons for more than average outsourcing renegotiations and fewer new contracts.

The Euro crisis is hitting Europe pretty hard as well as government cost cutting. This is going to drive businesses to revisit their contracts and try to the scope and the price. In this business climate suppliers are willing to listen.

Then there are new delivery models emerging or reemerging. For example cloud computing is maturing and businesses will want to use these in some instances, which will drive contracts to be restructured. Again suppliers will be eager to get a piece of this and they know there is stuff competition.

But I suppose the overriding factor is that during these tough times businesses want to get their existing deals in order before they sign new ones.

TCS continues to invest in Europe

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Tata Consultancy Services (TCS) has acquired French IT services firm Alti for €75m and boosted its workforce across three European countries by 1200 in the process.

Indian IT services firms are increasingly investing in Europe to provide more onshore services to their customers.

Large enterprises and public sector organisations in Europe are prefer certain services to be delivered locally. To this end TCS recently opened a delivery centre in Liverpool to as part of a contract with the Home Office, which will have more than 300 staff when the contract is fully up and running by the end of June.

The Alti acquisition will support the company's business in France, Switzerland and Belgium. ALTI is a provider of IT services around enterprise software such as CRM.

Alti co-founder Andre Bensimon, said the agreement will benefit customers and employees.

"Supplementing our current services with TCS' renowned global expertise will provide tremendous additional value to our clients; while our employees will secure the advantages of building their careers in a larger global organisation, which is considered a Top employer in Europe."

Graph reveals PC Armageddon

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You don't see graphs like this one too often in the IT industry, but the PC market is on its way out by the looks of it. The advent of alternatives in the shape of tablets is reducing sales of PCs at an alarming rate.

PC market graph.JPG

The IT services sector on the other hand goes from strength to strength and, in comparison to some PC makers, it has been quick to reinvent itself in the face of new technologies such as the cloud.

Gartner revealed some research that looked at how IT sourcing executives will have to change their approaches in the light of Generation Y becoming 75% of the working population.

One of the interesting things is that Generation Y prefers to buy IT rather than build it. This means more outsourcing.

Birmingham City Council joint venture with Capita under review

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I've been off a few days so haven't written about the news about Service Birmingham. The Birmingham Mail published an interesting article last week about how there is currently a review.

Service Birmingham is a joint venture between Birmingham City Council and Capita. It covers HR and IT services.

Apparently councillors have little idea about how much the arrangement is costing.
According to the BirminghamMail, Councillor John Clancy that Birmingham City Council members were being "deterred from getting a grip" on the nuts and bolts of the "complex" deal because the facts were unclear.

"Nowhere is there a clear, total figure for what we are paying and what we should be paying," he is reported to have said.

"The biggest issue is transparency; we have little idea of what is going on."

So the political representatives of the people paying for the contract struggle to understand the costs. I can sympathize as I imagine only a lawyer or expert in this type of relationship would be able to easily get a grip of the costs.

I remember when I started writing about the government's plans for mutual, where public sector services would be owned by the staff, the government and a third party supplier. Now that is a complicated. Mutuals have been described as a kind of joint venture, where another party puts money in for investment and the body is run by the previous public sector staff who worked for the organisation.

If you bring a private business into the public sector services equation transparency is paramount.
Remember the trouble at Cornwall Council. The trouble really kicked off when the council's cabinet tried to push the deal through without the consent of the full council never mind the public.

Former Cornwall Council CEO Kevin Lavery can't escape outsourcing controversy at the other side of the world

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It's a tough job but somebody's got to do it.

I blogged back in January about the outgoing Cornwall Council CEO Kevin Lavery and the fact that he was leaving to take the top job in New Zealand's capital Wellington.

Unless there was a last minute change of plan last month he became CEO of Wellington City Council. And already he appears to be at the centre of more outsourcing controversy. I suppose it's the nature of the job -and that's "why he gets paid the big bucks", as they say.

The article does not mention Lavery but he looks set to be the person that will drive the programme through.

Lavery was the force behind Cornwall Council's controversial outsourcing plan, which led to the council leader being overthrown, Cornwall decided on a scaled down outsource. In the end the council outsourced IT and created a telehealth partnership with BT after rejecting a controversial plan to privatise a much broader range of council services.
This article gives more details about his move and describes how Lavery does not count outsourcing as an ideology but an option. One which cash strapped UK councils must face.

I did a poll to get people's views on the outsourcing of services in local government. 404 people have responded with 231 (57%) saying services should be outsourced, 162 (40%) saying they shouldn't and 8 saying they don't know.

So the largest chunk support what Lavery does. What do you think? Please fill it in by going to this blog post.

Inside Outsourcing interview: TCS public sector win shows that offshoring is not about labour arbitrage, but service innovation

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I met up with the UK head at Tata Consultancy Services (TCS), Shankar Narayanan last week. It was good to catch up on TCS, it being the biggest of the Indian IT services firms, which UK businesses have become so reliant on.

Shankar has worked for TCS for over 20 years, starting off as a mainframe developer.
I asked him about the significance of TCS's deal with the Home Office to run the Disclosure and Barring Service (DBS), which was created when the Criminal Records Bureau and the Independent Safeguarding Authority came together.

This is an interesting deal because government has always seemed reluctant to award contracts to companies based offshore. Public opinion will inevitable go against a government that awards a contract to a company that will offshore work.

But here is the interesting part. When TCS takes over the contract there will be fewer of the delivery staff working offshore than there was under the previous supplier Capita. This is because TCS is increasing the amount of automation and digitization, which requires less people.

This will see TCS automate internal processes and offer citizens new digital channels for services.

Shankar says the Home Office did not chose TCS to get a lower cost but for service to be updated and improved.

As part of this TCS has opened a delivery centre in Liverpool to ensure it complies with government rules on security as part of a contract with the Home Office. The centre will have more than 300 staff when the contract is fully up and running by the end of June.

On the subject of public sector offshoring we also talked about the increased level of acceptance of offshoring. Shankar agreed that there is an "increased level of acceptance of global delivery." I think almost all big suppliers these days deliver services from offshore so it makes little difference where the company is listed. But when companies are listed in countries such as India they do come in for more criticism.

Whenever an offshore firm is liked to a government deal there are always concerns about security. The thought of information about citizens being used offshore scares people. But the data stays in the UK.

Shankar told me about the incredibly strict security TCs has in its Indian offices. Sophisticated technology is used to ensure staff only have access to and use the information that they need, and this is heavily monitored. "This security is much higher than in the UK."

On the cloud Shankar told me that TCS in the UK is currently building a private cloud which will be available soon but in the true spirit of cloud computing he believes that most cloud requirements for TCS customers can be fulfilled by partners. This includes Amazon. He said a lot of TCS's customers are happy to use Amazon for many things. TCS even recommends it to them.

In UK business terms, while the public sector is an emerging opportunity, Shankar said financial services is strong as banks attempt to meet regulations and insurance firms try to move away from legacy IT systems. He also said the retail and consumer goods sectors are demonstrating strong demand.

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