IT Insourcing: The New Normal
By Mala Narasimharajan on Jun 13, 2014
Written By: Rick Beers, Senior Director - Product Managmeent, Oracle Fusion Middleware
I was doing a little research last week on some of Oracle’s customers who best exemplify the architecture of AppAdvantage and stumbled upon something unexpected when I checked up on Melbourne, Australia’s Yarra Valley Water. They have recently begun insourcing IT, bringing previously outsourced IT services back in house, as explained by last year’s itnews article entitled “Insourcing, the New Black”. Reading it got some creative juices flowing.
The trend towards IT insourcing (or ‘back-sourcing’, as it is also known) has been widely reported over the past two years. Much of the analysis has been anecdotal and tied to high profile examples such as General Motors (‘GM will slash IT Outsourcing’) and Delta Airlines (‘Delta Airlines to Take Control of its Data Systems’). IT spend is notoriously difficult to track consistently so short term trends are unreliable, but there is clearly something going on that is beginning to reverse a 25 year trend.
IT outsourcing virtually exploded during the mid-late 1990’s, the result of the industry-wide success in standardizing business processes and business data and the ERP systems driving them. Until that time, IT outsourcing was largely limited to hardware and infrastructure within a hosting model. With the broad adoption of ERP, business process and data standardization, both real and perceived, produced the business case necessary for platform-wide outsourcing to succeed. As ERP matured and began to commoditize during the 2000’s, the trend accelerated. Lately the trend lines flattened and by some measures have actually begun to reverse. Deloitte recently published an extensive analysis of this developing trend (‘From Bangalore to Boston, the trend of bringing IT back in-house’).
And it is certainly part of a broader trend of operational insourcing over the past 4 years, led by high profile cases such as Starbucks, Caterpillar and GE. Most often cited as core reasons for the shift are (1) the need to get closer to the customer, (2) the pace of business change and (3) escalating wages in countries such as India and China as their economies mature. But the more I think about it, the more it appears that something else may be driving IT insourcing; something more impactful. The underreported driver of IT insourcing may very well be the role that enterprise technology is playing in what might be the beginning of a disruptive cycle in the traditional IT outsourcing model.
IT is becoming a strategic capability again after a 20 year cycle of commoditization and cost cutting. The Big 4 of Innovation, Social, Mobile, Cloud and Big Data, are elevating IT to a leadership role in the development of enterprise strategy rather than in just implementing a strategy already established. IT operational skills, particularly those of enterprise, process and technology architecture, are becoming core strategic assets that belong in house.
Enterprise technology is disintermediating away from the ERP centric models of the past 25 years to a hybrid of ERP and Best of Breed, interoperating in real time thanks to maturing Integration and Identity Management capabilities. Layered enterprise systems frameworks, such as Oracle’s AppAdvantage below right, are allowing enterprises to decouple processes that should be agile, such as Talent Management t from those that should be standardized (such as core HR). This in turn allows outsourcing to accommodate standardized processes (aka ERP) while keeping control of technologies and agile processes in house.
Finally, the Cloud itself is a type of IT outsourcing. With the emergence of Platform as a Service and Infrastructure as a Service to add to the maturing SaaS market, IT organizations can effectively outsource parts of their operation while retaining control of how they are architected and operated. This is probably the most disruptive of all forces driving IT insourcing and it will continue to accelerate, perhaps exponentially.
To be sure, IT outsourcing is not going away, rather it is evolving away from al all-in, platform model to one designed to accommodate a variety of business models, providing CIO’s levers to pull in influencing and executing their enterprise strategy. Above all else are the 2 C’s most valued by IT leaders: Control and Choice. Such leaders can finally be bound by the requirements of the enterprise, not by restrictive technologies.