There have been many column inches spent over the last week discussing General Motor’s decision to move from an outsourced model to an insourced model in relation to its IT. What drives much of the debate is the skills agenda and can GM manage the transition. If you look at the reasons that GM gave it was less about cost and more about innovation.
Whilst there is a fair amount of rationalisation included, for example data centres down from 23 to 2 and a reduction in applications by 40%, the balance really seems to be in favour of improving competitive advantage by using IT as a source of innovation.
In a number of discussions recently I have sought to test a hypothesis about the future of outsourcing that goes like this.
Over the past 20 years organisations have sought to outsource areas such as HR, procurement, and IT. They have primarily done this in order to create efficiencies through scale, or delivery processes. The first tranches of efficiency savings are created fairly easily and take a short period to implement. The trade-off for the investments made, often by the outsource provider, is a medium/long-term relationship. At the end of the first contract, the relationship is extended on the basis that second tranche of efficiency savings can be made in return for perhaps a wider scope or deeper relationship. With each tranche it becomes more difficult to unlock large enough savings to outweigh the often rigid delivery approach that is required to create the efficiencies within a scope that was defined in perhaps a different business environment a few years back.
At some point client organisations move from a primary driver of efficiency, to locking in the efficiencies and accepting that there is a law of diminishing returns at play. At this point they switch to looking at how do they drive effectiveness from the efficient platform that has been developed. At this point, innovation, flexibility, and agility become vital aspects of the relationship between the client and the outsource provider. It is also likely that the relationship with need to adjust from client-provider to more partnered.
Could GM be playing out this hypothesis? Will we see more companies taking such an approach?
It’s all possible, and such a move from outsourcing for efficiency, to outsourcing for effectiveness is about tipping points. Different organisations will have different tipping points and will reach them at different points in time. It’s unlikely we’ll see a massive and sudden change, however, GM could be significant in terms of being a signal for outsourcing providers.
Whilst it’s unlikely that all clients will have the ability to follow the GM route and insource as the solution, we will likely see clients requiring their outsource providers to deliver a different blend of benefits with innovation being at the core. Whilst the leaders in the field are actively innovative in a wide sense, the vast majority of the field focus their innovation on delivery efficiency based on the traditional assumption that this is what matters most to the client. The new world of outsourcing for effectiveness requires a different approach to innovation underpinned with a different mindset, skillsets, and toolsets, but the good news is that there is time to develop them, although not too long.