HOW IT INSOURCING SAVED ME $2MIL

YES INSOURCING! BY WILL LASSALLE

07 April, 2015 Mind of CIO, TechTalks 2626

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Author Will Lassalle, CIO for Mohican Band of Indians
Welcome to my second post on JobberTechTalk. In this post I would like to discuss
Outsourcing and Insourcing at a high level and when it makes sense to explore each
option.
Outsourcing usually comes with a negative connotation lost jobs, heartless
organization, and greed. You also get the stigma of Offshoring, which is really
outsourcing a business function to another country. (The typical stereotype being
India, further perpetuated by a show, called Outsourced, on NBC a few years
back). Yet, outsourcing is sometimes a necessary part of an organizations ability to
not only increase value, but to deliver business functions better, more efficiently and
yes cheaper to the bottom line.
Insourcing is the cessation by a company of contracting a business function and the
commencement of performing it internally. Yet in most cases, it is no longer the exact
same function or performed the exact same way as initially outsourced.
Here are some cases I have noticed the last couple of years where it would make
sense to Outsource. In two organizations I have dealt with, they have radically
changed an information system or systems. For example, changing from a Novell
environment to a Microsoft environment, or migrating from Lotus Notes to Microsoft
Exchange for email. In both cases, the operational functions of the legacy systems
were done in house, the migration work was being performed by a contractor
company that specializes in these migrations. And in both cases, I ran into the
problem where the current staff that supported the legacy system and would
subsequently support the operations of the new system were not engaged and
enthusiastic about the change. In both cases, these staff members did not embrace
the upcoming change and instead sabotaged the migrations. Staff members did not
absorb the training given to them or were so used to supporting the outgoing
systems that they could not embrace the new system. Novell administrators that
cant create simple GPOs in Active Directory, Lotus Administrators that cannot
resolve a Distribution List error or duplicate contacts in Exchange, Novell staff that
cannot push patches to servers/workstations with WSUS or SCCM, and the list goes
on. At this point, it would probably make more sense to either replace the staff
entirely with new staff or outsource the business function from a purely
support/service delivery aspect. Bringing in an organization with the skillset to take
over the business function could also garner cost savings with the replacement of
the staff that let time pass them by, but in the above cases it would mostly be to
support the new future systems that will drive the business for years to come.
I guess the cases above could be deemed strategic outsourcing. There is also a
case for strategic insourcing.
Lets face the facts, most organizations outsource to save cold hard cash. The
enhanced delivery spiel wont sell to a CFO or Board of Directors, but saving 25% in
OpEx?? Do pray tell
When taking into account all costs associated with housing an IT function, one must
take into account the loaded costs of FTE (Full time employees/equivalent). These
costs include: Salary, Paid Time Off, Holidays, Bonuses, Healthcare, Training,
401K/Pension, Payroll Taxes. An employee whos salary is $50,000/yr can cost an
organization $90,000+/yr in loaded cost. You need managers, supervisors, and
directors to manage, supervise, and direct these employees. You end up with a
hypothetical $1MM a year cost to support the said business function and out goes
the RFP/RFI to companies that can reduce this cost and save you money, while
delivering better service. HR is happy because it is less benefits they have to
administer, the CFO is happy because it is saving the organization money, and your
customers are happy because the support levels have improved. You have signed a
5 year agreement with a company to outsource the business function @
$750,000/year with a 3% Increase annually. You have just saved the organization
~$250K annually, (your bonus will look lovely!). For this blog post, lets say that the
contract is written very well with little to no grey area (I have a great blog post
coming up on SOW/Contract writing and pitfall avoidance) .
Everything is running great for the next 5 years, IT Kings (fictitious name of the
outsourced service provider) has been phenomenal. It is contract renewal time,
through the course of those 5 years, you have virtualized the server farms, reduced
your physical server footprint from 250 to 45, and saved money in electricity and
cooling costs. In a nutshell, your environment is much different from 5 years prior. It
is technology, (Moores Law), after all.
The world around you has changed as well. Healthcare reform, Affordable Care act
debates (Obamacare), taxes, Recession, high unemployment, no pay
raises/bonuses.
Back to contract renewal time after 5 years your paying IT Kings ~$870,000 now,
they want a 5% increase and 3% escalators or they just want to renew the contract
@ its current rate with the 3% escalators for another 5 years. The terms do not really
matter for this example. The easy thing for the IT exec is classic if it isnt broke,
dont fix it and just renew the contract. Well, this is where I feel the opportunity to
Insource presents itself.
I had a CIO years back that I respectfully disagreed with. It was a year from contract
renewal for our outsourced provider that managed the Helpdesk, System
Administrations and Desktop functions. She directed me to not bother writing a new
SOW and go through the RFP process because they were Cheap, having bid much
lower 4 years before during the RFP than all other competitors. I told her, I beg to
differ and since we still have 10 months, I suggested we investigate if outsourcing is
still cost effective. Of course, I got trumped and we ended up renewing but in my free
time, ( I barely have any at all lol), I did an analysis to see if my hunch was spot on.
Here are the results of that analysis (omitting the organization and actual names)
Information Gathered for Analysis
o Total cost of Outsourced services- $6,700,000 (Next Fiscal Year
estimate based of previous FY actuals and 3% CPI increase)
o Salary guesstimates for key roles: Help desk, desktop tech, System
Administrators, Leads/Coordinators (this should include loaded cost and be
generated from multiple sources such as: payscale.com, salary.com, dice.com,
careerbuilder.com, Onetonline.org)
o Space requirements needed for help desk component including
architecture design of VoIp system (since the help desk was out of state, space
would be needed and components added to our VoIP system such as IVR,
CTI)
o Hardware needed for employees
(Computers/laptops/software/printers)
o Service Desk Software- $150K
o Support Contracts with Vendors needed (Microsoft, VmWare, Etc.)
Dedicated support staff to business units System Admin ($95K),
Dedicated Support ($52K), System Admin ($95K)
Organizational Benefits Reform have reduced loaded cost of an employee (higher
employee contributions, copays, cheaper healthcare options, elimination of vacation
carryover, scaled back PTO, etc.)
Services Staffing Model (Proposed)
Help Desk-$755K Base Salary, $1,060,000 loaded cost
o 15 Help Desk Roles- 9 first shift, 2 second, 2 third, 2 Weekend (all
new employees since this function is currently done out of state in centralized
call center)
o Avg Salary- $45,000 ($19/hr)
1 coordinator (Vacant) reporting to Organizations Help Desk manager $80k
Desktop Support-$714K Base Salary, $1,000,000 loaded cost
o 12 desktop support techs (including build area/Imaging)
o Avg Salary- $52,000 ($25/Hr)
1 Coordinator reporting to Organizations Desktop Manager- $90k
Systems Administration-$1,070K Base Salary, $1,500,000 loaded cost
o 10 System Admins- Rotational/On Call, 7 first shift, 2 second shift, 1
third shift (DBA, Unix, Citrix, Patching, software distribution)
o Avg Salary- $95K
1 Coordinator reporting to Organizations Server Manager- $120K
Hardware Procurement- $90K Base Salary, $135,000 loaded cost
1 FTE IT Hardware buyer Under Financial Management group $90K
Dedicated support staff to business units- $242K Base Salary, $340,000 loaded
cost
3 FTEs-System Admin ($95K), Dedicated Support ($52K), System Admin ($95K)
Costs
41 FTE= $3,695,000- Total Labor Services
3 FTE= $340,000- Dedicated
Service Desk Software= $150,000
Hardware(desktops, monitors, VOIP) =$125,000
Total: $4,135,000
Lets add in $400K for Implementation Costs (project management, recruiting,
onboarding, training, etc.) for a total year one cost of $4,535,000 to insource the
business function that would cost us $6,700,000 to keep outsourced. Thats over $2
Million in savings, (even more after year 1), to essentially keep the same staff
(converting them from contractors to FTEs of the organization) performing the same
functions. Now this was a high level analysis, but it does show that investing some
money into further investigation of the insourcing of the business function is well
warranted. I took an Assumption of 40% on top of base salary for taxes, benefits, etc.
The big assumption in the above model is the SAME service at cheaper costs. I
would go as far as saying BETTER service at cheaper costs by insourcing. How is
that Will?- you might ask. Didnt you just say outsourcing is better service at
cheaper costs? Well, lets examine that, shall we?
As a disclaimer, obviously one size does not fit all. Thats why there are times when it
makes sense to insource and times when it makes sense to outsource.
In the above scenario, saving $2 Million a year just makes sense to insource, the
savings is one thing but what you can do with that money is another. Updating
infrastructure (Cloud perhaps?) with less TCO (total cost of ownership/operations)
for one and investing in BPI (Business Process Improvements) is another. These two
independently or combined can lead to further cost savings and IT transformation.
The rationale for outsourcing is cost savings combined with better service delivery.
The key is to baseline what you have in terms of systems, infrastructure and human
resources. Once you have that in hand you can make the case for outsourcing the
function or keeping it in-house. In the previous scenarios, the environment
dramatically changed, as most IT environments would in 4-5 years.
The same goes for insourcing after the business function has been outsourced for
years. You have to re-baseline what those systems are, what is the infrastructure in
place now as opposed to at the time of outsourcing, and what is the skillset
necessary to run the business function. If after doing this analysis you realize you
can bring it back in house you should. Such as in the above scenario.
Nevertheless, the organization above renewed the outsourcing contract. The CIO did
not want to be bothered with changing what she perceived as not being broke.
Now when you take a look at my analysis and apply it to the Outsourced Service
Providers costs of doing business, imagine the profit margin there laughing all the
way to the bank.
The moral of this blog post is there are times to outsource and there are times to
insource. Do yourself, the organizational stakeholders and your customers a favor by
investing in the analysis. $2Million can go a long way and fund some great projects.
The previous CIO did a disservice to her organization by not at least investigating
insourcing the function before initiating another 5 year contract.
To quote the CIO of GM, Randy Mott, who not too long ago started a large insourcing
initiative:
Insourcing presented the optimum flexibility, as we would control the what and how
of IT delivery, with the ability to change it as necessary without striking a new
agreement
Let me know your thoughts or examples of business cases for insourcing or
outsourcing.
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by-will-lassalle/
01/05/2017 12.04.51