The first thing to keep in mind is that what happens internally is a different matter from the outsourcing decision. A decision on maintaining an internal IT department is something that can be made at any time. Thus, most of this memo will focus on outsourcing.
Just about any corporate function can be outsourced, and IT is one of those. There are a few key advantages of IT outsourcing. The first is that it frees up organizational resources that could be deployed elsewhere. The cost issue will be looked at separately, but even the talent that it takes to run the department, and the line staff that support it, can be used elsewhere if they are not needed to run the IT department. This can be a significant benefit, but further input would be needed from other department heads with respect to that, because they will have a better sense of how much such a move would free up their resources.
Outsourcing IT often allows for the third party vendor to take on some of the risk, but also some of the investment cost. One of the most costly, burdensome aspects of IT is the need to update technology frequently. The third party vendor will often be able to buy or develop solutions in bulk, so the cost of development is lower than it would be if we kept that function in house. Whether this translate to the overall numbers is less certain -- the third party vendor's margin might eat into that -- but ultimately there is an opportunity with a third party vendor to maintain more modern technology than we could on our own, because they will always work with the latest, and the cost of upgrading is likely to be lower, and maybe even built into the contract price.
Nowhere will this be more noticeable than in the realm of security. It can be very difficult to stay on top of security trends, but the third party vendor has the size and scope to be able to have a large full-time security department (Overby, 2015). They develop solutions, and patches, and then roll these out to all their clients. That lowers the cost of security significantly, but more important they have the capacity to address all potential security risks, whereas to do this in-house might be substantially more difficult to do that. Even if the rest of IT is not outsourced, there is a good case to be made that security should be.
One of the interesting aspects of this is in recruiting. It can be difficult to recruit top IT talent. This talent can be expensive, and is not always easy to recruit to some locations. If there is a shortage of IT talent in Indianapolis, then it might make sense to work with a third party rather than to continually run a shorthanded department for lack of quality workers in the sector locally. One recent survey showed that Indiana has a surplus of tech workers, graduating 1000 more people in the field than there are positions annually. Thus, this potential advantage is less of one for Triad because of its location in Indiana (Wright, 2012).
IT outsourcing can be much simpler as well, because of the third party vendor's team. They can bring in more people as needed to solve problems, whereas an in-house team can be overwhelmed by major issues. It is much more difficult to build in crisis capacity in-house, whereas third party vendors can do that. The reduced complexity is one of the main advantages of outsourcing, because they manage that complexity for the company (Barker, 2013).
It is also possible that IT outsourcing will be cheaper. Third party vendors tend to have scale that allows them to do most things at a lower cost than an in-house team would be able, and they should be able to pass some of that lower cost base along to their clients. There is the risk that their margins will eat into this, and it will not be as affordable as the company might like. However, the company would not sign a contract that was coming in at a higher price than what can be done in-house for equivalent services.
There are some significant disadvantages in IT outsourcing as well. The first is that the more people have access to our data, the greater the risk of breach is. The third party vendor should have a strength with respect to security, but the third party is also another point of weakness where a hacker or cybercriminal can gain access to our data. Consider a bank that outsources the hosting of its data -- it is usually...
The same principle applies here.
Another disadvantage of IT outsourcing is that there is a push towards standardization in the industry (Overby, 2015). In a sense, this is good because the standardization lowers the cost to clients, but there is also the risk that a one-size-fits-all approach is not good for our company. It is worth remembering that all functions that the company performs should support our strategy. If the decision to outsource IT is strictly financial, and does not take into account the impact on strategy, and our ability to execute our strategy, that it might not be the wisest decision (McBeth, 2015). The strategic plan is one of the considerations when we are looking at doing a re-org in house or not, so it should also be part of the thought process when looking at outsourcing. It is certainly worth taking the strategic overview with respect to standardization, because a highly-standardized service offering might not be appropriate to the business. In the case of Triad, solutions that are generally designed with the insurance industry in mind should be acceptable, but this would depend on what the vendor was offering and who else the vendor works with as to whether or not their standardized offerings are going to be acceptable.
Another disadvantage of IT outsourcing is that getting things done is dependent on the contract. The contract offers protection to both sides, of course, but because of that it may cost extra to get extra service that is not in the original contract. Versus an in-house team, this can be a considerable incremental cost. As such, the savings that are normally associated with outsourcing might not materialize.
A last thing to consider, if an outsourcing decision is made, is where the talent will be that is being used to service us. Good workers can be found anywhere, but there is reason to show caution with a company that outsources its own talent to India or other faraway location. Triad would have little to no ability to exert quality control over such workers, we do not know anything about them. There can be language barrier issues, and there can be time zone issues. It is important for Triad to carefully evaluate what it wants in an outsourcing arrangement, because there is the potential for hidden negatives to arise.
As CEO, I expect you are going to take the interests of the shareholders into consideration. One of the biggest mistakes that companies make with outsourcing decisions is to focus on the money, especially in the short-run. It is easy to listen to a pitch from a third party vendor that sounds like cost savings and get excited about that. The reality is that short-term cost savings might help a quarterly report, but they might come at the cost of constraining growth. Ultimately, Triad might benefit from keeping its IT in-house for the time being. There are certain aspects of IT that can be outsourced, such as security, but for the most part the company's strategy is more conducive to an in-house team.
The first reason is that there is a surplus of talent, so we can bring in people on reasonable salaries if we are recruiting from the Midwest. Schools in a number of Midwest states are graduating a surplus of IT talent, so our in-house costs are not going to be that high. The second reason is that the insurance business is a highly-competitive business with low margins. Information, in particular big data, is absolutely critical to the success of the company, because every percentage point we can gain in terms of margin the more competitive we can be. Information is what drives that. Insurance is still based on understanding the data and translating that data into risk premiums. If Triad is doing the same things that everybody else is doing, there is no opportunity to use IT as a pathway to competitive advantage. If we keep IT in-house, we have better opportunity to innovate, better opportunity to do things that nobody else in the industry is doing, and earning competitive advantage that way. Outsourcing is fine for companies that see IT as a line function, but in insurance…
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