The limits of IT outsourcing
Forget outsourcing, it's time for more insourcing suggests John Leonard
"Our people are our greatest asset", proclaims the corporate boilerplate. "Unless you work in IT," mutters the disgruntled techie as he clears his desk for the last time.
The great IT outsourcing boom has been going on for two decades now and, while there have been ebbs and flows, it shows no sign of abating. The latest Gartner figures put outsourcing as a global industry worth $288bn and growing at around five per cent annually.
It is increasing both in the degree to which it is employed and the number of options available. Organisations are faced with an embarrassment of outsourcing riches to choose from, with the many varieties of cloud (PaaS, IaaS, SaaS and their offshoots) jostling for position with more traditional co-location, offshore software development and managed services.
By listening to the pitches made by the outsourcers, one might think that an organisation could just pick and choose the most suitable option for each particular need, just as a chef might select ingredients, choosing each on the on the basis of price and quality.
Nice theory, but unless you are a small start-up that has decided to base all of its operations on standard-issue applications in the public cloud, IT outsourcing is always more complicated than that. For one thing, outsourced services need to integrate with what's already there; for another, making price and service quality comparisons between the offerings of competing suppliers and in-house technology can be fiendishly difficult.
Make the wrong choice and you can easily end up exchanging a complex, inflexible, expensive in-house environment for an even more complex, inflexible, expensive outsourced one over which you have less control.
Time to bring in the experts - except they were made redundant in the last reorganisation. So add consultancy fees to the contingency list.
"Outsourcing's like Ryanair," said the CIO of a large services company that restructured recently, in order to conduct more business online.
"It may look cheap but once you have got everything you want you wonder why you didn't build it in-house as it would have cost a lot less."
Brain drain
Whatever its nature, outsourcing means that knowledge, skills and sometimes staff are transferred from the client organisation to the supplier. Technical, coding, engineering, networking and systems administration skills all tend to be leached out of organisations, leaving a hollowed out IT team consisting of a few service managers and the occasional all-purpose IT technician.
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The limits of IT outsourcing
Forget outsourcing, it's time for more insourcing suggests John Leonard
And in a recent Computing survey, 22 per cent of IT decision makers said that they expect to see a reduction in IT headcount as a result of future outsourcing, and among those that did, just 27 per cent expressed confidence that sufficient knowledge would be retained in house to be able to negotiate competently with suppliers in all necessary areas.
This situation throws up a few questions. First, at a time when organisations are increasingly differentiated by their IT and the data they hold, why are they farming out their core assets to a third party?
Second, while financial savings are often the main impetus for outsourcing, why, once all the legal, risk mitigation, consultancy, contingency, integration, commissioning and other costs have been taken into account are organisations so often surprised when the service ends up costing more in the long term, or when service levels decline to keep prices low?
Third, how can an organisation hope to get the best out of technology when those who understand the nuts and bolts are considered surplus to requirement?
IT is constantly told it needs to be more closely aligned with the business. Indeed, the ability to adapt quickly as the business changes is one of the main drivers of outsourcing. But unless the business knows what it wants and the IT department is able to budget for it, outsourcing will not cure the flexibility problem.
"In order for outsourcing to be successful, you need to have a full view of what you are going to want going forward. A lot of outsourcing fails as we constantly have to cut costs," the CIO told Computing.
All of which is not to say that outsourcing is in some way wrong, rather that the sort of due diligence required of those who take it on is sometimes lacking. Perhaps the "utility computing" idea has been somewhat oversold over the years. A standardised, standalone process or application or one requiring 24/7 support may be very well suited to being outsourced to a third party, and many outsourcers are more than competent in managing an array of IT functions for their clients, but the temptation to use outsourcing as a quick fix or a way of slashing costs is very likely to lead to disappointment if management and technical oversight falls short - as is increasingly likely if technical staff are laid off.
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The limits of IT outsourcing
Forget outsourcing, it's time for more insourcing suggests John Leonard
The case for insourcing
A prime example of this may be found in the public sector, which for years has seen IT staff moved wholesale onto the payroll of the large suppliers and where the rush to save some of the one per cent of GDP currently spent annually on ICT (some £20bn) has led to some poor choices being made.
In June, government CTO Liam Maxwell laid into public-sector CIOs, describing some as "facilities managers with a Gartner subscription who then became the CIO". Short-staffed and ill-equipped to grasp either the bigger picture or the fine detail, there has been a history of directors handing over far too many of the decisions affecting their departments to external suppliers. This often has the effect of ramping up costs and complexity in the long term.
The government is seeking to diversify away from the large integrators that still dominate almost all of the public-sector IT contracts (80 per cent of central government's ICT work is undertaken by just 18 suppliers) towards smaller SME suppliers. Once it gets off the ground the policy of moving away from the mega-suppliers should produce savings in the long term, but it is likely to require more oversight by the CIO. After all, it is harder to manage 10 contracts than it it to oversee one. CIOs will need to become more proactive, specifying and managing individual systems rather than relying on a contractor, which suggests that it might be more cost effective for public-sector agencies to be bringing in skills rather than letting them go at this time.
Reports have suggested that so far only a tiny proportion of government contracts have gone to SMEs. The slow progress may be another result of the lack of retained expertise, with policy makers underestimating the task of dismantling long-standing single-supplier contracts and those tasked with enacting the changes lacking the resources to do so.
And what goes for the public sector applies in the private realm too. Last year's NatWest payment glitch was blamed in part on the excessive outsourcing of software development functions leaving few in-house staff who properly understood the bank's legacy systems. In another example the head of IT at an online services firm told Computing about what happened when an over-mighty board overruled his department and put the HR system in the cloud.
"It was perceived to save money over three years," he explained. "But it ended up costing 50 per cent more than an in-house system would. Although there were no capital costs, the up-front consultancy was very expensive. The proposal also had lots of grey areas. An HR system needs to have a lot of integration but they didn't properly define it and they needed twice as much bespoke development than they originally thought."
In this case the supplier was not to blame, but in other examples there is no doubt that a slick sales pitch and low entry price can be very persuasive. Some of the lowest prices and apparent flexibility may be found in the large public cloud providers such as Amazon and Google, but the IT director at a medical charity warned that these offerings should not be taken at face value.
"Big companies make big mistakes. A lot of the time their initial strategy was wrong. They are immature," he said.
Caveat emptor, as the old adage goes. Buyer beware. But if there's no one left to make an informed decision, this may be more easily said than done.