General Motors has shocked the outsourcing industry with its announcement to radically cut external IT projects. The U.S. auto giant has talked of reducing its IT outsourcing to just 10 percent from the current 90 percent. What could be the reason behind such a move? Is it political, philosophical or just a business plan? At present, 90 percent of GM’s IT services are outsourced to vendors such as HP/EDS, IBM, Capgemini
GM’s new CIO Randy Mott is aiming to change all these over the next three years. The move comes at a time United States is facing presidential election. What is also to be noted is that GM has recently emerged from the brink of bankruptcy, a crisis only averted by a $50 billion government bailout.
The reduction in outsourcing is part of Mott’s far-reaching overhaul of GM’s IT. As part of the plan, the company reduce its data centres from 23 to just two, a 40 percent reduction in GM’s 4,000 plus apps. It will create three new software development centres; new forms of portfolio management that will require a cost-benefit analysis for every IT project and a restructuring of its data wearehouses – moving its current 200 data marts to one data architecture.
Mott and GM say the new structure will take shape quickly and help deliver more value to customers. It is a philosophy that Mott has employed previously, most notably at HP where he tried to implement a near identical plan.
Politics than Philosophy
However, in the case of GM, some believe the plan may have more to do with politics than philosophy. “It is not a bad message for GM to say they are bringing these jobs back,” said IT researcher and renowned outsourcing critic Dr. Art Langer.
“I think GM could have a very nice message saying we are going to create all these jobs for America,” he added, “-and GM is America – so there could (also) be some marketing and sales aspect to this.”
However, Dr. Langer believes the move is aimed at boosting its image in political circles. Among the others, he includes cost. “The true cost of outsourcing is not properly measured,” he said. “The easy way to measure it is to say the rate is lower but there are costs of losing ownership and control, there are costs in the increased amount of time and rework that has occurred.”
Dr Langer also believes bringing IT services back in-house will allow GM to assert greater control over the risks involved in IT development and, crucially, enable it to secure its own talent from a pool of IT professionals likely to be hit hard in the near future by the loss of workers who had deferred retirement due to the economic crisis.
“There is going to be a dramatic loss of talent and there is a real need to start replacing that talent internally or else what’s going to happen is you will have companies that are American that will be run by foreign people,” he said.
KPMG outsourcing analyst Stan Lepeak agrees with Dr. Langer that cost is a likely factor but believes GM’s decision could have been caused more by the changes it has undergone since bankruptcy than the hidden cost of outsourcing. “They were able to take out a lot of labor costs going through the bankruptcy and they didn’t have the ability to do that restructuring with the outsourcing arrangements unless they pulled them back,” he said.
However, Lepeak believes downsizing operations such as its data centres will not alone boost its image in the U.S. “It looks good from the perspective of supposedly bringing work back onshore but I think the reality is the level of work that will come back is over-stated,” he said.
Whether the move is successful or not for the company will depend not on GM’s motivations but on what the company does next, according to Lepeak. “You can argue philosophically that that’s the way to do it,” he said, “but the reality is that it is going to be the execution that is going to determine retrospectively whether it was a good idea.”
Whatever the final results for GM, the influence of the decision is already being felt throughout the ITO world. Some analysts believe bringing jobs onshore will become common in the days ahead and it could also be an indication of what is to come.
“What you are going to see is a rebalancing,” said Dr. Langer. “It went too far in one direction and it is not only creating problems for certain companies, it is creating problems for economies and countries.”
“Certain things can be outsourced effectively, economically and that make sense [to outsource],” he added. “And then there are many other things that were outsourced strictly based on rate and what has happened is the realization that some portion of that needs to come back.”
Which Model is More Agile?
Outsourcing providers must share responsibility for the trend towards insourcing, according to David Rutchik, a partner at consultancy firm Pace Harmon and outsourcing specialist. ”There have been frustrations that they are not as agile or flexible as they need to be and that they don’t understand the specifics of their customers business to the extent they need to,” he said.
“People are looking for an alternative,” he added. “If the model were meeting more needs this would be less of a consideration.”
However, Stan Lepeak believes the apparent trend towards in-sourcing is not the straight reversal of outsourcing. “We do see a lot of firms shifting work around – taking work that was outsourced and putting it into a shared service centre, occasionally bringing work back from offshore,” he said. “But one thing we see is that when work is brought back in-house it often ends up being automated.”
According to Lepeak, these reversals do not mark a decline in outsourcing. “The trend is still towards more outsourcing, still towards more cloud software and commercial service software,” he said.
Lepeak even believes we may see GM return to outsourcing in the future. “I wouldn’t be totally surprised if in a few years we saw some additional outsourcing being done,” he said, “but perhaps through contractual arrangements that give them more flexibility or through the consolidation of those arrangements so they are not having to deal with so many providers.”