A discouraging word in the outsourcing world is insourcing (or backsourcing). Although insourcing is a reality, it’s important not to view this kind of activity from a sky-is-falling perspective. While the “insourcing trend” described in the Goodbye Outsourcing article published today in cio.com rightfully took a journalistic view and didn’t necessarily intend to raise an alarm, attention to the article has spread like wildfire in just a few hours. (Even a hint of bad news always spreads quickly.) From my view, the article missed some important perspectives on insourcing.

First of all, some outsourcing deals are planned from the outset with insourcing/backsourcing as the exit strategy. 

In these deals, services are not brought back in house because of the provider’s poor service/performance. Sometimes companies take a staff-augmentation approach in their outsourced IT strategy, outsourcing functions that are “in the way” of their in-house IT staff being able to take on new, more strategic projects right away.

These kinds of deals are sometimes not on the radar screen of businesses that track “outsourcing” growth because, in the past, these staff-augmentation deals often were not considered true outsourcing. But the days of drawing borders and boxes around what is outsourcing versus what is contracting versus what is staff augmentation versus what is a “project,” etc. are coming to an end – if not completely over. 

Staff augmentation deals, or one-time “project” deals such as a technology implementation, historically have led to the planned/expected insourcing or have evolved to the “outsourcing” model (meaning it evolved to ongoing services instead of a temporary or one-time project service). To gain a true picture of whether insourcing is now becoming a trend, one would need to separate the deals that were planned with insourcing from the outset.

Secondly, the growth of on-demand, hosting, and cloud services over the past year has led to some companies switching their previously “outsourced” arrangements back in house to regroup and leverage the benefits of these new service delivery models. 

I’ve always advocated that outsourcing is an effective strategy to achieve business objectives – but ONLY if there is a strong business case and only if the relationship is structured for win-win success at the outset and modified as need be later on to sustain the win-win outcome. 

Taken from a business-case perspective, a company that once had a preponderance of Oracle applications and outsourced maintenance of those apps over the over the past few years to reduce costs and risks of not upgrading, would now have a strong business case for switching to Oracle On Demand for a totally hosted model managing the same apps plus even more benefits and services.* And some companies, especially those that have  a multisourcing environment (with various IT functions or apps outsourced to various service providers) insource their IT before switching to a hosted or cloud model.

So is insourcing a trend? In reality, it always has been. However, I believe what we are seeing these days is more evidence of companies switching and moving to services models that have a stronger business case for a particular business objective at a particular point in time. The external-services strategy is no longer a one-way street. More and more, companies are using hybrid strategies, moving in and out of various service models. But it’s not a rejection of “outsourcing” as a business model; rather, outsourcing is morphing into a blending of strategies for services from external third parties. 

There are, however, some instances of insourcing that do result from the service provider not meeting the required or expected service performance. This, too, is not a “trend” in that this has always been the case with many third-party service arrangements. However, I believe that the strategy of enhancing the “partnering” aspect in services deals can have an unintended consequence of insourcing – and this is true in BPO as in ITO. 

Here’s why. Buyers that are happy with their existing outsourcing arrangements often add more processes/function or scope to the arrangement to strengthen the partnership (both parties view it as a reward for the service provider’s performance). But sometimes companies do this without first doing due diligence and ensuring the business case is strong enough. Along with the cost savings/avoidance evaluation, the business case should always include a realistic assessment of risks and possible negative outcomes to other service areas.

During the past year and a half, I have noticed an increasing number (dare I call it a trend?) of outsourcing relationships that added scope to enhance the relationship (and achieve further cost savings), and then the buyer took that portion of the scope back in house (often in less than a year). 

In some cases, the buyers told me they added the scope on an assumption that the provider would be able to ramp up to expectations even if the provider had no previous experience in that function or process. In these cases, developing a business case would have avoided the relationship and cost problems that ensued and the subsequent insourcing. 

In other cases, the buyer and provider mutually did the business case analysis, acknowledged the risks if the provider did not have the level of experience/expertise necessary at that point in time, and mutually agreed before adding the scope to do it on a temporary basis for a set period of time (and sometimes at a smaller volume or in some manner that did not involve the buyer losing IT and people for a temporary experiment) to make sure the added scope would turn out to be a win for both parties. In these cases, insourcing was planned from the outset as a potential exit and was not an indication of the provider’s poor services, nor did the insourcing wound the relationship.

So is insourcing a trend? Yes and no. It’s been happening for years. But there is a new twist with the hybrid use of service models and the efforts to enhance relationships – and from my perspective, both of those drivers are strong indications of a thriving services industry. What’s your opinion? 

Disclaimer: Oracle On Demand did not pay me to say this, nor were they even aware I would be writing this blog. However, more than a year ago, I wrote a white paper on the business-case analysis of the Oracle On Demand model; thus, I am very familiar with the business-case facts that I used as an example in this blog.

Since 1998, freelance writer Kathleen Goolsby has studied outsourcing relationships’ successes, failures, trends, and best practices. She has interviewed more than 860 executives at buyer and service provider companies and is the author of “Critical Requirements for Building and Sustaining a Successful Outsourcing Relationship,” a chapter in Global Outsourcing Strategies: An International Reference on Effective Outsourcing Relationships (December 2006, Gower Publishing). As a freelancer, she also currently serves as the Senior Writer for Outsourcing Center (whose parent company is sourcing advisory firm, Alsbridge) and has authored dozens of articles as well as white papers. In a past role, she was editor of Outsourcing Venture (a former print publication). You can contact Kathleen at ksgoolsby@gmail.com.

No related posts.