When outsourcing goes sour, think before you act.
Insourcing because outsourcing has gone wrong is a mistake. If you are thinking of taking a business function back in-housebecause of failings either in your supplier or, indeed, because of failings of your own, pause for a minute.
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There is one good reason to insource, to which I will come. But myriad technical issues, operational difficulties and relationship problems that can cause you to despair of ever having uttered the "O" word are not it. Insourcing for the sake of it merely compounds your troubles.
You might be forgiven for thinking insourcing was the latest outsourcing trend, based on some media reports. But what is really happening on the ground is far harder to discern, and therefore far more complex.
A number of surveys have suggested that something is wrong. Deloitte recently said that 64% of companies had brought deals back in-house. Dun & Bradstreet say that 50% fail by year five. PA Consulting Group reported that 15% were considering the insourcing route.
What the figures tell us
Apart from the obvious fact that the figures vary widely, they must also be seen in context and in terms of what they actually say.
First, the context: outsourcing is growing. It only stands to reason that the number of retreats will grow too. Orbys Consulting's research suggests the relative number of terminations is pretty constant.
Second, and even more importantly, the actuality. The bald figures distort the satisfaction that, for the most part, is felt. On the one hand, just because 64% of companies have brought deals back in-house does not mean that 64% of all outsourcing is terminal. Most of these companies will have several outsourcing deals.
It is also not surprising that many contracts are reconsidered five or more years down the line. For one thing, it is good practice to put periodic break clauses in agreements. And renegotiation is a must after such periods to reflect inevitable changes in the business and its operating environment.
Having said that, insourcing is an option that many are likely to consider at some point. Whether it is for the negative reasons of supplier factors (complacency, overselling, rising costs, and the like) or client factors (poor rationale, poor sourcing, poor internal management and so on). However, the reason why insourcing can compound troubles in these cases is twofold.
Issues with insourcing
First, insourcing can be as problematic as outsourcing was in the first place. In particular, in-house skills and systems that have been reduced or removed have to be returned, a process that carries risk and cost. Second, and more profoundly, insourcing for these reasons will only store up problems for the future.
Provided outsourcing has been reviewed alongside other sourcing options, in the vast majority of cases outsourcing is right in terms of the decision, but if it struggles to realise benefits, it goes wrong in the execution.
These issues can be put right, but if the fundamental reasons for outsourcing still hold - such as wanting to drive through efficiency, effectiveness and transformational changes - then to go back on the decision represents an opportunity cost for the business. When added to the cost of insourcing itself, the total might be very detrimental indeed.
There is one good reason to consider insourcing. That is when external factors are such that the situation in which the organisation finds itself has changed so much that it becomes not only attractive but right.
This does happen and there are well publicised examples toillustrate. For example, when JP Morgan merged with Bank One the economies of scale that it had sought by outsourcing with IBM were suddenly realisableinternally.
Alternatively, when Cable & Wireless decided to insource, again from a deal with IBM, the reasons were good, the company having found itself in a trading position where it wanted to exercise the kind of control over costs that could only be gained by insourcing.
These examples though are rare. They are extraordinary, so the insourcing that accompanies them should be as well. In most cases, it is far better to work in partnership with your supplier to get outsourcing right.
Mark Sukiennik is director of Orbys Consulting
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