As operations and procurement professionals we have to understand the outsourcing drivers and manage vendors to continuously improve…or be ready to support a shift in delivery model. Outsourcing is often primarily driven by cost savings with the hope for improved management, innovation and delivery excellence. Decades of evolving services with excellent marketing have resulted in companies aggressively outsourcing with a healthy application of hope. As is often said…“Hope is not a strategy”. There are many successfully examples, but understanding how challenges have been met in the past helps us evaluate management trade-offs.
JP Morgan and General Motors are two IT examples where both initially outsource IT Operations. These were multi-billion dollar deals with visions of efficient growth and accelerated innovation while reducing costs, increasing quality, and providing exciting career opportunities for their employees. Both companies ultimately reversed those decisions.
JP Morgan outsourced roles in 2002 and then insourced many of these same employees in 2004. Even though industry analysts were positively on the move, the company suffered the negative impacts on employee morale, lost focus due to transition activity and delays on projects and technology changes. Corporate acquisition activity and the changing business environment drove these changes highlighting the requirement for flexibility in both contracts and partners.
In 2013, General Motors began shifting from a 90% outsourced IT to a 90% insourced model. This change had many benefits including a reduction in the number of data centers from 23 to 2, bringing back 10,000 jobs to the United States, reducing available applications by 40%, and creating three new software development centers. Sometimes, rationalization and standardization is best handled internally.
These examples highlight challenges of managing IT as a commodity to drive process efficiencies and cost reductions. However, consider more recent trends and how the cloud is changing the IT landscape. Outsourcing now brings new opportunities and innovation through cloud services. New investment roadmaps, radically different infrastructure models and deployment timelines bring outsourcing into a different light.
Manufacturing examples also show ever changing shifts. General Electric outsourced their design and manufacturing of the GeoSpring Water Heater to China but the design was difficult to produce and assemble. In 2012, GE invested $800 million to reestablish a manufacturing facility in Kentucky to on-shore design and manufacturing which allowed GE to innovate and redesign the water heaters. Assembly time was reduced from 10 hours to 2 hours and allowed GE to reduce the retail price from $1,599 to $1,299. Even with the $800 million investment and higher operating costs, on-shoring led to a new innovative design and a lower total cost. The ability to innovate had been lost through outsourcing, but regained internally.
GE is not a lone example in its strategy for bringing design and manufacturing back to the United States. In recent years, Whirlpool moved its mixer-making from China to Ohio, Otis moved its elevator production from Mexico to South Carolina, and Wham-O brought their Frisbee-molding back from China to California all with expectations to improve quality and reduce TCO.
No doubt, outsourcing can be an effective strategic lever to control costs. But to avoid dramatic changes in strategy we need to continuously manage for innovation, expertise, quality, and scalability to provide real value with the flexibility to support true growth. Effective use of outsourcing does require change and diligent internal management which is often a hurdle to success, but the result is a true strategic plan with well balanced execution delivering more than hope. It can achieve the right balance which over time increases competitiveness and delivers innovation and savings.