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by No Analyst or Consultant

Backsourcing: Why, When, and How to Do It

Jun 20, 20055 mins
CSO and CISOData and Information Security

by Jeff Kaplan

One of the most controversial business decisions today’s organizations face is whether to outsource all or part of their IT or business operations to reduce costs and/or increase the focus on their corporate objectives and core competencies.

This dilemma has become more complex recently because, despite the overwhelming growth of IT outsourcing and even greater growth in business process and offshore outsourcing, past experience suggests that as many as half of today’s outsourcing agreements will fail to meet their original business objectives and will be either terminated or substantially restructured.

The full Executive Report uncovers the latest trend: backsourcing—reassuming responsibility for previously outsourced IT functions and bringing these functions back into an enterprise. The report provides a set of guidelines for establishing an effective backsourcing process that ensures that IT organizations can continue to support corporate operations even when an outsourcing arrangement is no longer meeting its original objectives and must be terminated.


Backsourcing is a process that often involves legal, human resources, technology, business operations, and vendor relationship challenges. It also may entail customer support, sales, and regulatory compliance issues.

Although backsourcing is often compared to a divorce, it doesn’t have to be the result of a failed relationship or an antagonistic process. Reasons abound for why an enterprise might want to reclaim responsibility for its IT functions.

For instance, many enterprises decide to discontinue an outsourcing relationship when a contract expires because of a change in corporate strategy or philosophy regarding outsourcing. Or, despite the best efforts of both parties, an outsourcing agreement may fail due to structural barriers, such as an offshore component or unrealistic service-level objectives (SLOs).

Even when backsourcing is the result of the outsourcer failing to meet its service-level commitments, it is essential for a cooperative disengagement process to occur to protect the interests of the enterprise and preserve the reputation of the outsourcer.

The peaks in outsourcing demand historically have been driven by downturns in the economic climate. By the same token, efforts to reverse outsourcing agreements generally have escalated during periods of renewed economic growth when enterprises want to regain control of their IT operations to capitalize on new business opportunities.


Given the integral role that IT plays in nearly every facet of an enterprise’s business, a bumpy transfer of any aspect of the IT operation back into the enterprise can have a direct impact on the enterprise’s corporate performance. Operational downtime or even a slowdown in application response times can have a negative impact on customer satisfaction, partner relationships, and employee productivity.

Therefore, a successful backsourcing process is essential. One of the most important ideas is to outsource with backsourcing in mind. To that end, the organization must develop an outsourcing strategy and a contracting and management process that provide multiple opportunities for it to exit the relationship and regain ownership and responsibility for its IT operations.

It is also important not to look at the sourcing decision as an “either/or” proposition in which the enterprise is either outsourcing or backsourcing its entire IT operation. A hybrid approach will be the most logical and likely sourcing strategy.

As we’ll see in the list below, communication is one of the keys to success in backsourcing. Communication should include automated reporting systems and regularly scheduled meetings between the enterprise and outsourcer staff.

The report elaborates on the following 10 important steps for a successful backsourcing process:

  1. Start with the initial outsourcing strategy and selection process.
  2. Determine which functions will be outsourced based on backsourcing considerations.
  3. Select an outsourcer with successful backsourcing experience.
  4. Build the backsourcing process into the outsourcing agreement.
  5. Set clear, measurable SLOs and service delivery obligations by both parties.
  6. Establish regular reporting policies, procedures, and collaborative problem resolution processes with the outsourcer.
  7. Set problem thresholds to identify issues as soon as possible before they become critical problems.
  8. State specific terms for termination or modification of an outsourcing agreement and initiation of a backsourcing process.
  9. Create a termination/backsourcing transition methodology.
  10. Hire experienced backsourcing lawyers and advisors.


The report concludes by offering steps an organization should take to help ensure a smooth transition. One of the most important is notifying the outsourcer that you are initiating a backsourcing process. Not only is this important for complying with contractual obligations, but this open-minded approach could also lead to actions by either party that could rectify a problem, a decision to restructure all or part of the original outsourcing agreement, or at the very least a more cooperative backsourcing process.

The organization next needs to conduct a current operations audit and needs assessment, develop a project plan and timetable, and determine staff reassignments.

A critical component of a backsourcing plan are the policies and procedures that ensure that proprietary information, private records, and intellectual property are correctly transferred to the enterprise without jeopardizing their security.

Properly communicating the changes to staff, customers, partners, vendors, and, for public companies, investors is an essential step as well.

Part of this process also involves establishing a governing committee that is responsible for overseeing the transition process; it should include enterprise executive and end-user representatives, outsourcer relationship managers, key vendors, and business partners that ideally had responsibility for overseeing the original outsourcing arrangement. This dual role can ensure continuity during the backsourcing transition process.

In summary, it is important to be realistic. Given the realities of failed outsourcing relationships, having a clear exit strategy that allows the organization to smoothly transfer IT functions back inhouse is imperative.