Outsourcing Vs. Insourcing: You Need Both
Reshored IT services are on the rise, but your company might be best served by “rightsourcing” — using a combination of insourcing and outsourcing based on your needs.
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he decision by General Motors to bring 10,000 IT jobs back to the U.S. over the next three to five years has been well chronicled. GM is definitely the biggest mover in the emerging insourcing or reshoring trend. We have also seen major U.S. companies including GE, Starbucks and Caterpillar announce the reshoring of manufacturing, services and IT jobs. Others will follow as the “Made in America” trend gains momentum.
Why is this happening now? Is this being driven by the H-1B visa issue? Cost increases overseas? Patriotism?
Yes, some of these factors are driving this trend, but the biggest reason for the emergence of insourcing or reshoring is that for the delivery of some IT services, it just makes sense.
Trends tend to be cyclical and are spurred by changes in market conditions. The rise of reshoring is being fueled by certain changes in IT such as a bigger domestic talent pool outside tier-one cities, the use of videoconferencing to make distributed teams highly productive, and the overall maturation of the outsourcing market. GM might be aggressive in its reshoring approach, but its move will likely motivate other companies to look at their own outsourcing.[ Time to question old hiring assumptions? Read H-1B Workers Not Best Or Brightest, Study Says. ]
Outsourcing strategies should be directly tied to business strategies, and as market factors change, so should outsourcing strategies. Common drivers of an outsourcing strategy include: cost, time to market, talent availability, customer support needs, global expansion and organizational readiness. Changing market factors such as increased offshore pricing, new delivery models (e.g. agile) and the rise of mid-size and specialty service providers all make it a good time for companies to adjust their own sourcing models. But that’s easier said than done.
When it comes to sourcing models, there are many terms to digest: insourcing, reshoring, outsourcing, offshoring, onshoring, nearshoring, captives and so on. All are familiar in the IT industry but the most important term to consider is “rightsourcing,” which sometimes gets omitted from sourcing strategies.
Rightsourcing implies the use of common sense to determine where certain services should be delivered. The right location of tasks and services is driven by quality, cost and availability of talent. Rightsourcing is directly tied to business goals and should be unique to each company — meaning there is no cookie-cutter approach to determining what sourcing model will work best for your company. Insourcing might work for some tasks and outsourcing for others.
Our industry seems to pit outsourcing vs. insourcing. That should not be the way, because most companies need both to get the right combination of best talent and most-cost-effective IT services. The best sourcing strategies treat outsourcing and insourcing as complementary, not competitive, and leverage onsite, onshore, offshore and nearshore options all in the same model. This is called a global services model and reshoring is an inevitable outcome of a global services strategy.
The outsourcing market is starting to mature and U.S. companies have realized that it makes more sense to undertake certain services locally. These services typically require more day-to-day — or even hour-to-hour — business interaction and communication. Here are some examples:
-Application maintenance and support (AMS) — for apps that require same- or near-time zone support or follow-the-sun support models.
-Business intelligence — for reporting where business users want quick response times.
-Testing — where more customer interaction is required.
-Mobility — because rapid prototyping and heavy customer interaction are required.
-Application development — for apps that require more business interaction or a follow-the-sun model.
Although providing these types of services locally comes at higher rates, the actual total-cost-of-ownership (TCO) can be attractive if you factor in higher productivity, fewer errors through better communication, and faster time to market. Conversely, traditional outsourcing and offshoring makes sense for application development and AMS if real-time or near-real-time customer interaction is not required.
One of the biggest enablers of the reshoring trend is the rise in talent availability in the market. Most of the large engineering schools in the U.S. are seeing rises in annual enrollment of around 10% for the past three or four years. This is extremely encouraging.
In 2012, my company, mid-tier Indian IT Services provider Mindtree, opened up a 400-seat U.S. Delivery Center (USDC) in Gainesville, Fla., in partnership with the College of Engineering at the University of Florida. The College of Engineering at UF has seen tremendous growth, with an active enrollment of over 8,000 students. This talent pool feeds the USDC and makes it a viable, cost-competitive player in the market.
Reshoring and insourcing are headline grabbers for politicians and the media, but the real driver of the made-in-America trend is a rightsourcing method that uses common sense, expediency and cost savings in sourcing strategies.
CIOs will need to leverage a global services model that uses both insourcing and outsourcing for certain tasks. This will inevitably lead to more of the right work being done onsite or in local delivery centers with competitive pricing and will benefit the entire IT industry, universities with strong engineering programs, graduates looking for jobs, and cities and states that support local delivery centers.