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.
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.
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