Research: Many Organizations Re-Assessing Outsourcing Strategy

A recent Compass poll of 70 North American organizations with outsourced IT operations found that only 4% of respondents would not consider taking all or some outsourced services back in-house. Compass, a global management consulting firm specializing in business and IT performance improvement, found the poll findings to correspond to Compass’ recent benchmark analyses of outsourcing contracts over the last 18 months. These analyses indicate that organizations are seriously considering the repatriation of at least some crucial IT functions. The emergence of regional “tier two” service providers and the growing long-term costs of outsourcing are contributing to this new approach.

“As the IT outsourcing market matures, client organizations are learning from their initial outsourcing experiences and are better equipped to make informed sourcing choices,” said Geraldine Fox, global director of Compass’ sourcing service line. “All of the trends we’re observing reflect this evolution of the marketplace, along with increasing confidence and ability of client organizations to develop and manage their service delivery strategy.”

Three key trends have emerged through the poll and the analyses:

  • The increased acceptance of insourcing, or repatriation, as a viable services strategy
  • The emergence of regional “tier two” service providers
  • A growing emphasis on multi-vendor sourcing

Bringing Services Back In-House

The insourcing trend is being driven by several factors. In some cases, organizations are finding that, over the long term, outsourcing may be more expensive than delivering the same services in-house. Other client organizations are taking operations back in-house to exploit the investment that outsourcers made to deliver a well-run, standardized global operation. And still others are finding that their business model could not adjust to the necessary restrictions of an outsourced contract.

“While we expect to see an increase in companies repatriating services,” said Fox, “we believe that ultimately most of these organizations will take the selective outsourcing route — keeping some services in-house and outsourcing others.”

Strengthening of Tier 2 and Regional Outsourcers

Traditionally, global companies considered only global outsourcers as potential partners. However, as outsourcing management skills of internal IT groups improve, Tier 2 and regional vendors have emerged as a viable alternative. Lower overheads, greater focus on cost containment, hunger for business, and a greater focus on customer satisfaction provide these players with a competitive advantage. As a result, the regional players have managed to capture a large percentage of their local market at the expense of the recognized Tier 1 players.

“Increasingly,” said Fox, “we see large organizations approaching the end of a global contract consider carving up their service provider relationships along geographic boundaries.”

Gains for Multi-Vendor Sourcing

Evidence suggests that selective sourcing results in higher client satisfaction levels than full-scope, sole-source relationships. The benefits of selective outsourcing have included greater control, higher quality, and greater client satisfaction and, in many cases, lower costs. Compass analyses indicate that organizations that engage in selective outsourcing:

  • are already well-run, efficient IT departments
  • begin the outsourcing process by analyzing their operation and how different areas might benefit from various sourcing approaches
  • have reasonable expectations regarding what is likely to be achieved.

“In the past, many global organizations were averse to the challenge of selective outsourcing, in large part due to the very real shortage of internal management expertise,” said Fox. “During the past two years, however, Compass has seen the maturing skill sets of the internal IT staff of the retained function, causing a growing acceptance of selective sourcing by CIOs.”

Compass believes the next wave of outsourcing will see a break up of the mega-outsourcing deals and a greater emphasis on multi-vendor outsourcing arrangements, carved up along geographic and tower boundaries. This will necessitate larger internal retained functions and the client having greater control.

“Client organizations need to take a broad, forward-looking approach to planning their outsourcing strategy,” said Fox. “Our advice is: Make no assumptions. Don’t be limited by past experience and don’t anticipate a solution before examining the issue.”

Fox will host an interactive web-based discussion on the factors driving the popularity of repatriation as a sourcing strategy option. That webcast is scheduled for 2 p.m. EDT on Wednesday, October 11, 2006. For more information, send an e-mail to facts@compassmc.com with the word “insourcing” in the subject line.