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

Revisiting Strategy

In a broader sense, the increasing consideration of the insourcing option as contracts reach their termination dates signals not so much the failure of outsourcing as it does a revision of an overall delivery strategy on the part of client organizations.

For one thing, insourcing reflects the growing maturity of the outsourcing marketplace. Specifically, clients are undertaking a comprehensive analysis of their sourcing requirements to determine what should be outsourced and what should be kept in-house. This more nuanced approach recognizes that outsourcing in and of itself is not a solution to management challenges. Clients are also becoming more confident in their ability to manage operations, and senior executives are becoming more willing to consider an internal IT organization's business case for insourcing. This was not the case a few years ago.

Organizations with a truly global scope, moreover, can be their own outsourcers, and gain many of the benefits of utilizing offshore service providers directly. For example, a multinational bank with operations in Poland could consolidate mainframe operations there and take advantage of that market's highly skilled workforce and low labor rates, as well as the benefits of consolidation. Large organizations can also afford to hire the best talent, as well as leverage economies of scale as do the large service providers.

Tier Two Players

The emergence of "tier two" regional outsourcers has been another key factor in changing clients' sourcing strategies. For one thing, midsize vendors provide more options in terms of selective sourcing, allowing clients to define specific functions to outsourceâ¬as well as specific functions to keep in-house.

Smaller, regional service providers are also proving to be more adept at, and committed to, delivering commodity services. Such relationshipsâ¬where the client's objectives are clearly defined as receiving services of reasonable quality as cost-efficiently as possibleâ¬tend to be most effective.

The growing popularity of smaller outsourcers also reflects a growing disenchantment with all-encompassing "megadeals" with global outsourcers. Rather, in reassessing their sourcing strategies, client organizations are finding that a selective approach employing a mix of regional players and insourcing can be the optimal "global" mix. Finally, for smaller client organizations, regional vendors can be a better fit organizationally, whereas working with the major players often results in a disadvantaged negotiating position.

Cautions and Considerations

Despite recent trends showing insourcing in a favorable light, client organizations should not underestimate the challenges of repatriation, and must ensure that they have a strong internal management function that can address the confusion and disruption that inevitably accompanies a repatriation initiative.

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