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How to Effectively Manage the Shifting Tides of Insourcing and Outsourcing

If you’re concerned about whether to focus on insourcing or outsourcing, I have some advice for you: don’t get too hung up it!

Regardless of what you choose, it need not be a permanent decision. In fact, your choice and direction may continuously change over time as your business strategy evolves, regardless of whether the enterprise or function is growing, pivoting, or throttling back.

Internal vs. External

There are many important factors that make it good to execute certain tasks internally: secret sauce, intellectual property, or just a gut feeling are all valid reasons.

Keeping those tasks internal will more likely align with keeping things the way they are, because generally there is very little you need to change or consider in order to maintain the status-quo.

Conversely, there are many great reasons to engage with resources that are external to your organization.

Once you have determined which tasks are better executed externally (the ‘what’), you are then faced with the decisions on what models to be used (the ‘how’) and where the work should be done (the ‘where’).

These decisions, too, will change over time, as other factors beyond your control may dictate. Politics, for example, seem to be playing a significant role in these choices these days. Will offshore continue to be a viable option for getting requirements fulfilled, or will politics change the luster of such models that we have enjoyed for so many years? Perhaps new countries will emerge as viable alternatives or maybe doing work domestically will prevail.

Shifting Strategies

Let’s reflect on some of the decisions GE has made over time in the outsourcing arena.

Starting in the mid 90’s there was an aggressive push to move upwards of 70% of the IT roles to externally resourced models. This was a bold move at the time and although most aligned to it, there was a lot of doubt as to whether it was the best approach, mainly because it impacted many internal roles and the lack of experience caused conservative alignment.

It was thought that this 70% designation was made up of IT work that did not involve any secret sauce or intellectual property, which led to the decision to go external.

On one hand, it was considered commodity work, which was thought best done by flexible and available resources in locations where it could be completed more efficiently and cost effectively.

On the other hand, some of the external resourcing was done where internal employees were simply not prepared or experienced in the technologies that the enterprise was moving toward.

The maturity of external resourcing models, alongside a focus on tasks over bodies, allowed GE to utilize these external resourcing models while maintaining the appropriate amount of intellectual property and secret sauce delineation within their walls.

Consider GE today, however. The company is changing its models due to goal to be a digital company while maintaining their manufacturing heritage. This desire is changing the amount of intellectual property they have throughout the company, which in turn is changing their insourcing and outsourcing ratios. The days of the 70% ratio have been replaced with much lower percentages.

The point is that this large company recognizes that the change in its business plan, products, and position in the market are, in turn, changing its insourcing and outsourcing strategies. Other companies will – or at least should – do the same as they evolve.

Factors That Change The Internal/external Sourcing Strategy

Even if a company’s product are not changing, there could be factors that will change its external resourcing strategies.

If President Trump succeeds in changing the cost of landed resources in the US, companies like TCS, Infosys, Wipro, and the like, will be compelled to make appropriate adjustments to how they serve their customers.

Some research companies have suggested that the Big 5 consulting companies are better positioned to absorb these changes since they have a higher abundance of project and technical leaders as part of their US-based sourcing strategies.

While that may be true, I think other forward-thinking consulting companies will make the proper adjustments to ensure their market share is not impacted by politics and regulatory changes. Things have been changing one way or another for decades in this industry. As those changes are implemented, so too will consulting companies react and adjust.

H-1B visas have been capped at various levels over time, sometimes increasing and then decreasing year after year. Minimum salaries are potentially changing with current regulations, while L1 visa rules have also changed over time. Skill availability and client alignment have always been the goal of consulting companies to stay one step ahead of their demanding clients.

How to React when Change is Needed

I can see companies like TCS, Wipro, Infosys, and others making changes to their proposals to incorporate more in-country resources, utilizing local hiring or modified onshore and offshore models with different ratios. Rural outsourcing could really take off as a solid, albeit moderately more expensive, alternative to offshore. I can see offsite centers springing up domestically in rural centers or perhaps co-located with specific client alignment.

The ‘what’ to outsource decision clearly belongs to the client as they decide what work needs to get done to satisfy the need and speed of business. The ‘where’ and the ‘how’ are often viewed by clients as something they need to figure out.

In reality, consulting vendors are really the experts in those two areas and letting them make, or at least influence, those decisions will result in better models, cheaper contracts, and higher quality results. As such, I expect vendors to spend the appropriate time monitoring political changes and making the right adjustments to their processes. This is vital to ensure that requirements will continue to be fulfilled with the best possible solution.

If H-1B visas are limited in number or more expensive to attain, you should expect the vendors to determine and implement appropriate changes and alternatives in your environment.

Change is Inevitable

Allow change to happen and use the talent and resources at your disposal – namely your vendors – to move in the right direction. If a change to insourcing/outsourcing ratios is required due to changes in the business, expect the vendors to fully align, regardless of whether it means positive or negative growth to them – those that don’t are not the vendors you want to stay with long term.

Together, clients and vendors should maintain awareness of political and environmental changes in the industry. Work closely with your vendors and enable them to make appropriate changes to their business models to accommodate not only your business direction, but changes in the global external resourcing market as well.

Article source: http://www.nearshoreamericas.com/manage-insourcing-outsourcing/

The traditional outsourcing model is officially out of value, but the future is bright for co-innovation partnerships

Remember all those juicy reasons why companies jumped into outsourcing? Like driving out cost, standardizing processes, perhaps even finding a few nuggets of innovation along the way with better access to talent and technology? Well our new 2017 State of Operations and Outsourcing Study of 454 major enterprise buyers gives a pretty gloomy picture of the current value impact of today’s outsourcing engagements:

What made us happy in the past no longer passes muster

If there was ever one home-banker benefit from outsourcing, it was always the ability to take 30%+ off the bottom line cost of running a process or set of processes.

The VPs and below are those who are managing the engagements – and not even a third of them view their engagements as being very effective at driving out significant cost or making their operations more flexible and scalable. Their bosses are slightly less cynical, but still the vast majority is underwhelmed.

“But how can they be unhappy, we saved them so much money?” I hear frustrated providers cry… 

Well, the answer is quite simply that those costs have been removed from the balance sheet – they no longer exist. Managing operations in a global environment is now the new normal – money that was saved was a onetime experience in the past. It’s like trading in your Hummer for a Prius… you don’t think to yourself, everytime you fill up with gas, “Wow, I’m saving $50 per tank”, but you might even think, “Hmmm… maybe I’ll get a fully electric car next and save even more on my running costs”.

We can go on to bemoan the disappointing lack of effectiveness from analytics, automation and cognitive from over four-fifths of outsourcing engagements, but we know clients are unlikely to have invested actual funds in these areas as part of most of these engagements today – they are getting what they have paid for in the past.

All is not lost as many operations leaders want their service providers to change with them

However, the next wave of engagements have to be set up in a very different way to bring back delights to these jaded customers, which is where the brighter news appears:

What’s encouraging here is that buyers, by and large, do not view their service providers as mere efficient cost take-out vehicles, which was how well over half viewed them a couple of years ago. While 43% of SVPs and above see service providers as competent partners who can deliver the goods, another 35% actually view them as real innovation partners who can work with them to achieve co-defined business outcomes.  This is a breakthrough for the services industry.

The Bottom-line: The door is wide open for ambitious providers willing to invest in developing their talent, but closing firmly shut for those perpetuating what worked in the past

There has never been a time in the history of services where we’ve arrived at such a pivotal turning point – what used to work for clients is now commodity, and those service providers wanting to avoid this drain-circling spiral into transactional insignificance must make serious investments in their internal capabilities to partner with their clients.  This means more people who can work in close proximity to their clients with real capabilities rolling out automation roadmaps, designing digital business models, working with clients to develop predictive data models and smart cognitive strategies.  Sadly, there isn’t much of an available pool of eager college graduates ready to leap into these roles at low wage rates, so providers need to reinvent themselves radically as true learning establishments and universities for their emerging talent… ambitious people will want to invest their careers with firms who are prepared to invest in their talent.  The future isn’t about buying packaged consulting, it’s about partnering with services firms whose stakeholders want to co-invest in themselves and their clients with a long-term vision and definitive plan.  The model has changed forever… and we can only watch, learn and work with it as it unravels piece by piece.

(Cross-posted @ Horses for Sources)

Article source: https://www.enterpriseirregulars.com/113976/traditional-outsourcing-model-officially-value-future-bright-co-innovation-partnerships/

Slow growth ahead for IT outsourcing | CIO

While the IT and business process services industry continued to grow through 2016, that growth slowed over the course of the year and could fall to less than 2 percent by 2019, according to a recent report from IT and business sourcing consultancy and research firm Everest Group.

[ Related: Outsourcing trends to watch in 2017 ]

The pace of year-on-year revenue growth fell from 4.5 percent in the first quarter of last year to below three percent by year-end. And Everest Group predicts a continued decline over the next one to three years, falling to as low as 1.9 percent by late 2019 as a result of as a result of macro uncertainties, technology disruption and intense competition.

The biggest question marks are the ultimate impact of Brexit and possible protectionist actions by the Trump administration in the U.S. UK buyers’ outsourcing transactions neared three year lows last year as they took a “wait and see” approach, and U.S. buyers might also delay deals until there is more clarity around potential changes to visa programs and the political climate around offshoring. “We expect a slowdown in decision making until there is more clarity on policies and the associated impact,” says Everest Group partner H. Karthik.

Lockheed, Raytheon Outsourcing Should Help This Defense Firm

Mercury Systems (MRCY) is likely to gain from big defense industry contractors outsourcing more subsystem work, Citigroup said Monday as it hiked its price target on the company.

“Defense primes currently outsource over 10% of the $35 billion electronics subsystems work done each year,” said Jason Gursky, a Citigroup analyst. “However, we expect this penetration rate to grow due to pressure to more rapidly design, develop and deliver affordable solutions to the Department of Defense.”

President Trump has proposed budget cuts in other agencies in order to increase military spending, an action that could lift all boats in the defense sector. IBD’s Aerospace-Defense group, which includes defense contractors, is ranked No. 32 out of 197 industry groups, up from No. 78 four weeks ago.

Further, Mercury is ranked No. 7 in the IBD 50, a roster of fast-growing stocks. Defense giants Lockheed Martin (LMT) and Raytheon (RTN) are big Mercury customers, and its products are used by more than 25 prime defense contractors, including Boeing (BA) and General Dynamics (GD).

“Even though we think most of the near-term incremental spending from Trump will flow to readiness accounts rather than more procurement, Mercury’s solutions help upgrade aging platforms,” said Gursky in the report.

Gursky hiked his priced target on shares of Chelmsford, Mass.-based Mercury to 48 from 45. Mercury stock moved up nearly 1% to 40.16 in the stock market today, and is up 32% thus far this year.

IBD’S TAKE: Which companies are hitting 52-week highs? That’s easy to find at IBD’s New Highs, but that list goes one big step better. That is, it ranks the companies making new highs by Composite Rating. So the best are at the top, making this a quick and easy read to find stocks for your watch list.

“As more programs move to Lockheed, Raytheon Outsourcing Should Help This Defense Firm

What “60 Minutes” Got Wrong About Outsourcing

On Sunday night, 60 Minutes aired a segment that blamed the layoffs of a number of white collar workers on major corporations using H-1B visa holders. A little probing and context would have revealed this conclusion to be highly suspect.

I sympathize with the workers who lost their jobs through no fault of their own. Everyone should be pulling for them. Despite the sympathy these workers deserve, that does not mean Congress or the White House making radical changes to immigration laws or regulations is the right policy solution, or that this would have made any difference in these particular cases.

60 Minutes should have explained that the workers interviewed lost their jobs not due to immigration, but because for the past 25 years, for competitive reasons, U.S. companies have increasingly focused on “core competencies” – contracting out elements of the company not central to its main product line or service. (There are many books on this.) Notice that the cases in the news typically feature a medical, publishing, entertainment or power company that decides to put out for bid information technology (IT) rather than keep in-house something that is not a core part of its business, thereby hoping to gain access to new technology, solutions and specialization, and at a lower cost.

To understand better how companies decide whether to outsource a function I interviewed more than 10 experts who advise major corporations. None of the advisors I interviewed considered H-1B visas to play an important role in outsourcing decisions.

Here is a typical response: “I would say cutting off the H-1B visa program wouldn’t really impact outsourcing overall, as the H-1B visa holders have a limited and specialized role in the outsourcing process (specifically, in pushing through the transition phase),” according to Alex Kozlov, director of content, What “60 Minutes” Got Wrong About Outsourcing