Treading Carefully with the Insourcing Option

“Insourcing,” or bringing work based offshore back to the US, has been receiving increased attention recently. Politicians in both parties have made outsourcing a hot-button campaign issue,
and as domestic wages and operating costs have dropped during the economic crisis of the past few years, the cost advantage of outsourcing does not seem quite as dramatic.

However, as demonstrated in a new white paper from sourcing advisory group Alsbridge, “Insourcing 2012 – Pros, Cons and 10 Things to Consider,” the decision to insource is not one to be made lightly or quickly. Even if an outsourcing buyer can identify specific benefits such as cost savings or improved public image, insourcing is an expensive, time-intensive process that can have disastrous results if not performed properly. Let’s take a quick review of Alsbridge’s advice to prospective insourcers.
 

 

Assessing the Situation
Alsbridge recommends companies considering insourcing assess factors such as why in-house IT processes were originally outsourced, whether an outsourcing provider is willing/able to restructure and/or reprice an existing agreement, the full slate of risks (including possible changes in business direction during transition and in-house knowledge gaps), readiness to fully manage IT operations, and capability to rehire outsourced staff.

Looking more closely at some of these factors, it becomes apparent that insourcing involves a lot more than canceling or declining to renew a contract and restarting IT operations in-house. For example, outsourcing IT is not something companies do for the fun of it. Generally IT is outsourced due to some sort of problem with properly managing processes in-house. And even if IT was outsourced solely due to cost issues and now the price of talent and equipment is lower, even the most pessimistic observers do not expect the current recession to last forever. Companies that insource due to current low operational costs may find themselves facing high operational costs again within a year or two.

Also, most outsourcing providers are reasonable companies that understand sometimes circumstances change and agreements need to be modified. It is definitely worth it for a company considering insourcing to sit down with their ITO provider and discuss the reasons they many want to bring IT operations in-house. It is very possible the provider will work to accommodate their issues and maintain the outsourcing relationship.

And as Alsbridge points out, insourcing requires a full risk assessment that goes beyond obvious “front of mind” risks and also requires readiness to manage IT in-house. That requires implementing and maintaining an in-house IT platform and data center, hiring technical and managerial staff with specific IT expertise, and also managing a whole new set of IT vendor and maintenance contracts. While rehiring outsourced staff with this knowledge base can greatly ease these burdens, insourcing companies will need to check their contract termination language to see if it is permissible and even then, there is no guarantee outsourced employees will want to return.

Selective Insourcing
So insourcing is a complex, multifaceted task involving many challenges. And when a company is nearshoring IT processes, the benefits of insourcing become even smaller as nearshoring offers added value in terms of time zone and cultural similarities, relatively strong English capabilities, etc. However, as Alsbridge suggests, the best route for companies who are considering bringing outsourced IT activities back in-house is to “selectively insource.”

That is, if the skillsets and supporting architecture for certain processes are readily available, it may make sense to include insourcing them as part of a broader multi-sourcing strategy. And in some cases, insourcing most or all of outsourced IT processes will prove the best option. But an insourcing decision should only be made after careful and thorough review of all the mitigating factors, and always driven by internal needs and not in response to fluid external situations such as exchange rates or political opinions.