Here We Go Round the Mulberry Bush It's not just the economy that goes in cycles. The first part of this year has seen several high profile announcements about companies bringing their previously outsourced IT back in house. It's big names too - Prudential Insurance, Cable & Wireless, JP Morgan Chase, and London Oxford Street retailer Selfridges. Some of these deals, which have either been cancelled or not renewed when the contracts ran out, are for substantial sums of money running into billions of dollars. To my knowledge this is at least the second time around this loop of outsourcing and then bringing everything back into the company - aka insourcing. So what's going on? There are a number of different interacting trends that drive the cycle, including the notoriously short memories of those at the top. Much of the most recent round of outsourcing was driven by two factors. The first was the desire by the bean counters to 'cut costs', especially in the tough trading conditions prevailing when the dot com boom ended. The second was a dire shortage of trained IT staff. There were plenty of ex-dot com wannabes around, but they lacked both the discipline and skills needed for mainstream IT. In these circumstances, IT directors looked longingly at the outsourcing suppliers who did have good quality trained staff, and became susceptible to the outsourcers' blandishments. Add to this the alluring spreadsheets showing how much could, hypothetically, be saved, and you have the makings of a rush to outsourcing for corporate IT operations. And indeed that's exactly what happened. Firms almost stampeded to hive off their IT departments. Top management, most of whom thought the term 'software' meant silk knickers, were only too happy to hand over the expensive and mysterious IT department to other hands. Of course, it turned out not to be quite so easy as it was expected to be. For a start, few people realised that if you outsource your IT, you need to employ some extremely competent - and therefore highly paid - staff to make sure the outsourcing company are doing what you want. You also need lawyers with technical expertise in the IT business to make sure that the contracts are watertight with respect to what you get for your money. Most of the firms putting out their IT didn't realise that, and as a consequence the contracts were riddled with loopholes, especially on the issue of quality of service. This, of course, was more than capable of wiping out the projected savings. Even worse, as soon as a significant number of firms outsourced their IT, the outsourcing companies started to suffer from the very shortage of trained staff that had impelled their customers to outsource in the first place! You don't resolve trained staff shortages by giving the work to someone else - that just pushes the shortage over to a different venue. So, while it appeared to work just fine at first, the potent mix of badly drawn up contracts (frequently lasting for ten or more years), inadequate supervision by customers, and serious staff shortages soon led to problems. These problems were compounded by the fact that usually all the work was outsourced to one supplier, so you couldn't compensate by switching work around between suppliers. At this stage we also had the fall out from the corruption in the dot com boom, and the aftershocks of 9/11. So the government added its little soupcon to the mix in the form of extra reporting requirements, for instance the Sabine-Oxley act in the US and the Basle II regulations in Europe. This meant major rewrites of the IT systems for most, if not all of the major corporations. It was at this stage that it finally became obvious to those at the top that outsourcing was not only not solving problems, it was causing even more, and had resulted in management losing control over important parts of the corporation and its policy. Welcome to the world of insourcing. Well at least until the shambles fades from corporate memories yet again! Yes, as you guessed, corporations are now starting to bring their IT operations back in house. This will solve the problems caused by outsourcing - at a high price - but it won't solve the problems that caused the work to be outsourced in the first place. And, of course, solving the skills problem is even more difficult post-9/11, because the governments are restricting the movement of skilled labour into the countries suffering a shortage. But that, as they say, is another story.
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