GLOBAL SOURCING: Bringing IT back home

Outsourcing is not a panacea to all business problems. After the
frenzy of outsourcing triggered by the economic downturn, organizations are now
agonizing over problematic deals. And many have figured the best way to beat the
problem is to go back to square one and bring it back in-house.

Sure, outsourcing can work wonders provided it is backed by
proper planning, execution, monitoring, and commitment to the project. The
change in business environment has also been a strong imperative for
organizations to take a call on their outsourcing decisions. Bringing back
operations in-house is commonly referred to as insourcing or back sourcing-a
trend increasingly finding favor amongst disillusioned customers.

Insourcing is not new. There have been sporadic instances of
insourcing over the past couple of years. The most publicized being the bringing
back of IT operations from IBM by JP Morgan after its merger with BankOne.
BankOne is known to have robust IT systems in-house. In fact BankOne was already
experienced in bringing back operations in-house having successfully insourced
operations from IBM and AT&T a few years ago.

The other most talked about insourcing project is by Cable &
Wireless who has terminated its 10-year deal with IBM and has started bringing
back its operations in-house.

Selfridges, a luxury department store chain, is yet another
customer who recently announced its intent to bring back the management of its
data center in-house after its contract with Capgemini expired. Selfridges will
of course outsource a part of the function with retail IT service provider,
Retail Assist. More recently, Prudential also announced the intent to bring back
operations in-house after its contract with Capgemini expires in April 2006.

Although insourcing has been taking place for a while now, a
report by Deloitte and another by Cutter Consortium-wherein they use the term
backsourcing-has brought the issue out in the open triggering heated debates
and interest amongst the outsourcing community.

So does this increased inclination to bring back operations
in-house spell doomsday for the outsourcing industry? Why are companies
reconsidering the benefits of outsourcing and opting for in-house expertise
instead?

The answer lies in the history of these deals and the changing
imperatives of companies that are linked to the dynamic economic and regulatory
environment. The current crop of problems has its origin in the perception that
IT is only a business enabler and not a competitive advantage. Organizations
then started looking for lower costs of getting things done and outsourcing was
the answer. But that did not solve the first question they were faced with,
which was: how was IT going to integrate with the business vision of the
organization?

Outsourcing was the most popular business fad during the
economic downturn and nobody thought it could go wrong. It was only after the
economic environment began to improve and benefits still failed to trickle in
that the management began to ask tough questions.

But nobody could do much, locked as they were in rigid
contracts. Most of the contracts in the early days were vendor-driven, as
customers, in a hurry to achieve cost savings, did not bother to put their house
in order before outsourcing. Consequently they did not even know what they were
outsourcing, much less be in a position to dictate terms to vendors.

Worse was to follow when they found themselves mired in rigid
and inflexible contracts. Where cost cutting was the major driver to outsource,
customers could do precious little when they found costs escalating and their IT
budget going haywire.

The Deloitte Report found that a quarter of the 25 companies
surveyed (which has IT, spends in excess of

$50 bn) brought back functions in-house after realizing that they could be
addressed more successfully or at a lower cost internally, while almost half
(44%) failed to see cost savings materializing as a result of outsourcing.

The report also found that seven out of ten firms surveyed have
had negative experience with outsourcing projects. It concluded that customers
who face more than five problems with the vendors are likely to take the
insourcing route.

Paul Schwefer, CIO, Continental Group-who joined the company
in 2001 to take over the ongoing ITO program of the group, which was in disarray-says
about his experience of working with IBM "Large companies are so
metrics-driven and inflexible that they cannot innovate." Whereas managing
the IT infrastructure requires both commodity services and a good amount of
customization. He scrapped the deal and brought back operations in-house to
regain control of the program.

The moment customization comes in the picture, costs escalates.
Even though the customer pays a maintenance and support fee, each time there is
a software upgrade you have to pay again for customization. At the same time,
customization increases the dependency on the vendor. All this leads to a
vicious cycle in the relationship.

What added to the disillusionment was that customers had no way
of knowing the value they had derived from the outsourcing relation because they
could not measure its benefit. The problem is so widespread that about half of
the participants in the Deloitte survey (48%) admitted that they did not have
standardized methodology to evaluate the business case for outsourcing. If only
they had instituted more controls and governance in place before outsourcing!

The Changing Economic and Regulatory Environment

The dynamic nature of the business environment calls for constant review of
business decisions. What was acceptable during the economic downturn does not
hold true during boom times. The imperative of cost cutting pales in comparison
for the urgency to achieve scale and growth. As the economy looks up, the need
is for stable integration of IT into business processes to achieve competitive
edge. Therefore there is a need for tighter control and deeper understanding of
processes. The imperative is not costs anymore but domain knowledge and how
technology can be integrated to bring business benefits.

The way Wal-Mart has deployed technology to overhaul its supply
chain and gain strategic advantage over competition is an outstanding example of
how business vision can be aligned with technology. The moment a Wal-Mart
customer picks up any product from the shelf and scans it at the counter, it
automatically generates a signal, which updates the inventory, sends a pop-up
message on its supplier's screen so that he can immediately make another of
that item and ship it to Wal-Mart via the supply chain to keep its shelves
always well stocked. Not only that, it allows Wal-Mart executives or any of its
suppliers to know exactly which products are moving at what rate and stock
accordingly.

That calls for in-depth understanding of the organization's
business processes and goals, which cannot be expected from an outsourcing
vendor. It is best to bring back such processes in-house and leave commoditized
services to outsourcing providers.

Outsourcing vendors will not be able to bring the kind of
commitment that an in-house team can and therefore bringing certain operations
in-house with the changing economic environment becomes justified. With the
regulatory environment changing everyday and with new regulations like SOX
compliance coming in, customers feels more comfortable in bringing back certain
processes in-house to exercise greater control over their security processes.

Reality Check: A Peaceful Co-existence

Clearly the hype cycle of the outsourcing fad is over. No longer will a
company outsource just because it is the 'in' thing to do. Deloitte says
outsourcing will lose its "holy grail" status. Cost will continue to
be an important factor but companies will ask tougher questions about the
benefits of outsourcing. The bulk of the outsourcing activity will be seen in
the commodity processes or organization will outsource temporarily to transform
functions and run it for a short- term period.

But make no mistake that outsourcing is here to stay. A report
last month from Gartner said the worldwide outsourcing market is expected to
grow from $293.4 bn in 2003 to $429.2 bn in 2008, an annual growth of 7.9%.

At the same time, the increasing complexity associated with
outsouring will drive many organizations to resort to insourcing, if not all
processes, at least partly. But insourcing has its own set of challenges and pin
points which organizations would like to avoid.

Balaka Baruah Aggarwal