Insourcing vs. Outsourcing

November 26, 2012

Last month HP agreed to transfer 3000 of its employees to General Motors (GM) as GM moves IT operations back “in-house”. Randy Mott (GM, CIO) decided to bring most of the company’s IT work in-house. In fact, GM announced that it will bring most of its IT work back in-house over the next three to five years (~10,000 positions) – a dramatic about-face for the automaker, which was an early adopter of outsourcing and offshoring. While most companies may not be making such major insourcing moves, many are reconsidering the outsource-insource mix.

According to an April 2012 Boston Consulting Group survey of more than 100 US-based manufacturing companies with sales over $1 billion, 37 percent responded that they are planning to reshore manufacturing operations back to the US, or are at least “actively considering it.” The top factors cited in the survey were labor costs, product quality, ease of doing business, and proximity to customers. Cliff Justice, principal in KPMG’s shared services and outsourcing advisory stated that “many companies that are considering some large-scale insourcing, because they believe they need better access to the innovation engine of technology.”

Insourcing is doing work in- house instead of having it outsourced to another company (onshore and/or offshore). Today’s definition of insourcing has also embraced bringing in experts to fill in a company’s short-term needs. These specialists may not be working for your company, but their expertise can be outsourced for the time being. This is where insourcing and outsourcing overlap.

Why the decline in outsourcing?

The achievement of results through outsourcing and IT services sourcing engagements has been always a “two-thirds full” (or one-third empty) glass. While 70% of organizations are happy with outsourcing, 30% are not and while 57% of projects are achieved on time and 67% on budget, the rest are not. Overall, achieving 48% of projects is generally considered “somewhat successful” with only 28% considered an “outstanding success.” Other reasons include:

1) Expectations are clearly higher with outsourcing… and they’re not being met. Only the ability to meet compliance and regulatory goals is brushing up notably well with the outsourced functions. Everything else is mediocre-to-average, in terms of meeting performance objectives. This is because many buyers’ outsourcing environments are relatively equivalent and their expectations were likely set to a high level when they embarked upon their engagements.

2) Shared Services delivery models aren’t faring much better. Those buyers sticking predominantly to a shared service model are also suffering similarly mediocre performance levels to their outsourcing peers. Only their ability to standardize processes is really coming though as a major plus. Clearly, they find it easier to internally make tweaks to process flows and delivery quality results to customer/organizational issues.

Gartner Research expects the convergence of IT services, software and infrastructure to cause significant changes in sourcing strategies, driven by the delivery of offerings “as a service.” Gartner predicts the slow but steady decline of traditional outsourcing (for low-cost services). The associated growth of cloud services can be viewed either as the death of outsourcing or a rebirth that removes delivery complacency, optimizes costs and inspires innovation in business-critical services for an increasingly connected world. Those who consider it a rebirth observe that use of an “as a service” business model still involves a transfer of responsibility to an external service provider and shared risk, which is essentially the definition of outsourcing. Whichever perspective one takes, it is clear that the size, shape, look and feel of the IT services market will change and we expect offerings to evolve as well. CIOs and sourcing officers should explore the opportunities, implications and desired outcomes for their organizations. They must:

You must be cognizant that your competitors (especially midsize businesses in fast growing economies) are advancing their sourcing strategies more frequently than once a year. Align the requirement to refresh your sourcing strategy to the rhythm of your business and its competitive stance. The more frequent the business changes, in addition to technology advancements and more intense competition, the more frequent IT and business service sourcing decisions must become.

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