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6/23/2014
09:10 AM
Rob Preston
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Which IT Is Really Core? InformationWeek Video

Box's Aaron Levie, GM's Randy Mott, and others weigh in on the role of outsourcing, insourcing, cloud.

It's a variation of the old build vs. buy decision: Which IT systems and practices are a company's core competency, and which ones should it farm out to cloud, outsourcing, and other third-party providers?

Those questions have gotten only more complex with new technology models and choices. At the InformationWeek Conference in Las Vegas last April, Aaron Levie, co-founder and CEO of cloud-based content management software vendor Box, talked about core vs. context. Levie gave the standard definition of core: Those information technologies that differentiate one company from another in a given industry, providing a competitive advantage via a unique or customized approach. As for "context," he cited email, storage backup, and similar products that deliver little if any business advantages.

Levie elaborated, focusing on how quickly cloud vendors can shake up a software segment with new products and product iterations. "Core vs. context is constantly being reinvented because the things that you thought were core, now there's a marketplace competing to build out those products," he said. (View the video clip below featuring the high-energy Levie.) Chances are that vendors that operate at very large scale -- the likes of Amazon, Google, and Microsoft in the case of raw cloud computing -- will be able to innovate faster and produce services at lower cost than your IT organization ever could, he maintains.

General Motors CIO Randy Mott, who views public cloud computing as a form of outsourcing, isn't convinced that third-party IT providers can do most things as well as GM can internally, given its own massive scale and global system-integration needs. GM is in the middle of a three-year plan under which it will move from outsourcing 90% of its IT to outsourcing only about 10% of it. Among the IT work being moved in-house and thus considered "core": application development and data center operation.

"At scale, there are not very many things in a large company that aren't a core competency," Mott said at the InformationWeek Conference. (View the video clip below.) Perhaps GM shouldn't be getting into the business of building its own benefits apps or email systems, Mott concedes. But he gave the example of transportation and logistics IT, where GM now contracts with myriad vendors to move $142 billion in components around the globe each year. There, he thinks there's room for a more customized, internal approach. And so GM is evaluating those contracts, asking that their IT components get broken out. "We've bundled too many things," he told InformationWeek earlier this year.

GM might still keep those transportation and logistics suppliers, including their IT components, but "we're unbundling the IT on a lot of those things to allow us to basically have choice," Mott told us.

(Source: Wikimedia Commons.)

Among other companies that see IT systems as a core competency in areas considered "non-core" by some: Union Pacific, UPMC, Capital One, and AstraZeneca. Consider these questions as you balance your own company's IT spending and assets.

-- How specialized are our IT needs? Railroad company Union Pacific sees fit to develop all manner of IT systems in-house, from supply chain and transportation management software to on-train networking consoles. Sometimes it just can't find vendors that make the systems it needs. In other cases, its decision to build rather than buy is all about risk management: Vendors that are in the railroad IT business are often a bad quarter away from bankruptcy, so Union Pacific needs to diversify its supply options, CIO Lynden Tennison told us in 2012.

-- Do we operate at sufficient scale so that owning and operating our own data centers and developing our own procurement, financial, logistics, and other applications could make sense? See GM.

-- Do security and regulatory compliance mandates require us to keep most of our IT systems close to the vest? See almost every major financial institution.

-- Is buying from third-party providers slowing us down? Lamented GM's Mott in July 2012, when the automaker was just beginning its IT insourcing quest: "When the business says go, then that means we start working on a contract, we don't start working on a project." Capital One insourced much of its application development under an agile process after CIO Rob Alexander looked at the digital landscape a few years ago and decided: "If digital is so central to our strategy, we really need an IT organization that is able to deliver like a technology company and not like a traditional bank."

--Could we make some meaningful money by selling the technology we develop? Union Pacific does just that, generating upward of $40 million in annual revenue selling or licensing its IT innovations. Having looked at the near-50% profit margins of Oracle and other IT vendors -- and comparing them to its own 2% margins -- healthcare system UPMC decided to create a technology development center in Pittsburgh to bring IT products to market on its own or in partnership with select vendors.

-- Have we lost a competitive edge by handing off too much of our IT to others? Capital One thought so. So did pharma company AstraZeneca, which under new CIO Dave Smoley, whose predecessor had a procurement background, is insourcing/strengthening what Smoley calls "technical leadership" -- identifying, evaluating, selecting, and integrating technology, as well as building partnerships with innovative companies. Among other areas Smoley is focused on are customer-facing roles and project management.

-- Do we have enough variable capacity, the ability to scale up and down quickly to meet business imperatives? FedEx is moving to outsource about 30% of its total IT work, mostly to cut costs but also to plug into expertise it doesn't need full time, letting it scale up and down. Mott says GM needs to outsource less than 10% of its IT to have sufficient variable capacity. Every company is different. Which IT assets and practices are core vs. non-core depends in large part on who's in charge. Even within industries, some companies depend heavily on cloud, outsourcing, or both, while others insist on managing and controlling most of their IT internally. New cloud-based choices and models have made this decision harder, not easier.

Our InformationWeek Elite 100 issue -- our 26th ranking of technology innovators -- shines a spotlight on businesses that are succeeding because of their digital strategies. We take a close at look at the top five companies in this year's ranking and the eight winners of our Business Innovation awards, and offer 20 great ideas that you can use in your company. We also provide a ranked list of our Elite 100 innovators. Read our InformationWeek Elite 100 issue today.

Rob Preston currently serves as VP and editor in chief of InformationWeek, where he oversees the editorial content and direction of its various website, digital magazine, Webcast, live and virtual event, and other products. Rob has 25 years of experience in high-tech ... View Full Bio
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tzubair
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tzubair,
User Rank: Ninja
6/27/2014 | 8:14:40 PM
Re: Which IT is Really Core?
"A lot of healthcare companies would be content to just stay at the industry middle of the pack when it comes to technology."

@Chris: I have seen this too and I find it a little strange as well. Why is it that hospitals do not tend to take a leadership when it comes to technological projects? Does it have to do with the fact that they believe they're not in the technology business? I do know of one hospital itself that took pride in the fact that their entire business processes were paperless and that actually made them have a competitive edge over the others.
tzubair
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tzubair,
User Rank: Ninja
6/27/2014 | 8:10:39 PM
Re: Three essential IT outsourcing methods every business should know
"How does the IT department fit in at a large organization? A mid-sized one? A small one? That's something I'd love to see some of these folks address."

@Kbannan: The relationship between the nature of the IT department and the organization size is also important - thank you for rightly pointing out towards it. Many a times, companies ignore the fact that their IT department is to support the business and the size of the business itself (which is often reflected through the number of employees) is very important. You can't really have a huge IT department with a very high budget for a small-scale organization. The scale of business operations is very much important to consider to keep the overall costs of IT support down.
ChrisMurphy
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ChrisMurphy,
User Rank: Author
6/26/2014 | 10:08:17 AM
Re: Which IT is Really Core?
I was at a healthcare conference yesterday where one line of discussion was how to take the big on premises electronic record systems they've installed and wring value out of them. I think many will turn cloud-based add-ons to those systems to get the functionality they want quickly, and without hiring a lot of dev staff. Does that draw them merely even with the rest of the industry? A lot of healthcare companies would be content to just stay at the industry middle of the pack when it comes to technology. 
zerox203
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zerox203,
User Rank: Ninja
6/24/2014 | 2:40:49 PM
Re: Which IT is Really Core?
I agree with the general tone of the comments already being made here. Of course, it's absolutely true that the decisions you make day-in and day-out, and which projects you take on over the long term, matter for your IT department and for your business. What you outsource, what you bring internally, what you license out... there are a lot of decisions to make, and they all DO matter. However, it's for that same reason that we end up with a pretty high signal-to-noise ratio on this topic. The truth is, you can make many approaches work if you do them right, which is what Mr. Mott refers to as an 'intangible'.

Just as you say, Rob, advice that works for one company may not neccesarily work for another. Moreover, thanks to the speed of this change, advice that's good one year may not even be good the next. As Mr. Levie points out, the dynamic nature of the whole system is the real takeaway - you have to be ready to think on your feet, and make complex decisions using your own logic, not a checklist. Knowing your own company is the name of the game here. Trouble is, it's as difficult a skill to teach as it is an important one to have. 

kbannan100
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kbannan100,
User Rank: Strategist
6/24/2014 | 12:42:56 PM
Re: Three essential IT outsourcing methods every business should know
I recently read a similar white paper (CIO.com/EMC/VMware sponsored) that looks at how business views IT-as-a-Service as opposed to how IT views IT-as-a-Service. Definitely worth the read. http://bit.ly/1loR3rG

As with any IT service, IT-as-a-Service is only as good as the provider, the agreement you sign with a provider and the service level agreements you make with that provider. You also need buy in at every level.

 

--KB Me: http://bit.ly/1iMdSE5
kbannan100
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kbannan100,
User Rank: Strategist
6/24/2014 | 12:35:50 PM
Re: Three essential IT outsourcing methods every business should know
Completely agree. I also think it's interesting to note that none of the experts interviewed talked about the actual IT department and whether it in and of itself is a core resource. We see so many more companies outsourcing their IT (or portions of) to an IT-as-a-Service provider. How does the IT department fit in at a large organization? A mid-sized one? A small one? That's something I'd love to see some of these folks address.


--KB (http://bit.ly/1iMdSE5)
TechYogJosh
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TechYogJosh,
User Rank: Apprentice
6/24/2014 | 7:49:11 AM
You have scale, but where to stop?
The argument that if a company has scale (like GM), it should do IT in-house makes theoretical sense. However, when should a company, whatever be the size, stop obsessing over its size and see the business value of doing things in-house? It's like if you are very rich, will you wear high branded clothes, ask these designers to make clothes for you, or buy a cloth making factory, or start farming of products to create fabrics, etc. I mean where will you stop? Looks like people are saying if your application has a business logic, it is strategic, if it does not have business logic (email, collaboration) it is not strategic. No one talks about the people aspect. If you have good people, with decent enough system you will be a good company. You can put any business logic in application, keep them in-house, if your people are bad, you won't succeed. Therefore, it's not about what applications you keep in-house or outsource, it's about what your people do with those applications.
tzubair
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tzubair,
User Rank: Ninja
6/24/2014 | 4:46:41 AM
Re: Three essential IT outsourcing methods every business should know
@Andrew: I agree with you that what needs to be kept in mind is the technology strategy when companies look to outsource. Unless there's a fit between the strategy and outsourcing model, the move cannot be successful. For instance, if you're strategy is to be a high quality service provider, outsourcing cannot work because the quality will suffer at the gain of cost savings.
tzubair
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tzubair,
User Rank: Ninja
6/24/2014 | 4:26:29 AM
Re: Outsourcing, cloud computing: two different things
"I view the cloud as an extension of the data center, imperfect though it may be, and possible replacement infrastructure for private servers/storage, but still under the control of the workload owner."

@Charlie: I agree with you. I think when it comes to outsourcing the idea is to lose control to the other business and let them handle the business process themselves. In contrast, when you go to a cloud, you're only using the other company's storage and processing facilities and you have a lot of control in your hands.
Charlie Babcock
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Charlie Babcock,
User Rank: Author
6/23/2014 | 8:48:44 PM
Outsourcing, cloud computing: two different things
I think there's a fundamental error in viewing cloud computing as another form of outsourcing, as GM's Randy Mott does. In theory, at least, the user never relinquishes control over the application, app development or application maintenance, whether it's running on-premises or in the cloud. I view the cloud as an extension of the data center, imperfect though it may be, and possible replacement infrastructure for private servers/storage, but still under the control of the workload owner.

 
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