Strategic CIO // Enterprise Agility
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8/5/2014
09:25 AM
Chris Murphy
Chris Murphy
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GE Capital CIO: Outsourcing Went Too Far

GE Capital CIO Jim Fowler looks to hire more IT employees and reduce outsourcing for strategic work -- while also embracing Agile development tactics.

As the recently appointed CIO of GE Capital, Jim Fowler is pushing to significantly reduce the use of IT outsourcing at the business unit, which has $514 billion in assets. The group has been hiring IT employees to drive insourcing, including at tech centers in Detroit, New Orleans, and Bangalore, India.

"We've gone too far from an outsourcing perspective," says Fowler, who had been CIO of GE Power & Water before taking the GE Capital role in June. Fowler discussed the insourcing effort in an interview exploring a number of initiatives, including GE's adaptation of Agile development techniques across the company.

Former GE CEO Jack Welch was one of the early leaders driving the IT outsourcing movement, particularly to India, in the 1990s. GE Capital has outsourced as much as 80% of its IT work in the past, but in the last year moved that mix to around 70%, bringing back in-house work that it considers strategic.

(Image credit: Robert Reukema)
(Image credit: Robert Reukema)

Fowler wants the in-house versus outsourcing ratio to be down to 50-50 in the next two years, "and I know I'm not done" at that point, he says. "We've outsourced some of our expertise, and we've given up some of the knowledge of how we run the business, how the place is wired, that we need to get back in-house."

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But it's not a 1-for-1 replacement of contract resources for GE employees. "We think the total count of resources will go down," Fowler says. GE is getting better-quality code and higher throughput using staffers than it did with contract resources, he says. Fowler sees that in measures such as fewer tickets for rework on post-production code that GE-badged employees built. He doesn't blame the software development partners for that quality difference, but sees it as a natural outcome of understanding business needs better, being part of small and agile employee teams, and knowing that you as an employee will be the person who has to be there long-term to deal with any problems. (Fowler declined to discuss which IT service providers it's working with and how they might be affected by GE's insourcing.)

As GE Capital insources more work, it's also making some other changes to how people work.

Hiring into development centers: It has about 300 tech pros in its two-year-old New Orleans center, with plans to go up to about 600. The company has similar centers in Detroit and Bangalore that it plans to expand.

Co-locating teams: Instead of having development teams with people dispersed around the world, GE Capital is trying to put projects in one location, with developers, analysts, and product managers all physically in the same place. It's also relying more on smaller, "two pizza" teams using Agile development techniques (more on that below).

University programs: Working with universities near its development centers, the program lets juniors and seniors work 19-hour weeks for the company, getting paid and earning college credit. If they join GE after graduation, they do a two-year "apprenticeship" in various roles, building on their technical backgrounds in areas such as computer science, development, or data sciences.

Fowler began a similar insourcing push at GE Power & Water before he moved to GE Capital. He says that across GE, the company is looking at "where we went too far on outsourcing knowledge around our most critical business processes and systems." The ratio of in-house versus outsourced will vary by business unit, and GE will continue to work with outside partners. Fowler says he leans toward companies that can run the technology and process for some of that non-strategic work. (Fowler is a member of the InformationWeek Editorial Advisory Board.)

Outsourcing critics love to see a high-profile shift like GE's, and have cheered similar moves from companies including General Motors and Capital One. But for IT leaders like Fowler, insourcing presents a complicated and high-risk strategy move.

"As hard as it is to outsource, insourcing is probably five times that difficulty," says Steve Martin, a partner at the outsourcing consulting firm Pace Harmon (which isn't working on the GE effort). Just hiring hundreds of people in a short time frame is fraught with pitfalls, including getting the right skills and building the right culture.

We've seen other high-profile, big company insourcing moves of late. General Motors is about halfway through its shift from 90% outsourcing to 90% insourcing, a move that requires hiring more than 10,000 IT pros in four US locations. Capital One is going from about 70% outsourced to 70% insourced, as it sees the digital interaction with customers increasingly at the heart of its competitive advantage.

But across industry, Martin doesn't see a macro insourcing move; it's moving "from a trickle to a slow drip." However, he does see dissatisfaction among long-time outsourcing customers that their providers "fall into a cadence" and stop delivering the speed and savings they once did. Quality problems rank just behind speed and cost as another top concern. Martin thinks companies still can get speed, savings, and quality from a well-crafted outsourcing deal, but that today "you're seeing just a lot of frustration with the outsourcers in terms of performance."

GE is putting renewed emphasis on speed and agility, of which insourcing strategic work is just one piece. It's also pushing a major Agile effort that extends beyond IT.           

GE's version of Agile
In a move championed from the top, by CEO Jeffrey Immelt, GE is pushing a concept it calls FastWorks, borrowing many Agile software development and Lean Startup concepts.

The approach involves using smaller teams focused on delivering small pieces of a given project every week or two, rather than gathering all the specs up front and delivering a full prototype months later. It also relies on short, frequent meetings among IT developers and business-side leaders such as product managers, to keep the project on track.

The shift has meant a big adjustment to how people work.

The hardest adjustment for business unit leaders has been the amount of time they need to regularly spend engaging with IT, Fowler says. In the past, business leaders might spend three weeks at a chunk getting every requirement documented, and then wait months to see the outcome. Under FastWorks, they "spend a day or two with us every week" reviewing changes and the latest piece of a project.

Another hard change: Only giving IT "what you want to see next week," Fowler says. "Don't give me everything you want day one." It's IT's fault, he says, that business users are skeptical. IT has conditioned business users to the idea that they get just one shot at getting software right -- that they need to ask for everything they might possibly want during the initial spec.

After the first two or three sessions, when they see progress moving toward goals, IT and business leaders start to buy in and get convinced. As the project evolves, people realize new features they didn't know they needed, and drop ones that no longer seem important. "The design of the solution will go in a way that they didn't even expect," says Fowler.

GE also has added a software development office in San Ramon, Calif., which is fueling the tactical and cultural change to drive faster development. (See video of Fowler discussing that effort at the InformationWeek Conference.)

Agile zealots won't think FastWorks goes far enough in embracing the concept. For example, while a GE Capital team might crank out new code every couple of weeks, it doesn't deploy those into the production environment nearly as fast. Given the highly regulated world of financial services, and the intolerance for errors, there's a regulatory compliance and testing stage that comes after coding and before deployment. Agile purists want all that testing, security, and compliance as part of the coding sprint, so you're constantly pushing code to production and getting feedback from the end-user. That pace of deployment isn't even a goal for Fowler, given the compliance, security, and performance risks.  

"In my world, true 'Agile' doesn't work," Fowler says.

GE will still do a lot of IT and product-development projects in classic waterfall development mode. Designing a new aircraft jet engine is the kind of multi-component, highly integrated project that needs the discipline of a waterfall model. Likewise within IT, projects such as ERP largely will follow waterfall methodologies. However, within those long-term projects, GE teams are finding ways to use FastWorks tactics to get their components of the work done, Fowler tells us.

GE's increasing insourcing and its use of Agile techniques have common elements. First, think speed. Companies are under pressure to get new product ideas into the market faster, and IT is under fire to get employees new tools sooner. A second factor is knowledge. Insourcing and Agile emphasize having people who deeply understand business needs working closely and consistently on product development. Fowler, and other GE leaders, are betting that speed and quality can rise together using those smaller GE-badged teams, and giving them responsibility for the entire project, from infrastructure to database to application code. Says Fowler, "They're able to work a lot faster, and they really understand the wiring from beginning to end."

GE and Airbnb take very different approaches to measuring cloud computing's value. Their strategies, plus our exclusive survey, show that calculating cloud ROI is far from an exact science. Get the new Cloud ROI issue of InformationWeek.

Chris Murphy is editor of InformationWeek and leader of its Strategic CIO community. He has been covering technology leadership and strategy issues for InformationWeek since 1999. Before that, he was editor of the Budapest Business Journal, a business newspaper in Hungary; ... View Full Bio
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DDURBIN1
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DDURBIN1,
User Rank: Ninja
8/6/2014 | 12:13:40 PM
Re: Yo-Yo Management

I think you hit on a good point.  From an upper management perspective outsourcing has two benefits affecting the stock price.  First is the perceived cost savings on paper.  I haven't seen an outsourcing proposal that didn't predict huge cost savings.  Second, senior management is perceived as "doing" something to benefit shareholders.   The plan is executed followed by the cost saving being a fraction of the proposed saving while business expertise is lost and benefit to business processes becomes less realized.  Hi-Ho it's time to insource again until the next new crew of senior management comes in and looks at the cost savings of outsourcing.

majenkins
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majenkins,
User Rank: Ninja
8/6/2014 | 11:59:09 AM
Re: Yo-Yo Management
Perhaps but my thought lately has been it is more about the stock price and stock options than anything else. "If we don't do something the Wall Street speculators won't push/keep our stock price up and our stock options won't be worth as much." Then they use the same old tired justifications for which ever direction they are going. Perhaps I am getting a little cynical in my old age as I approach retirement.
DDURBIN1
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DDURBIN1,
User Rank: Ninja
8/6/2014 | 11:48:57 AM
Re: Yo-Yo Management
These same drivers to justify insourcing have also been used to justify outsourcing; better code, faster code, lower cost, faster turnaround, better expertise, better support, process improvement and the likes.   I  think this has more to do with human tendencies than actual facts.  The grass is always greener on the other side of the fence until you actually get on the other side of the fence then guess what? The grass is still greener on the other side of the fence even though you just came from there.  Don't know how else to explain it.
majenkins
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majenkins,
User Rank: Ninja
8/6/2014 | 11:33:58 AM
Re: Yo-Yo Management
DDURBIN1, I agree 100% with you. And this issue is also seen in the merge/divest cycle. The same business drivers are used to justify both actions there as well.
majenkins
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majenkins,
User Rank: Ninja
8/6/2014 | 11:31:00 AM
Re: Insourcing and quality
Laurianne, It not only echoes your other article but it echoes what some people were predicting before the outsourcing trend went crazy. I also think Thomas is correct that language probably has a lot to do with the quality.
DDURBIN1
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DDURBIN1,
User Rank: Ninja
8/6/2014 | 9:38:49 AM
Yo-Yo Management

The finance and banking industry was the first industry to start the outsourcing trend in the early 80's to HP, IBM and others followed by insourcing followed by outsourcing to EDS, Perot and others followed by insourcing followed by outsourcing to India, China and others....well you get the picture.  What is interesting about this yo-yoing between out and in sourcing is the exact same business drivers are used to justify both actions.  The next "new" CEO at GE will start the outsourcing again. This article can be used again, just replace the word insourcing with outsourcing and hiring with firing, presto you have a good article on how GE is outsourcing. 

Thomas Claburn
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Thomas Claburn,
User Rank: Author
8/5/2014 | 5:01:00 PM
Re: Insourcing and quality
I'd be curious to know whether there's a difference in results between outsourcing locations where communication is a challenge vs. locations where communcation is in the same language. Is it geography or language that improves results?
Laurianne
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Laurianne,
User Rank: Author
8/5/2014 | 11:59:12 AM
Insourcing and quality
"GE is getting better-quality code and higher throughput using staffers than it did with contract resources, he says. Fowler sees that in measures such as fewer tickets for rework on post-production code that GE-badged employees built." This echoes what Shane O'Neill just outlined in our related article: 4 Outsourcing Trends To Watch.
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