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Why companies opt to insource for IT innovation

Stephanie Overby | March 17, 2015
IT outsourcing customers are increasingly demanding IT innovation and will either look to providers to deliver real business outcomes or take their innovation-related business back in-house to run themselves.

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Companies are increasingly taking a multisourcing approach to IT outsourcing, signing shorter, smaller deals with a mix of providers. At the same time, some are pulling certain pieces of the IT portfolio back in-house.

"As you get into the second and third generation renewals, each renewal sees a bit more work being sliced off and taken back in-house," says Mike Slavin, Managing Director of outsourcing consultancy Alsbridge. "And those functions being repatriated are often related to innovation."

Outsourcing customers seek innovation

Lack of innovation remains one of the top complaints about outsourcing. Outsourcing customers say that providers fail to bring any new ideas to the table. Providers protest that clients don't know what they mean by innovation and aren't willing to pay for it. And traditional outsourcing bidding and contractual processes aren't designed to drive innovation--in fact they thwart it.

"Because of competitive pressures, providers have to do internal cost take-outs to win deals. That squeezes margins and profit expectations, and means that most of the upside for the service providers is during the latter portion of the deal," says Slavin. "This gives account management teams little room to provide creative ideas and fund innovative pilots and projects."

In addition, few outsourcing agreements call for a standing innovation committee or an innovation fund, for example.

Traditional IT service providers -- like IBM and HP -- built their businesses on the transfer of both human capital and physical assets to the supplier, creating an environment that discouraged innovation, says Slavin. Indian vendors developed business models on a foundation of labor arbitrage and price competition, which also obstructed innovation. 

Little has changed about either approach in the last decade. "Rather than hiring and training a new style and culture of technical talent to support what IT looks like in 2015, clients often see 20- and 30-year veterans who have survived the many layoffs and workforce reductions being rebranded as cloud or mobility experts," says Slavin. "But the reality is that these veterans have little grounding in those technologies."

Innovating for customers vs. supporting in-house customer innovation

Traditional players with significant infrastructure assets are digging in, arguing that their years of experience running those systems makes them best suited to innovate on behalf of their customers, Slavin says. In addition, they employ various "handcuff" strategies that make the process of exiting agreements and moving operations back in-house difficult for a customer, according to Slavin.

Some Indian firms, however, are encouraging their clients to take some services back in-house, even offering their staffing resources to support in the transition to and management of the new model, says Slavin. "These providers do not have the large asset base in fixed assets such as data centers and are happy to provide services to a client in their own data center or perhaps a [co-located center].  Several pitch this strategy as something that mitigates the traditional sourcing risks, allowing the clients to potentially move services more readily if they are not happy."

 

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