What's behind enterprise insourcing of IT?

Insourcing a trend that we have seen take off. Aivars Lode avantce

What's behind enterprise insourcing of IT?

By Mary Shacklett

November 26, 2012, 5:37 AM PST

Takeaway: Some U.S. companies are making moves towards bringing formerly insourced jobs back in house. What’s behind this decision?

The annual salary of a software developer in the U.S. is $94,000. In India, it is $14,000, and in the Philippines it is $7,521 (Source: http://jobs.aol.com/articles/2012/07/09/gm-vows-to-insource-most-of-its-it-jobs-beginning-of-a-trend/.) Cloud-based tracking software gives companies immediate insights into the productivity of the offshore workers that they contract with-and the ability to provide true “follow the sun” resources for projects and IT support. All of this has made offshore IT markets extremely attractive to U.S. companies.

At the same time, there are U.S. companies that have or are making make countermoves toward insourcing.

One of them is General Motors, which announced in 2012 its plans to insource 90 percent of its IT jobs within three years. The goals are higher productivity from onshore staff, reduced travel, lower management burdens, better cultural fits and most importantly, the ability to directly command technology expertise for new product innovation and speed to market that will drive revenues and to also give the company a competitive edge since technology expertise is now a major defining competitive factor in most industries.

GM is not alone. Ford, Starbucks, Caterpillar, Google and GE all have made or are making insourcing moves. They cite factors like bringing products to market quicker, lower transportation and warehousing costs, better product and service quality, less rework, stronger intellectual property protection and a stronger “goodwill image” among Americans who are still struggling economically.

“A major reason large companies are considering insourcing IT is out of fear that their in-house IT skills bases are eroding with outsourcing and that they no longer have the technology “wherewithal” to support or to innovate with their own technology resources,” confided one IT industry consultant who works with a major corporation  who is  moving to insourcing.

Is excessive outsourcing ultimately a threat to American companies?

Prognosticators like Paul Craig Roberts, who served as Assistant Secretary of the Treasury in the Reagan Administration, say “yes.”  Robert described outsourcing as “fool’s gold for companies.” He went on to say that “Corporate America’s short-term mentality, stemming from bonuses tied to quarterly results, is causing U.S. companies to lose not only their best employees–their human capital–but also the consumers who buy their products. Employees displaced by foreigners and left unemployed or in lower paid work have a reduced presence in the consumer market.”

Not every company looking at insourcing has necessarily connected all of the dots to arrive at Roberts’ conclusions about the consumer market.  But what more companies that are insourcing are concerned about is the steady erosion of intellectual capital within their four walls-and also the ability to protect their product and idea innovations amid loose or nonexistent patent laws abroad. When this happens, you can find yourself investing in and doing all the R&D work-and then losing the market to those who have made off with your ideas and marketed them under their own labels.

It is in this scenario that IT potentially becomes high risk–because so many of the innovations companies are making-not only in products but in speed to market and the ability to capture more revenue while cutting costs-come from technology innovation. This is the area that more companies are starting to churn into their strategic thinking. They are weighing insourcing against the simple mathematics of procuring commodity IT labor at cut-rate prices. Other important areas, like speed and quality of manufacturing and time to market, are also getting consideration.

The debate will continue as we move into a new year. But it’s safe to say that in a majority of cases, we will continue to see a “mix” of outsourcing and insourcing practices, with a number of companies concluding that they have over-outsourced over the past few years to where they are now risking the long-term health of their internal intellectual capital.