How will digital manufacturing impact on IT outsourcing?
IT in manufacturing is changing fast as companies introduce technologies that reach beyond the factory boundary in line with trends such as Industrie 4.0 and the Industrial Internet of Things (IIoT). At the same time, executives are looking to make organisational changes that place the customer at the center of an extended supply chain in which their manufacturing plant is just one, albeit important element.
The complexity of information technology in this context is increasing while skills remain scarce. As experienced IT professionals leave the industry and retire it becomes even more difficult to deliver new technology projects that impact deeply on the organisation.
Traditionally the CIO would look to outsourcing IT to specialised providers who provide the necessary skills and delivery capabilities.
However, are these partners adequately prepared for the next generation of technology in manufacturing? Do they have the skills and vendor relationships necessary for success? Do the old models of outsourcing still apply when much of the digital transformation program must be driven deeply from within the manufacturing business itself, and where executives will need to be much more hands-on in matters digital?
No longer will it be adequate for the CIO to have a single outsourced contract for all IT. The future requires a combination of multi-sourced and in-house digital capability where functional executives like marketing, manufacturing, supply chain, etc. each take ownership and drive relevant digital business initiatives themselves. The traditional CIO role might in time morph into a Chief Digital Officer, but this role change alone still does not address the need for a comprehensive overhaul of the way IT is managed and the increased role of senior executives in this process.
In the past, IT outsourcing has tended to swing like a pendulum between in-house IT and outsourced IT, and back. Reversing an outsourcing decision is very difficult, but does happen when the business changes, the vendors do not perform or the initial objectives of the contract are no longer aligned to the new business priorities.
Where manufacturing companies look to outsource IT
On paper, outsourcing promises some quick wins where complex and difficult areas of technology can be handed over to a specialised service provider allowing the company to focus on the core manufacturing business. But is it as good in practice?
Some typical IT outsourced functions include:
• System integration: system integration projects that involve several different proprietary technologies are complex and need specialised skills.
• Vendor management/aggregation: the concept of ‘one throat to choke’ appeals to the CIO to manage the interfaces between multiple technology vendors.
• Application development and support: software development requires specialised skills with a short half-life. Software companies are usually best positioned to attract and retain the best application development and support skills.
• Application implementation projects: certain complex projects like a new ERP implementation require experience with the application. These projects often have some unique characteristics which require specialised project management expertise (such as Agile methodologies), and require a joint project management function that include both the business experts and the outsourced technical project team.
• Specialised consulting: often short-term consulting interventions are necessary to address specialised technology-related topics such as system security. On other occasions the business needs to drive significant changes to business processes and organisation, requiring independent consultants. These assignments are usually temporary in nature and are expensive. Often the business is not left with the in-house skills at the end of the project to sustain the change and a retainer with the consultant is necessary going forward.
• Infrastructure support: traditional IT infrastructure such as networks and communication systems are rapidly becoming commoditised, but there is still a need for specialised expertise to design, implement, and support these systems in industrial environments.
• End-user support: IT services such as help desk and desktop support are often outsourced to a provider who can leverage economies of scale to offer this service more cost-effectively than you can in-house.
The need to review outsourcing relationships
As a manufacturing company, you cannot of course abdicate your deep understanding of what is changing in your core industry (manufacturing). You need to make sure the outsourced partner remains aligned with your priorities through regular reviews that ideally involve the whole executive team.
Remember that outsourcing companies play in a different industry and have a different business model to you – this will create some tension alongside your own long-term strategic objectives.
During the reviews, remember that the outsourcing provider is also faced with skills challenges. Skills in areas such as Industrie 4, IIoT, and SaaS are in short supply industry-wide, and no-one is immune to this problem. Challenge your provider to prove they are attracting the best talent in the industry to serve your business.
Costs will increase
It is incorrect to assume that manufacturing companies outsource IT to save costs. There may indeed be savings in the short term, but ultimately the outsourced partner is there to make a profit from you. It may still be worth paying a premium to be able to focus on your core business functions, but then be prepared to increase the budget for this. It helps not to look at IT services as a cost, but rather to drive added value at every interaction.
The dynamics of the technology environment make it very difficult for manufacturing companies to develop and sustain in-house IT capacity and skills. At the same time, owing to cost-cutting over an extended period, manufacturing budgets are stretched with a remarkable percentage of IT spend allocated to ‘keeping the lights’ on, and relatively little funding available for new initiatives. The reality is that this situation is at odds with the need for strategic digital transformation programs.
Developing deep technical capabilities in-house can be a long and expensive process – while hard skills can be acquired through training, many of the softer skills only come through time and experience; as well as exposure to many projects and situations across the industry.
Over time you grow dependent on the outsourced partner, making it very difficult to end the relationship without damaging your business. Key people supporting applications and technologies are often employed by your partner and the services contract will normally prevent you from employing these people directly and ending the relationship.
The success of any outsourced relationship strongly depends on good leadership, both in the client company and the outsourced partner. A long-term strategic view of the relationship is important to overcome the inevitable obstacles along the way. Many digital technology initiatives will take 3-5 years to implement. The key will be flexibility, relationships that are based on give and take develop over time, and require a deeper level of understanding that this is not a zero-sum game. Offering the outsourced partner meaningful incentives related to your success is worth considering.
The question of leadership goes beyond you creating a position for Chief Information or Chief Digital officer – ultimately managing IT in manufacturing also boils down to good business acumen which should be present in every member of your executive team.
This article was first published on SA Instrumentation and Control.
By Gavin Halse
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