Funeral March for Outsourcing?

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Don’t start the dirge yet.  In a recent posting on Business Week, I had written about the dynamic nature of outsourcing strategies and why companies must develop an exit decision model and an exit strategy concurrently when they first decide to outsource. The GM decision to insource their IT function, which had been 90% outsourced, might be a perfect example of that concept.  They are currently looking for 10,000 IT professionals – in the US!!

GM was clearly an early pioneer in outsourcing and is now leading the way on insourcing.  Typically, these are thought of as two different processes.  But the right way to think about them is that they are a part of an overall value creation and delivery strategy that understands the dynamic nature of cost arbitrage and tries to exploit that arbitrage.  In addition, decision factors need to go well beyond the traditional bounds of TCO and these additional factors do NOT need to be measurable (cost/unit, yield, lead time, etc.).  Just take a look at why GM made this decision.

Obviously, GM has decided that the cost advantage of outsourcing has faded and issues beyond cost are much more significant now.  If you look at what is happening to labor cost in India(for BPO) and China(for manufacturing), the cost arbitrage has been shifting for a while and will continue to do so.  Therefore, moving to low cost(non-major metropolis)areas in the US, coupled with incentives (link our interview on this topic)from local governments and other entities, allows corporations to not have to give up all of their cost advantage.  In addition, it also provides for reduced “overhead”(travel time, cultural fit, time zone differences, etc. etc.).  And not all of those are quantifiable in the traditional sense.

What’s even more interesting is that GM is not doing this for cost – some of the reasons mentioned in Business Week are massive redundancy in their application portfolio, expediting product development and decision making, better understanding of their industry.  None of these are your traditional TCO type metrics that are easily measurable like $/mips(is that term even used anymore?).  CIO magazine goes on to say about this trend “large-scale insourcing, because they believe they need better access to the innovation engine of technology…..they will focus on partnerships that drive innovation, new technologies, and competitive advantage into the organization, as opposed to just low-cost commodity outsourcing done principally for labor arbitrage.”  Exactement!!  

While GM will face all the challenges of bringing this in house, their executives have made the strategic decision that IT is too much of a core competency to be outsourced based on some TCO model from a decade ago.  This is why every single outsourcing decision must have an exit decision model and an exit strategy.  This will of course be driven by your risk appetite and whether you are an early adopter or a late adopter.

Stephanie Overby goes on to say, “But a strategic IT function should never be judged on cost effectiveness alone, but rather by other measures including productivity, business alignment and innovation.”  You can easily replace IT with any other function on that quote.  If you have been following our evangelist type zeal on this topic (Strategic Sourcing is Dead, The Sourcing Emperor Has No Clothes) then you know that we are in total agreement.  TCO destroys value!  The insistence on only using those factors that can be measured lead to sub-optimal decisions and behaviors!  Value must be measured by our customers (productivity, alignment, innovation) and not by us (on time, on budget, in scope etc.)!
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Dalip Raheja
Dalip Raheja is President and CEO of The Mpower Group (TMG). Dalip has over 30 years of experience managing large organizations and change initiatives. He has worked across the spectrums of supply chain management, strategic sourcing, and management consulting.
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2 Comments

  1. What GM is doing may not be a good idea for reasons given below,
    1. Outsourcing companies has skillsets be it software platforms/ experience/ exposure to different models, nowadays there is one model for success it is a mix and timing which makes a decision click.
    2. Geographical location provides working time of 18 hrs on a given time per day which may be lost.
    3. A clear expectation and lacking communication skill on both ends is the main reason for failure and cost escalation.

    The right model for insourcing is gradual reduction in outsourcing, training and workforce retention… Hope these are laid out by GM.

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