The ins and outs of insourcing

Insourcing because outsourcing has gone wrong is a mistake. If you are thinking of taking a business function back in-house because of failings either in your supplier or, indeed, because of failings of your own, then just pause for a minute. There is one good reason to in-source, to which we will come, but the myriad of technical issues, operational difficulties and relationship problems that can cause you to despair of ever having uttered the ‘o’ word are not it. In-sourcing for the sake of it merely compounds your troubles. You might be forgiven for thinking that insourcing was the latest outsourcing trend, according to some recent media reports. But what is really happening on the ground is far harder to discern and so far more complex.

One thing is for sure: outsourcing is growing and for the most part people are happy with the deals they construct. One independent statistic – a recent Gallup survey –showed that 57 percent of companies surveyed believe that outsourcing has delivered 100 percent of the expected benefits. This is a good success rate by any measure. So where does the comment on insourcing, with its suggestion that outsourcing is riddled with shortcomings, originate?

Lies, damn lies and statistics

A number of surveys have suggested that something is wrong. Deloitte recently said that 64 percent of companies had brought deals back in-house. Dun & Bradstreet say that 50 percent fail by year-five. PA Consulting Group reported that 15 percent were considering the in-sourcing route.

Now, apart from the obvious fact that the figures vary widely – from 64 to 15 percent – they must also be seen in context and in terms of what they actually say. First, the context: outsourcing is growing. It stands to reason that the number of retreats will grow too. Our own research suggests that the relative number of terminations is pretty constant.

Second, and even more importantly, is the actuality. The bald figures distort the great satisfaction that, for the most part, is felt. On the one hand, just because 64 percent of companies have brought deals back in-house does not mean that 64 percent of all outsourcing is terminal. Most of these companies will have tens of outsourcing deals: it is perhaps only one of those in just over half of all companies that has experienced problems.

And on the other hand, it is also not surprising that many contracts are reconsidered five or more years down the line. For one thing, it is good practice to put periodic break clauses in agreements. And for another, renegotiation is a must after such periods of time to reflect inevitable changes in the business and its operating environment.

Right choices

Having said that, insourcing is an option that many are likely to consider at some point, whether it is for what we believe are the negative reasons of supplier factors (complacency, overselling, rising costs, and the like) or client factors (poor rationale, poor sourcing, poor internal management, and so on). However, the reason why insourcing can compound troubles in these cases is twofold.

First, insourcing can be as problematic as outsourcing was in the first place. In particular, in-house skills and systems that have been reduced or removed have to be returned, a process that carries risk and cost. Second, and more profoundly, insourcing for these reasons will only store up problems for the future.

The issue here is that provided outsourcing as an option has been reviewed alongside other sourcing options, then in the vast majority of cases outsourcing is usually right in terms of the decision but, if it struggles to realise benefits, goes wrong in the execution. Execution issues can, with time and application, be put right. But if the fundamental reasons for outsourcing still hold – reasons such as wanting to drive through efficiency, effectiveness and transformational changes – then to go back on the decision represents an opportunity cost for the business. When added to the cost of in-sourcing itself, the total might be very detrimental indeed.

One good reason

There is, we think, one good reason to consider insourcing. That is when external factors are such that the situation in which the organisation finds itself has so changed that it becomes not only attractive but right.

This does happen and there are well-publicised examples to illustrate. For example, when JP Morgan merged with Bank One the economies-of-scale that it had sought by outsourcing with IBM were suddenly realisable internally. Alternatively, when Cable & Wireless decided to in-source, again from a deal with IBM, the reasons were good: finding itself in a trading position where it wanted to exercise the kind of control over costs that could only be gained by in-sourcing.

These, though, are seismic changes. They are extraordinary, just as the insourcing that accompanies them should be as well.

In fact, the real outsourcing story is far more positive. The industry is maturing. We are seeing sourcing decisions and governance improving, as companies become savvier both in terms of what they want and in terms of what they ask from providers. Moreover, providers are rising to the challenge too. They realise that it is in the interests of all concerned to have deals that allow clients and providers alike to flourish. These are, after all, partnerships.

But remember, insourcing because outsourcing has gone wrong is a mistake. Far better is to get outsourcing right in the first place.