C-Suite strategist Mitchell Osak believes big companies could be shifting away from outsourcing toward a vertical integration strategy. If he's right, it's a trend that would affect not only what CIOs are managing, but also put more focus on IT integration.
In a Financial Post column, Osak points to recent moves by Fortune 1000s to acquire downstream resources, including Oracle's acquisition of the hardware company, Sun Microsystems, as indicators of "the reappearance of vertical integration as a core business strategy." He also notes Google, Apple, ExxonMobil, Coca Cola and Pepsico have moved to keep "major elements of their delivery model in-house."
What's driving this shift? Well, for one thing, the economy, which causes concerns about whether companies can control access to key resources and production. Other motivators include the desire to shorten product lead times and the rise in transportation costs, according to the Osak.
Companies are also starting to see that, in many cases, outsourcing just isn't delivered the promised cost savings, and. in fact, can lead to unexpected costs in things like relationship management, administration and travel, he writes.
Obviously, if companies should shift from outsourcing, this could affect CIOs, who are often charged with managing or even fixing these contracts. But in reading Osak's article, it strikes me that CIOs may find their IT shops called upon to do more internal integration work.
For instance, he lists the "drive for cost savings" as an impetuous for vertical integration, writing,
"Properly executed, vertical integration enables firms to achieve major cost savings by: enabling higher scale economies, exploiting continuous improvement initiatives and recapturing economic rent (i.e. the outsourcer's profit)."
When I read that statement, I think about all the internal integration work that's going to require, including information sharing, BI dashboards that access data along that vertical and, of course, the basic integration required to support centralized administration of any acquisitions.
He lists other reasons to consider vertical integration:
- Enhance customer experience, achieved through acquiring "a high degree of control over their delivery model including a common vision, stable operating processes and customer feedback mechanisms."
- Reduce business risk.
- Improve supply chain responsiveness, with the idea being vertical integration can create more flexibility, faster results and more control than you can achieve with outsource partners. But, again, that's only going to happen with supply chain integration.
If Osak is right-and I think he makes a strong theoretical case, at least-then once again, it's another indicator that integration could become IT's main focus in the near future.