Insourcers as outsourcers

I have been in the IT industry for more than 20 years now, and one not-so-recent trend that seems to be gaining steam is what I like to call “insourcing.” What I mean by this is that there are a number of companies that have progressed enough along the IT maturity curve to realize that they really are a service provider to the business, and through adoption of a service provider mentality, they can effectively stave off attempts from the business to outsource the IT function to an outside enterprise.

This extends all the way to the application of advanced management technologies like service-level management – technologies that have traditionally been limited to the “classic” service provider community. The advantages of IT becoming an insourcer are obvious – high business value and job security.

Interestingly, some companies have evolved this concept even further. They have become so effective at insourcing that they realize they could also sell those services *outside* of the enterprise – in effect, evolve from an insourcer to an outsourcer.

I became intrigued with this concept last fall when I met a gentleman who is a senior manager in the IT organization of a large insurance company (I was unable to reach him about using his company name, so its identity will remain anonymous).

Over the years, the company has invested heavily in its Computer Associates Unicenter infrastructure to help support its internal business requirements. About two years ago, the company realized that it could sell its knowledge as a service to external customers and they began selling their services to other companies in the financial services field. It targeted its independent agents, which are mostly small businesses that can’t afford to hire the caliber of personnel or make the investments necessary for a Unicenter-type management infrastructure.

The last twist in the story was that the parent company decided to spin off the IT department as a wholly owned subsidiary, which provided the IT organization with its own budget and profit and loss expectations, with the emphasis on profit. The last I heard was that the new division was doing quite well, adding to the parent organization’s bottom line as well as continuing to provide high levels of service to all of its “customers,” regardless of whether they were inside or outside of the company – insourcing and outsourcing at the same time. Another nice side effect of this is that the folks in IT can then receive compensation based on the division’s profitability, instead of hard-to-quantify management by objectives and other performance metrics.

It seems to me that this is an intriguing way for the large management vendors – namely IBM, CA, HP and BMC – to open up a channel to the small and midsize business (SMB) market. All of these vendors have traditionally struggled with penetrating the SMB markets, as their solutions were considered complex and expensive to acquire and deploy. Even some of these vendors’ so-called “express” offerings are really just targeted at midsize businesses.

This strategy would allow their most mature customers to increase the profitability of their IT departments by leveraging those management investments as outsourcers. One key success factor, in my opinion, is that the management outsourcer needs to have vertical expertise, which is what the company in the financial services field can offer. This allows the outsourcer to understand its customer’s business model and to design products and services that fit the customer’s needs.

If you are involved in a similar project or have knowledge of other companies that have a) become an insourcer, and then b) evolved to an outsourcer, I would love to hear about them. If I get enough responses, I will post a follow-up article in this column in the near future. As always, I welcome your ideas, suggestions and comments on the subject of outsourcing; you can e-mail me at mehr@enterprisemanagement.com

Thanks for reading.