As organizations have scrambled to assess and adjust to the unfolding economic impact of the COVID-19 pandemic, IT leaders are taking a closer look at their sourcing strategies — in some cases, with an eye toward insourcing.
Repatriating previously farmed out work has increased in the recent past — particularly for IT services — for a number of reasons, says Vivek Bhatia, practice director at Everest Group. Among them: a desire for tighter integration and alignment with the business, greater cross-functional collaboration to improve speed to market or accelerate digital transformation, better control and governance of services, minimization of operational or regulatory risk, or increasing in-house capabilities for core or IP-intensive work.
Companies with severe liquidity challenges — retailers, airlines, and hotels, for example — have had to quickly reduce their cost structures and get expenses off the books. These firms are likely to continue to outsource (seeking discounts from providers) and sell their captive offshore delivery centers, says Steve Hall, partner in ISG’s Digital Advisory Services. On the other hand, transactional processing and call center needs — for example, in finserve and insurance — may be ripe for insourcing to address an extensive backlog of transactions as outsourcing providers themselves have shifted to remote work, raising regulatory, remote access, and capability issues, Hall says.
“In the mid-term, organizations will need to continue to reduce costs for core functions as they recover from the crisis and rethink their digital transformation,” Hall adds, which will accelerate movement to the public cloud and greater insourcing as clients collaborate with cloud providers to architect new solutions.
The current crisis has also exposed business continuity weaknesses. “Both enterprises and global business services organizations will now focus on greater integration with a sharper focus on risk and governance,” Bhatia says. “Going forward, this will be an additional consideration to insourcing.” Companies that have mature internal services organizations capable of greater resilience and flexibility may bring more work in-house in the near to long term, according to Bhatia.
In addition, some companies are insourcing discrete projects or activities as some of their own critical resources or subject matter experts have been taken off non-essential projects put on hold and thus have increased bandwidth. “In many cases, using the spare capacity of employees may result in higher quality and efficiency of project outputs due to their existing knowledge of the environment and ways of working,” says Gordon Wong, managing director at Pace Harmon.
For those IT leaders weighing the potential financial, operational, or strategic benefits of insourcing, there are a number of important issues to consider. Some steps to take when considering bringing IT services back in-house include the following.
Never insource blindly. “Global outsourcing has evolved well beyond labor arbitrage. The last several months have demonstrated the value of outsourcing to support and maintain critical systems, get people productive from their homes, and protect critical corporate assets,” Hall says. “Don’t throw the baby out with the bathwater when deciding what worked and what didn’t.”
Organizations often overestimate what they can accomplish, while also underestimating the complexity of running large scale operations, Hall adds. If there are particular issues or costs driving the desire to insource, talk to the outsourcer about them first. “Be transparent with your service provider when discussing challenges and resolve the core issues,” Hall says.
Consider all options for cost reduction
Insourcing is not the only lever to cut costs quickly — and, in some cases, it may not produce savings quickly. Exhausting other avenues for expense reduction is a great initial step.
Pace Harmon suggests finding and resolving billing error or non-compliance issues, identifying and eliminating underutilized or unused services and technology, and leveraging flexibility already built into contracts, such as partial termination of contracted work or shifting the geographic mix. It also recommends collaborating with outsourcing partners on opportunities to reduce cost in exchange for contract term extensions or SLA performance relief.
Focus on services suited to repatriation
Not all outsourced work worth insourcing. The trick is to tease out which services are most strategic for bringing back in-house. Services most aligned with your enterprise technology roadmap are the ones most ripe for full or partial insourcing.
“Insourcing certain roles within a project can help clients build in-house technology capabilities that may be useful as the client continues to invest in these technologies going forward,” Wong says.
Those services that require a niche skill or capability may make sense to bring in-house as well. “This approach can be a way of attracting or retaining a skillset that may be needed long-term,” adds Wong. “By insourcing this niche skillset, clients will have greater control of the use of this resource as well as the ability to cross train others.”
“CIOs should think in a full-stack, product-oriented mindset. Outsourcing to strictly reduce costs or insourcing to mitigate risks need to be balanced with new compute, storage, workplace, and network capabilities provided in as-a-service models,” says Hall. “The COVID-19 experience has demonstrated the need for integrated applications, communications, enhanced security, and collaboration tools — all of which could be supported in different models.”
Do the math
Before committing to repatriation, be sure to calculate all the associated fees and costs. Every outsourcing agreement includes early termination fees, which generally ramp down over time. In addition, it’s important to factor in the transition costs both for people, technology, and data.
Get everyone on board
If it seems like insourcing may be a viable option, it’s time to involve more people in the organization. “During the design phase, the enterprise must align internal stakeholders on objectives, scope, and efforts for insourcing,” says Bhatia.
Prepare for transition
IT leaders should give both IT employees and business users who will be impacted by the insourcing initiative ample time to absorb the news and prepare for the switch, creating a well-thought out message and change management plan.
Understand all rights and responsibilities
“During the transition phase, the enterprise and incumbent vendor must align with regards to termination rights and responsibilities,” says Bhatia. This is especially important when it comes to issues related to human resources, such as the right to hire vendor employees.
Plan for portfolio management
“Applications should be bundled by product or business function and managed as a portfolio,” Hall says. “This approach will reduce delivery costs, enhance the overall experience, and provide opportunities to better integrate capabilities into the product suite.
Win over the new workforce
If the IT organization is rebadging vendor employees as its own, communication and incentives are key to address fear and uncertainty about the transition and ensure ongoing engagement and productivity. “Do not underestimate the role a vendor can play in providing support in successful rebadging,” Bhatia says.
Create a success plan — and a way to measure it
“Making sure that you set realistic performance targets and expectations is critical to ensuring a successful construct for growth in the long-term,” says Bhatia.