Outsourcing is no longer the permanent cure for an expensive IT or business process ailment. Having spent the past few years handing over control of troublesome processes to service providers, increasing numbers of technology leaders are choosing to bring control of problematic systems back in-house.
Prudential's recent decision to review a major outsourcing deal, to investigate the potential of bringing part of its IT operations back in-house, follows a series of high-profile moves away from external service provision (Computing, 31 March).
This latest trend is being termed insourcing. Nearly two-thirds of organisations have already brought some form of outsourced service back in-house, according to consultant Deloitte.
The high level of insourcing can be partly attributed to poor management decisions, says Richard Punt, head of Deloitte's strategy practice.
'While the popularity of outsourcing grew remarkably quickly, customers' businesses were not growing to the same extent,' says Punt. 'Outsourcing was often seen as a way of cutting costs.'
IT managers also used sourcing to farm out difficult IT and business processes to external service providers - a case of out of sight, out of mind, says Punt. 'Outsourcing was sometimes seen as a way of dealing with your mess for less. Some deals should not have been made,' he says.
The first indication that some blue-chip companies were rethinking their arrangements came two years ago, with Cable & Wireless's (C&W's) decision to terminate an outsourcing agreement with IBM. The 10-year, £1.8bn deal, signed in 1998, covered IT infrastructure and customer billing systems.
Last September, financial services group JP Morgan Chase announced its intention to cancel a $5bn (£2.7bn) outsourcing deal with IBM, and to reintegrate the previously outsourced portions of its infrastructure, including data centres and helpdesks.
And Selfridges recently decided not to renew a deal with Capgemini covering data centre management tasks. In an attempt by the retailer to cut costs, control for some of the functions was brought in-house.
It would appear that businesses are reconsidering their enthusiasm for outsourcing. Analyst Gartner predicts the outsourcing market will grow by just five per cent per annum over the next few years, a figure far lower than the double-digit highs of a few years ago.
What's more, the analyst has revealed that nearly 80 per cent of outsourcing relationships will be renegotiated over the duration of a contract. So what went wrong? Why are companies reconsidering big external service contracts for in-house provision?
Punt says many blue-chips rushed headlong into long-term outsourcing contracts, with the result that many IT leaders failed to clarify the relationship between supplier and customer. 'Once you get beyond the deal, they're not sure what they want,' he says.
'The vendor can manage the contract. As businesses change, so do third-party relationships. Provision will inevitably become more fluid and there will be a change in how such services are delivered.
'Insourcing is of interest because people are acknowledging that deals are not providing benefits.'
Deloitte believes that many, if not all, companies which have faced more than five problems with their service provider have taken the insourcing route.
Bringing services in-house is certainly appropriate for some companies, says Duncan Aitchison, managing director of sourcing advisory firm TPI. 'It's a valid and viable option in some cases,' he says. 'It's all about the context.'
C&W moved its essential technology services back in-house two years ago. Chief information officer Martin Taylor says that although insourcing can be seen as a courageous move, the long-term benefit is more control for the business.
'Unless you fully understand the operational cycles that the business requires, it is going to be difficult to make the argument for outsourcing,' he says. 'When the business moves towards rapid change, you inevitably want control.'
In Prudential's case, the organisation was keen to establish if an existing data centre deal could be run more efficiently in-house.
The financial services company used a benchmarking exercise to help determine the level of service and value for money offered by supplier Capgemini.
Andy Mulholland, chief technology officer at Capgemini, says that where contracts have reached maturity, insourcing is a growing trend. 'We accept that people will change their corporate goals,' he says. 'Our models are not designed to be locked down.'
Organisations that rely on restrictive outsourcing agreements can also find themselves lagging behind.
Many companies are lax when it comes to contract writing and the all-important benchmarking of service provision. Just 16 per cent of companies incorporate a mid-term review as part of their contract, according to Gartner.
It is not surprising, therefore, that eight in every 10 businesses attempt to renegotiate their outsourcing deal at some point during its lifespan, and that 15 per cent of contracts are renegotiated within the first 12 months of signing the agreement.
At least 20 per cent of TPI's work involves helping organisations deal with contract renegotiation, says Aitchison. 'Usually you need to start thinking about your contract at least two years before its end,' he says.
'You need to think about where the business is moving and whether multiple sourcing strategies can help you. Businesses need a sourcing strategy that is well-thought through, and a hybrid approach that blends internal and external sourcing.'
Carl Dawson, IT director at travel company Thomas Cook, says it is vital that the right people are managing the technology, whether it is internally or externally controlled.
Thomas Cook works with a variety of suppliers: PinkRoccade for service desk and on-site desktop support; Accenture for human resources, finance and data centre support; and Syntel for application development and maintenance.
'The main benefit of outsourcing for Thomas Cook was to centralise our IT,' says Dawson. 'Before that we worked with a lot of different companies.'
Thomas Cook regularly assesses the value of its contracts. 'You have to benchmark,' says Dawson. 'If you don't, you will not know what your suppliers are up to.'
Thomas Cook also uses analysts, such as Gartner, to assess service levels and total cost of ownership.
If an IT director does decide to insource, bringing service back in-house is a complex process.
'Companies need to evaluate all the possibilities fully before they decide to insource,' says Punt. 'Businesses are looking at how they can make their sourcing deals more effective. But just as they are easy to get into, contracts are hard to get out of.'
This is why many companies choose to renegotiate their outsourcing contract rather than change direction. More than half have moved from long-term contracts of six to 10 years, to shorter deals lasting up to five years, to increase flexibility and bargaining power, according to Deloitte.
Other businesses are waiting for the contract transition point before deciding whether to insource a technology or business process.
Three-quarters of organisations are now working with multiple vendors to reduce dependency, says Deloitte.
And a business-focused technology leader is likely to draw on a broad range of sourcing strategies, including outsourcing, offshoring and insourcing.
'Selective outsourcing is becoming the most popular tool among private sector organisations,' says Gartner principal analyst Nicole France. 'Sourcing strategies will start to evolve and will be based on a changing market direction.'
Fellow Gartner analyst Gianluca Tramacere says tactical adoption of outsourcing will rise, as businesses become frustrated with external service provision.
'Disillusionment is one of the biggest inhibitors to growth,' he says. 'That doesn't mean there will be a huge swing towards insourcing, but companies are looking to reduce the size of their sourcing deals.'
But with 80 per cent of outsourcing deals renegotiated - a figure Tramacere describes as 'alarming' - there is clearly potential for companies to insource.
'Organisations are looking for the optimal source of delivery,' says Tramacere. 'Insourcing will always be there as a presence.'
Case study - Cable & Wireless
Cable & Wireless (C&W) moved its external services in-house to enhance its UK business operations.
The transition to insourcing began two years ago when the communications giant terminated an outsourcing agreement with IBM. The 10-year, £1.8bn deal, signed in 1998, covered IT infrastructure and customer billing systems.
About the same time, C&W insourced a customer care and billing contract with Schlumberger Sema - now part of Atos Origin - which covered fixed-line customers outside the UK.
C&W chief information officer Martin Taylor, who joined the company in 2003, says C&W realised insourcing would provide more influence over technology decisions.
'The business was in a period of rapid change and we needed to control the processes that supported our business,' he says. 'We wanted to be able to change our systems.'
But bringing technology services back in-house was not an easy proposition for the company. It was faced with disparate billing systems and multiple, inefficient servers.
Looking back, insourcing was a complex process, says Taylor. 'It took us between six and eight months to insource,' he says. 'It is one of the most difficult projects I have been through at the company.'
Much of the complexity surrounding insourcing was driven by TUPE (Transfer of Undertakings: Protection of Employment), the regulations governing the transfer of workers during outsourcing.
'Specialist help is required here,' says Taylor.
Technology transfer was another problematic area. 'There is also the tricky task of running the systems that are still running the business,' says Taylor. 'To attempt to bring that technology in-house and run it simultaneously was very complex.'
But the move to insourcing has shown clear benefits. For a start, the company has consolidated internal IT systems and implemented standardised desktop environments for its UK employees.
C&W has also noted an improvement in operational efficiency and customer service since the change.
Costs have also fallen dramatically, and total cost of ownership for the company's insourced services has fallen more quickly than at any other blue-chip, according to the benchmarking database of consulting group Compass.
But despite the success of the company's insourcing policy, Taylor is not opposed to external service provision, particularly if an outsourcer offers a higher quality of service.
Too many businesses are taking their eye off the ball and outsourcing to save money, he says. Efficiency of operations should be the aim.
'Companies need to look towards quality of service first, not cost,' says Taylor.
Is insourcing the best option for your organisation?
With 80 per cent of companies renegotiating their outsourcing contracts, the time might be right to consider insourcing your company's external service provision.
Andy Mulholland, chief technology officer at Capgemini, says companies are beginning to think more carefully about their sourcing choices. A technology executive has a number of options, including insourcing.
'The question in the corporate head office should be: do you want to be liable for your own IT?' says Mulholland. 'Some people still say no.'
Duncan Aitchison, managing director of sourcing advisory firm TPI, says a number of big insourcing moves take place every year.
'But I'm at a loss to understand how it could turn into an insourcing wave,' he says. 'Pretty much every company has issues of increasing competition and agility. The momentum still seems to be with outsourcing and there is no evidence that is likely to diminish.'
But Aitchison recognises that every company has its limitations in terms of economic capital, and there are important decisions to make when it comes to sourcing.
And if Cable and Wireless (C&W) can run external service provision more efficiently in-house, why not everybody else?
After bringing its billing technology back in-house two years ago, C&W chief information officer Martin Taylor says it is important to revisit deals from the perspective of how the business has changed.
'Insourcing blindly is as daft as outsourcing,' he says. 'Ask yourself if you understand the service. If you do, ask yourself if you can run it for the same quality of service internally.'
Several key lessons have emerged from C&W's outsourcing experiences:
Look at the business in discrete chunks
Maintain transparency and executive control
Make sure everything is in order before you outsource. Don't outsource a problem, outsource a system.
Richard Punt, head of Deloitte's strategy practice, says large-scale insourcing requires significant commitment from senior management.
'Deals are hard to manage as you become more expansive, and having someone integral to how you operate is difficult,' he says.
It is important to pay attention to the function of the business you are dealing with, says Punt.
'If the service is highly complex and needs tailoring, insourcing back into the business can be complicated,' he says.
'You have to rebuild your expertise and that can be difficult. How to manage the change can also be an issue.'
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