The New Trend: Insourcing IT Services

Insourcing is the opposite of outsourcing! Well, that sounds obvious, isn’t it? However, many people do not know what it means. However, this is a trend that is hitting the market in developing countries. Take India for instance; it is the largest exporter of software services in the world. A few bellwether companies primarily ran India’s information technology business. Tata Consultancy Services, Infosys, Wipro, Cognizant, etc, are a few of these stalwarts. However, the recent quarters have been turbulent at these companies. A lot of clients have left these companies and taken back their contracts. However, what is surprising is that the contracts have not been outsourced to another third party company but rather it has been insourced. In this article, we will understand the concept of insourcing and how it will affect the marketplace:

What is a Captive Center ?

A captive center is owned by the company itself. It is set up in offshore locations to ensure that the tax and labor advantages are not missed. For instance, if Wal-Mart sets up its IT services center in Bangalore (which it has already done) then it would be called a captive center. The difference is that the work is not sent to a third party. Rather a legal entity is created and run by the parent company itself. This entity if called the captive center.

The concept of Global Shared Services Organization has also emerged. This simply means that the Wal-Mart office set up in India will provide services to all operations of Wal-Mart from across the world! Hence, it is a bit like outsourcing. But instead of outsourcing to a third party, companies have started outsourcing to themselves.

Maturing Markets

Companies like Colgate, Sony Pictures. Pfizer, Bayer, etc, have all opened their offices in India in the past few months. In many cases, they have simply hired the talent that was anyways working for them at their vendors. This move towards captive centers is because of the maturing stage of the software export industry. Earlier, the costs were abysmally low. Also, companies like Infosys and Wipro were the only ones that had access to the limited pool at low costs. The volume of software services was also not significant enough for the companies to consider opening their centers. The rising costs, falling quality of services, increasing reliance on automation have all led to the beginning of this insourcing trend.

The Costs Involved

Insourcing software services can have substantial costs involved. IT service contracts are often multi-million dollar contracts. Terminating them also leads to unexpected losses for the IT vendor. They are left with infrastructure and workforce whom they will have to pay. As such, these contracts have a heavy termination fee that involves millions of dollars. However, if the contract is simply not renewed after its completion, there is no fee. It is for this reason that clients wait for their 7 or 8-year contracts to end and then simply insource the work.

Knowledge Transfer

Insourcing is also a logistical nightmare. IT systems tend to be complex and have several applications that have had several upgrades. Hence, no one really knows what exactly is going on. This is true in the case of outsourced services. The knowledge about the systems lies with the IT service vendor. Hence, knowledge transition is a significant insourcing challenge. Not only does it take several days but also an incredibly big effort from both sides. The vendor and their employees are disinterested in the process. This adds further to their woes.

Effect on Vendors

The insourcing trend is having a disastrous impact on vendors. Services have become more or less commoditized. Hence, there is no unique selling point which enables them to sell at a premium. Contracts are being awarded to the lowest bidder. As a result, there is a lot of pressure on the profit margins. Hence, relying on volumes is the only thing that IT vendors can do to maintain their profitability. However, with insourcing becoming fashionable, newer challenges are arising in the marketplace and the volume of business is also shrinking.

Effect on Workforce

Workers have been the biggest beneficiaries of the insourcing trends. Third party corporations have lower margins. Therefore, they cannot really pay their workers as well. Also, there is an increasing drive to increase profitability

On the other hand, captive centers do not have such constraints. They can offer better job security, higher pay, and more perquisites. The creme-de-la-creme of information technology workers are therefore flocking towards captive centers despite there being rumors that this business model may be short lived. Captive centers have at least 50% less attrition than their peers who undertake outsourcing projects.

Transition Time

Vendor contracts expire every 5 years. Quite often companies have to move their business to another cheaper vendor. Each time the process moves to a different vendor, the learning curve starts all over again. Insourcing offers stability. Hence, as time passes, the exponential gains in learning add up. Each and every employee becomes an expert in their domain. This enables the captive center to provide more seamless support to the business than any third party vendor possibly could!