Home C-Letter Outsourcing vs. insourcing at home, abroad and in the cloud

Outsourcing vs. insourcing at home, abroad and in the cloud

by david.nunes
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Connect-World’s eLetter May I4th Jun 2013
Outsourcing vs. insourcing at home, abroad and in the cloud

General Motors announced last year that it would ‘insource’ its information technology needs; this was the first time I paid close attention to the term ‘insource’. GM had outsourced for as long as I can remember, especially to EDS its ex-subsidiary. It was a dramatic announcement; they claimed they would create or re-create thousands of jobs – 10,000 or so – over time. After years of hearing about manufacturing, office and IT jobs fleeing the USA, running off to Asia and other developing regions, and about the mega-outsource handlers in India, manufactures in China and such, my worldview tilted.

In the USA and parts of Europe, outsourcing has long been a political hot potato. It is hard to balance the benefits outsourcing brings companies and consumers against the pain of workers who have lost their jobs to labourers in other countries – especially when politicians use the pain to swing the balance in their own favour; it’s hard to be rational when it hurts.

Economics and xenophobia often share the same bed. In the late Eighties and early Nineties Japan was the villain of choice. Japan’s then booming economy, and the cost of creating jobs in Japan where labour was increasingly pricey, set cash laden companies and individuals on a foreign buying spree, cherry picking choice companies and properties throughout the world and adding them to Japan Inc.’s balance sheet. Outsourcing and politicians sent many – from factory workers to knowledge workers – into an ‘us vs. them’ mind frame.

Politically fuelled outrage set people around the world against Japan. Even those, who defined ‘an economy’ as savings at department store or supermarket sales, were upset, “they’re going to buy our country”. Soon, though, like any economic excess, the over-reachers were caught short and paid the price – Japan has yet to fully recover.

I haven’t been able to come up with much hard data about insoucing – bringing the work back home -on the Internet. It seems to be growing and for a variety of reasons outsourcing seems to have slowed, nothing dramatic, but according to a report by Deloitte (it’s on the Net) a small, but mounting, number of companies are backing away from outsourcing and 48 per cent of their 2012 survey sample had to cancel their IT outsourcing agreements before the end. About a third of these brought their IT services back to their companies.

The reasons for IT insourcing, so said Deloitte, include greater internal control, improved service and even – after experience proved the expected savings just were not realised – to reduce costs. I also expect there was an unconfessed need to recapture the knowledge lost when they outsourced and have it close at hand.

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A few months ago, Apple and GE, also announced plans to bring some product manufacturing back home. There must have been a good many more, but they, unlike Apple, didn’t get journalists from all over announcing the second coming of ‘jobs’ (bad pun intended).

GE’s gigantic Appliance Park, not so long ago just a decaying relic of manufacturing in the USA has  ramped up employment, and production of formerly outsourced items and selling them cheaper – and better – than their outsourced counterparts.

The Apple iPhone has an increasing number of components, and its glass screens, labelled ‘Made in USA’. Apple also announced plans to produce some of its Mac equipment in the USA within 12 months.

Since 2008, there have been some painful, and some productive, changes in the US, the EU and many other regions as well. Prices of parts and materials have dropped, interest is lower and some salaries too.

Increased productivity in the US, in good part because of IT, has also built interest in insourcing. The wide availability of specialised software – MRP and ERP among others – better, more efficient equipment, M2M communications and other improvements raised the efficiency of manufacturing facilities and processes. The recession and some hard bargaining with unions on salaries and work rules have also pushed productivity to a higher level in many facilities.

Rising petroleum and transportation costs are hurting overseas outsourcing of manufacturing and salaries are mounting in many of the countries where the outsourced work goes; highly skilled labour is always scarce.

What happened in Japan about 20 years ago is happening again. The low labour costs that outsourcing destinations count on are quickly, 18 per cent per year, becoming more expensive. Even China with its massive population, its phenomenal investment in infrastructure, and its burgeoning internal growth is starting to find it cheaper to produce in even lower-price countries like Vietnam. I know of one Chinese company that built its latest and biggest manufacturing facility – about a kilometre on each side – in Vietnam. Even there, the Chinese have problems; like everyone else they have to import raw materials from all over the world – many thousands of containers each month, some 8500 from the US alone – on ships fuelled by oil that costs three times as much as ten years ago.

International outsourcing will not end and insourcing, as things now stand, is not likely to become an instant major trend. Nevertheless, we should expect more balance and an increasingly wider range of sourcing options.

The Internet, smartphones and tablets make it easier for small, even tiny, firms around the world – at least those with better ideas, better products and lower prices – to thrive in world markets. For larger companies, though, scale, complexity, large investment requirements, speedy reaction to market needs, quality control, greater efficiency, closer over-all control, internal know-how and the like are among the principal factors that convince them to stay – or return – home.

Until recently, guaranteeing productivity in factory or office settings could be a headache for larger companies. Outsourcing did more than just offload production of all types; more importantly, it left the problems of managing activities and controlling personnel to others. Today, information and communication technologies make it easier and less expensive to manage, coordinate and monitor operations and workers closely. ICT lets companies supervise their own employees more directly and cost effectively than outside providers – even if they are working in the field or from home.

The use of computers to closely monitor work has been growing for some time. Personally, I find it a bit sinister, but it is, for the most part, what enables many tele-commuting jobs – an upgrade in the lives of many.

Julie Wulf is a Professor at Harvard Business School and a Co-Editor of The Journal of Law, Economics, & Organization. Ms. Wulf has published many articles in leading business publications about organizational structure, senior management, decision rights and internal governance.

At many of the leading high-tech companies, we have come to associate an ICT focus with a loose, decentralised, management style that encourages decision-making at increasingly lower levels. Surprisingly, Ms. Wulf has found that in most cases the decentralisation one would expect as information generally became more widely and easily available has not occurred. Indeed, Ms. Wulf claims that the ‘flattening’, the ‘de-layering’, of organisational structure has had the opposite effect.

Because ICT has strengthened the ability of top-level executives to see into the guts of their companies, decision-making, instead of moving down the ranks has tended to concentrate at the top. Giving top management the ability to easily exert effective, deeper, hands-on control of larger operations is likely to give some companies one more reason to reverse course and insource.

ICT can have a big influence upon decisions to insource and bring back previously outsourced business or manufacturing processes and relatively recent changes in the ICT environment are becoming an increasingly important factor in decisions to insource or outsource IT itself.

The traditional method of outsourcing IT – shifting it to a datacentre – is slowing. The cloud is part of the reason.

In the recent past, the choice was between in-house or managed server hosting using domestic data centres, off shore datacentres and near shore datacentres. Today, there are also several flavours of cloud solutions in addition to the traditional options. With more, perhaps better, options to consider – each with its own advantages and disadvantages – the decision of if and how to outsource or insource is even more complicated.

Cloud computing does not take place in the troposphere amidst lightning and heavy weather. The cloud is just an enormous collection of datacentres and servers that we connect to via telecommunications – mostly the Internet. Gmail, Dropbox, Amazon Web Service all run on the public cloud.

There are ‘public cloud’ solutions, private cloud solutions and mix and match hybrids. A private cloud is the same sort of environment except your company owns – or contracts – the datacentre and the network connected to it. Private clouds are either internal or outsourced, much like a managed server hosting.

Outsourcing to a datacentre, including for a private cloud, offers a variety of benefits: there are no capital expenditures – the service is delivered and billed monthly; the staffing and management of the service, the entire infrastructure and the ability to ramp up or down the servers used according to need are provided by the datacentre; hosts can provides security, backup, disaster recovery and may offer compliance solutions. Hosted solutions are also likely to be easier and quicker to implement than an in-house facility.

Internal private clouds give closer control over hardware, software and can be more responsive to changing circumstances of all sorts. Larger companies, with the capital to spend and the specialised human resources needed, might opt to build their own cloud to maintain tighter security, higher levels of compliance and greater flexibility.

In the end, the decision should rely upon a carefully researched understanding of the company’s needs from a wide variety of perspectives, and an equally well-researched understanding of the advantages and disadvantages of each option. Unfortunately, there is rarely a perfect solution, but the number of good options is growing and most are getting better.

Fredric Morris
Connect-World Magazines
United Kingdom
Email: fredric.morris@connect-world.com
Web: www.connect-world.com
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