Research

Is Insourcing the New Outsourcing?

Organizations whose financial situation has stabilized may now be revisiting their outsourcing strategy and determining that they can manage operations more efficiently in-house.

By Bill Fowler

September 20, 2006 — CSO —

A recent Compass poll of executives from 70 outsourced companies in North America found that only 4 percent of organizations would not consider taking all or some services back in-house when their contract term expired. Two years ago, this result would have been surprising, but recently an increasing number of client organizations view repatriation of services or insourcing as a viable option.

The growing popularity of insourcing results from a variety of factors, including acquisition of outsourced companies by insourced companies, clients' disillusionment with their outsourcing deal, an increased focus on selective sourcing (and retaining strategic services in-house), and a growing confidence within companies in their ability to efficiently manage an IT operation.

Sourcing Scope

Over the next 18 months, according to published reports, outsourcing contracts worth more than $90 billion will be up for renewal. A variety of factors suggest that many client organizations are seriously considering insourcing a significant portion of those outsourced services.

The key factor driving the consideration of insourcing has been the failure of outsourcing to achieve the consistent, long-term and significant cost savings clients anticipated. Compass analyses of large outsourcing contracts show, on average, a cost reduction of 15 percent over the first 18 months of the agreement. However, because of growing demand for services, and the "back-end loaded" nature of many outsourcing contracts, the client's costs are oftenâ¬by the end of the termâ¬30 percent higher than those of a well-managed internal operation.

In some cases, organizations facing financial difficulties outsourced with the clearly defined objective of short-term financial gains, such as getting employees off their books, realizing immediate IT cost savings or receiving a cash infusion in exchange for assets. Organizations whose financial situation has subsequently stabilized may now be revisiting their outsourcing strategy and determining that they can manage operations more efficiently in-house.

Meanwhile, organizations that expected the best of both worlds from outsourcingâ¬low cost and "value-added" responsiveness and commitmentâ¬have inevitably been disappointed, and are now revisiting their decision to outsource.

In other instances, outsourcers have become victims of their own success. Consider: An organization hires an outsourcer to tackle daunting challenges such as consolidating standards, processes and systems following an acquisition or merger. After the outsourcer commits the resources and resolve the client lacked, and delivers a well-run, standardized global operation, the client brings the operation back in-house, exploiting the outsourcer's investment and reaping the rewards in terms of ongoing cost savings. It's an unfortunate situation for the outsourcer, which has invested substantial resources in anticipation of a long-term relationship.

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