The concept of outsourcing IT functions to third-party service providers has been moving full-steam ahead in recent years, but if new trends are any indication, it could be making a bit of a u-turn — back in-house.
For a variety of reasons, enterprise IT managers are in general becoming more savvy and selective when it comes to piecing together their outsourcing puzzles. For instance, instead of deciding to hand off their entire IT infrastructures, as was frequently the case in previous eras, managers are choosing to keep their core competencies in-house and outsource only those elements around which they do not have the required expertise, or which simply do not make good economic sense to do themselves.
The term “backsourcing” has loosely come to be associated with this notion of IT being brought home to roost after having been outsourced at an earlier time. But Albert Silverman, senior vice-president, IT Advisory Services for PricewaterhouseCoopers LLP in Toronto, cautions that not all instances of IT returning home qualify as backsourcing.
“If you want to be strict about it, it should only apply where a customer goes into an outsourcing agreement and then, before the termination of the agreement…repatriates the thing in-house,” he says.
By that definition alone, backsourcing can hardly be seen as an escalating trend, Silverman says. There are, however, other examples of outsourcing engagements in which the IT services are brought back in-house under situations that are hardly acrimonious, such as a contract being up and simply not renewed.
There are new models emerging as well, says Silverman, in which IT, although outsourced, is designated beforehand to return to its owner at a set point in time.
Under this concept, “Companies go to an outsourcer and say they want to outsource it, they want the service provider to build an outsourcing capability, run it for [them] and then…transfer it back in-house. That was the intent when they entered into the agreement.” Known as the “Build, Operate, Transfer” model, Silverman says this is a trend that is becoming more and more popular, especially with those CIOs who see the initial stages of an IT deployment to be too difficult and costly to handle on their own.
The number of positive experiences that clients are having with this model is spawning a sub-trend, adds Silverman. “We’re seeing customers intend to go into a Build, Operate, Transfer mode and then they go through the build and the operate and say, ‘You know what? This isn’t such a bad deal; we’re not going to transfer at all. We’ll let the outsourcer continue to operate it.’”
MANAGEMENT SHUFFLES
Another cause of IT returning in-house can be a changing of the guard at the customer’s executive level. When a new leader or leadership team comes on board, frequently as the result of a less-than-satisfactory overall performance by the company, heads — and IT outsourcing agreements — are apt to roll.
Similarly, corporate changes on the part of the service provider can cause skittishness levels to rise amongst the customer base, as was the case for Diesel, an advertising agency in Montreal. When Versus, its provider of advanced managed hosting services, was bought out by Fusepoint Managed Services in late 2004, Martin Gauthier, senior partner and general manager, Interactive Marketing, was concerned about how the transfer would affect the handling of his outsourced Web hosting responsibilities.
“They have great service, and I was very nervous about that when they merged,” says Gauthier. “It wasn’t easy. We had a lot of meetings. It was really hard because we wanted to make sure we didn’t lose this relationship.”
Gauthier says the process around the Versus-Fusepoint transfer of power was transparent and the outsourcing endeavour is still running smoothly. The firm’s decision to outsource in 2001 was arrived at only after Diesel had tried hosting Web sites that its designers had built for advertising clients, only to have them crash on an all-too-frequent basis.
“We are storytellers, and it is our job to create traffic. The better stories we create, the more people will come to the site,” he says. “[When we hosted sites ourselves,] lots of times the sites crashed; we were not professionals. You need a lot of people and infrastructure to make that happen, and that’s why we were looking for a partner to outsource this.”
Adds Gauthier: “We tried it and we failed at it. Business-wise, it wasn’t profitable. We looked for a business plan that made sense.”
SAVVY SOURCING
Decisions such as Diesel’s to outsource after careful scrutiny of the root problems are typical of an increasingly savvy outsourcing customer base, one which is taking a collectively closer look at the pros and cons of potential IT handoffs to service providers.
“[Customers] are more savvy,” says George Kerns, president and CEO of Fusepoint. “If you go back in time, there was kind of an all-or-nothing attitude where people threw up their hands because they weren’t getting what they wanted out of their [internal] IT organization, so they knee-jerked and got rid of the whole thing.”
Now the industry is witnessing customers pulling some of the outsourced functions back in-house, adds Kerns, because “it wasn’t a pill that cured all ills. You’re seeing more and more people selectively outsource, trying to match their skill sets and what they should concentrate on versus what service providers like us provide at a good price point.” Silverman agrees, and points to the blossoming length of termination clauses as evidence of an increasingly aware set of clients.
“What you’re seeing is a whole bunch of work being done at the contract stage, almost like prenuptials, saying, ‘Look, I’m going into this deal with you and I really want it to work, but just in case we fall out of love, here’s what happens should we split.’” Silverman adds that he recently completed a termination agreement that came in at a whopping 40 pages.
Such clauses may stipulate, among other things, that certain employees of the service provider working on the customer’s account would stay with the latter should the agreement be terminated prematurely, or that “software licenses that are used by the outsourcer must be transferable back without any fees or penalties,” says Silverman.
Despite the increased examination of the outsourcing process on the part of customers, Kerns is expecting the trend towards increased outsourcing to continue, particularly in such untapped areas as e-mail outsourcing.
“[E-mail] is kind of like your phone systems and like a desktop tool to you, but it’s becoming more and more complex. Before,[customers] felt like they had control, but now they’re realizing that it’s not as important anymore, and they realize it’s hard to manage.”
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