By Craig Kane and Mohit Mohal
The problem with many discussions about reshoring—the trend to locate a workforce in the United States or Western Europe rather than in lower-cost offshore or nearshore countries—is all the noisy politics. The discussions tend to center on bringing back jobs, reducing unemployment or fulfilling a political candidate’s vision.
But when it comes to preparing your IT organization to succeed in the next decade, all that noise is irrelevant. What’s needed is not so much reshoring but IT rebalancing.
A few months ago, we did a research study on the seven key factors driving the offshoring of services. We were looking to see if and when services that have been offshored will start migrating back onshore. What we found, however, was more complex.
Our study found that offshoring does continue, robustly, largely because the cost advantages and availability of relevant talent remain significant. Yet we found that some IT work is indeed returning.
General Motors’ 2012 announcement to change from 90 percent outsourced IT work to 90 percent insourced and onshore was seen by some observers as a political move related to its federal bailout. However, more recently, many additional companies have brought back select IT work from offshore locations. In doing so, they are also typically adjusting their service delivery models to better enable the business—changing not just the jobs’ location (offshore/onshore) but also their structure (outsourced/insourced).
What’s going on?
We believe that these companies are responding to multiple significant disruptions in the market. They’re rebalancing their IT functions, with new large-picture strategies that change the structure, skills and locations of their IT organizations.
The three biggest disruptions are:
· In technology: With widespread commercialization of cloud-based applications and virtualization services, many CIOs are placing increasing priority on moving their applications to the cloud. For example, we worked with a large consumer packaged goods (CPG) manufacturer that is moving 20 percent of its IT application portfolio into the cloud by next year and has already closed one data center.
To manage these changes, a company must make a step change in its IT organization, while resetting traditional IT outsourcing contracts.
· In the business model: With technological trends such as digital marketing, e-commerce and mobile computing, IT can play a bigger role in driving business enablement. But the new profile requires a new breed of IT skills, such as big data analysis and mobile app development.
Given the business impact at stake and the relatively limited availability of these skills offshore, many savvy CIOs are investing in onshore talent to speed their time to maximum value creation.
· In the IT outsourcing landscape: Over time, first- and second-generation outsourcing contracts have proved less effective in some functions than others. For those functions, the emergence of lower-cost locations in the United States and Europe, as well as in near-shore countries, has provided a viable alternative to building these skills in-house.
For example, a large CPG company pulled back 50 to 70 full-time equivalents (FTEs) of SAP enterprise resource planning (ERP) functional work from a multimillion-dollar, multiyear contract to an in-house function in a Latin American near-shore location.
In short, IT outsourcing is at an inflection point. But it’s not a pendulum on a two-dimensional plane, simply swinging back from distant to near shores. Instead, the strategic disruptions will force IT organizations to restructure into new models, moving into a third dimension.
These changes will affect all IT organizations, regardless of whether they have been traditionally efficient or innovatively business-savvy. If they don’t expand in new directions to meet the new realities, they will be left behind.
So how can CIOs turn the rebalancing into an advantage? We recently helped several companies rebalance their IT portfolios and adjustments in service delivery models and found that structured holistic ways of thinking are especially useful. That process includes the following steps:
1. Assess Business Priorities: How will your business priorities evolve in next five to 10 years? How will technology-enabled disruptions in business models affect your industry?
2. Review and Refresh IT Strategy: How will business and technology disruptions reshape your IT strategy in terms of business capabilities, IT services portfolio, sourcing strategy, and an operating and organizational model?
3. Rebalance IT: In the refreshed IT strategy, which of your services and skills are core? What is your optimal organization and operating model (roles and skills, insourced versus outsourced, location)?
4. Reassess and Rebalance: Given the pace of change, are you reassessing and refreshing on an ongoing basis?
IT rebalancing is real. Over the next two to three years, we believe an increasing number of CIOs will pursue options to rebalance select IT work as part of a reassessment of a global IT operating model. The challenge, as always, is to ensure that IT capabilities, skills and delivery models are best aligned to enable business priorities, while balancing cost considerations.
Today’s disruptive events should serve as a wake-up call for both CIOs and IT outsourcing suppliers to think about how to pivot to the next generation of outsourcing.
Craig Kane is a partner in the strategic IT practice of A.T. Kearney, a global management consulting firm. Based in Dallas, Kane can be reached at [email protected]. Mohit Mohal is a manager in the strategic IT practice at A.T. Kearney. He is based in Chicago and can be reached at [email protected].