Could GM’s decision to insource IT start a trend?

analysis

Could GM’s decision to insource IT start a trend?

Karl Flinders

As General Motors brings its heavily outsourced IT environment in-house, we examine whether the decision is likely to trigger other companies into similar transitions or whether it will be a one-off.

General Motors (GM) announced earlier this year that it would insource about 90% of its heavily outsourced IT operation. Through a historic link with IT services firm EDS, GM outsources most of its IT to HP.

EDS was part of GM from 1984, before it was spun out as a standalone company in 1995 but continued to be GM's main IT supplier. EDS was acquired by HP in 2008.

But GM CIO Randy Mott has taken the brave decision to reverse the outsourcing and bring most IT back in-house. This will create 10,000 internal IT jobs at GM, which has already recruited 3,000 from HP.

Mott said the reason for insourcing was to give GM the resources, tools and flexibility it needs to provide better services and products to its global customers.

Rather than rely on suppliers to provide IT to react to market trends and customer needs, GM can quickly develop IT in-house.

But will GM’s move be repeated, or will the company's scale make it an exception?

No sudden wave of companies insourcing IT

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, doubts that GM's decision will be repeated across the industry.

He said there are broadly three drivers for a move to insource: suppliers messing up; short-term tactical needs; and strategic goals. 

If suppliers mess up or offshoring models are not working, businesses can pull back work out of necessity. They could also pull work in-house for tactical reasons, for example in the interim if they wanted to change suppliers. Then there may be a more strategic reason, such as the need to focus their IT attention on developing systems specific for their business.

"I understand from those close to the [GM] situation that it is particular to the history of the GM/HP relationship, and that what it does will not be a trend in IT outsourcing," said Lewis.

“The inside facts are not public, nor would I expect them to be, so we are speculating. I am not aware of any similar situation anywhere in the world. Nor do I see corporates generally wishing to own massive IT departments,” he added.

Lewis does see a growing trend to multi-source and industrialise IT, however, with the public cloud making big inroads into corporate IT. He said that does not sit with corporates owning big IT departments.

But there are some notable multi-national groups that have retained big IT functions alongside selective outsourcing. 

“It could be that GM will be one of those. But why? It could equally be that this is a step to a more distributed insourcing/outsourcing model and that, over time, GM will start to deploy other computing models, including public cloud. We'll see. What is for sure is that we will not see waves of big corporates reversing big outsourcing deals and insourcing."

Creating business opportunities through IT

IDC analyst Douglas Hayward said the pendulum is swinging towards insourcing, but only marginally. 

"GM insourcing is not a one-off, but won't be a trend. Only some large organisations can do it," he said.

Hayward said big businesses can create opportunities for themselves through IT, which they would not get from suppliers, because suppliers rarely go beyond what they are contracted to do. 

"We have not reached the stage where supplier services are fully trusted to be on time and to budget, with creativity and proactivity," he said.

Insourcing might become more common if suppliers don't change their attitudes and become more proactive and business orientated, added Hayward.

Former EDS UK head and head of strategic outsourcing Europe at IBM Global Services, Sean Finnan, said there are always examples of suppliers and customers falling in or out of love with outsourcing.

“I don't think this is the start of a new trend beyond the normal ebbs and flows of business. Outsourcing remains an important and viable part of the IT landscape,” he said. “The essence of rejecting outsourcing as an option is normally a CIO who believes she or he can gain sufficient scale advantage to equal or outweigh the profit requirements of the market.”

Finnan said many outsourcing deals have a forgotten element, which is often the transfer of risk – not just risk of project failure, where suppliers soak up cost overruns, but also the risk of innovation failure.

“The failure to provide sufficient new features from the IT environment to remain competitive is often overlooked,” he said.

Mott’s decision will enable the GM IT teams to focus on innovation and the creation of systems designed to support its specific business and customer needs, for example.

One IT professional, who was in agreement with Finnan, said: “From what we've seen of many outsourcing deals in the UK, particularly in the public sector, there is no real transfer of risk.”

He said the end customer business remains dependent on the suppliers' IT systems and there has been very little evidence of suppliers really having to pay the true cost of failures to the customer's business.

GM’s decision is “admirably clear-sighted”, he added, and will ensure the company does not become too dependent on third parties. 

“The bigger problem is that outsourcing inevitably removes skills and experience from the customer. And once the in-house jobs/skills have been shed, there is very little most businesses can do to retreat from the outsourcing trap – at best they can try to switch from one outsourcing supplier to another, with the same risks and costs.”

Not many companies can afford to hire thousands of IT workers from a supplier in the way GM is.


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