Understanding the Risks of Insourcing Helps Unlock the Rewards

Share:

What Is Insourcing?

Insourcing can take many forms. Here we are discussing insourcing as a means to move work in house from a managed services provider. But, just as business services come in a wide variety of functions, structures and purposes, insourcing procedures can vary wildly from case to case. Be aware that other forms of insourcing—for example, temporary staff augmentation—can imply different risks.

The first thing to understand is that insourcing is a means to an end. Deciding to insource is neither right nor wrong; choosing to do so should be based wholly on what an enterprise is trying to accomplish. If an organization chooses to insource, it should be aware there are inherent consequences, many of which are not related to cost, and it is critical to think through these consequences as part of the decision-making process.

It's also important to note that insourcing may mean bringing work back in-house temporarily and then subsequently and selectively sourcing pieces of the scope to niche providers to complement the new retained team. Your insourcing/outsourcing strategy should be a journey that continuously shifts and evolves.

To Insource or Not to Insource

Pulling IT and business services back from a managed service provider and insourcing them with full-time employees can be a double-edged sword. It turns out that many of the benefits of insourcing are mutually exclusive of the benefits of outsourcing. And enterprises that insource may very well find themselves struggling with the same burdens that spurred them to seek a service provider in the first place—most commonly, high labor costs, lack of skilled resources, quality issues and organizational complexity.

But, it’s also possible, with careful accounting for the costs, to use insourcing as a powerful method for optimizing an organization. With greater control, flexibility and visibility of their processes, enterprises can use insourcing to create multiple avenues to realize high-level efficiencies.

Of course, the decision to insource is wholly dependent on an enterprise’s very specific needs and goals. Before deciding whether to insource or not, an enterprise should consider both the risks and rewards:

Rewards of InsourcingRisks of Insourcing
  • Efficiency gains from optimized operating models
  • Flexibility gains from eliminating a layer of contract governance and management
  • Ease of eliminating tasks associated with employee lifecycle management
  • Improved alignment of services with the business due to increased scrutiny of labor rates
  • Tax advantages in certain countries that may be worth investigating
  • Switching from variable labor costs to fixed costs, which requires high resource utilization
  • Limited resource pool and skillset gaps
  • Absence of service-level rigor provided by third party
  • Inefficiencies caused by trading contractual commitments for managerial ones


Please use this form to continue reading.


 

What Are the Costs of Insourcing?

The fundamental costs of insourcing are those related to taking on the work that used to be handled by a service provider. In terms of labor, that means having to account for the traditional costs of a full-time employee, including costs related to salary, recruitment, reskilling and more—all of which may be exacerbated by a competitive labor market or the need for specialized skills.

Enterprises must also account for the management of new employees. By its nature, managing new employees creates additional complexity in an organization, as new structures, processes and talent have to be established to replace functions handled by the service provider’s organization. Leadership skills for technical talent can be hard to find.

Beyond those broad costs, multiple variables may affect the level of risk involved with bringing labor in house:

  • Bringing offshore roles onshore: This is the most common insourcing scenario and the most likely to increase an enterprise’s unit costs for labor. Especially in a tight labor market, companies will have increased recruitment risks: they will be competing for a smaller talent pool with fewer opportunities for arbitrage.
  • Staying offshore with a global capability center (GCC) or an offshore shared services center: While this strategy may be more cost-effective than onshoring, it includes drawbacks. Depending on the location, large managed service providers can provide more learning and career growth opportunities than a GCC. This poses a challenge to GCCs’ talent acquisition and employee lifecycle management efforts. There are also costs associated with setting up and operating a GCC, including managerial overhead. One frequently overlooked cost is travel: at least one ISG client reported that its travel budget alone motivated it to consolidate multiple GCCs into a single site.
  • Taking on the onus of fulfillment: In a managed service agreement, the service provider absorbs the risk and responsibility of fulfillment. Service provider contracts generally define terms for recourse in the event of a failure and take into account extenuating circumstances like changing unit costs or efficiency. Then the provider takes over responsibility for the outcomes. Shifting that responsibility back in house means accepting a weaker fulfillment structure, based primarily on wage incentives or other, more subjective performance management techniques.

In essence, when you contract a managed service, you buy an outcome. When you hire an employee, you become the guarantor of an outcome.

Compensating for Service Provider Advantages

Bringing services in house usually means building a business IT function from scratch. Because service providers offer specialized areas of expertise, they enjoy a few advantages enterprises may need to compensate for, including:

  1. Access to global talent pools
  2. Shared resources, such as talent, across multiple enterprises
  3. Employees with core competencies in specialized fields
  4. Established structures for business processes
  5. A suite of specialized licensed tools, often obtained at a volume discount

Insourcing Can Streamline Operations

Once risks have been managed, insourcing opens up a powerful opportunity for optimization. Taking processes back in-house can give an enterprise more visibility and control over its workflow. Often, this is preceded by an assessment that identifies where automation or restructuring can bring about new efficiency.

In essence, when you contract a managed service, you buy an outcome. When you hire an employee, you become the guarantor of an outcome.

The flexibility afforded by managerial control also carries with it the possibility of improved efficiency. Contractual control is a near-static process that requires strong governance to direct its scope and direction while maintaining a healthy vendor-client relationship. Removing the need to negotiate with a third party is itself a method of streamlining operations.

Primary Activities for Insourcing Managed Services
PrepareBuildTransformStabilize
Notify provider of terminationStart management processesPerform knowledge transfer and trainingManage issues
Build repatriation plan with team and responsibilitiesDefine ITIL processes for servicesMigrate services by towerTroubleshoot
Develop job descriptions and hire personnelUpdate service deskInstall new toolsAchieve steady state
Disentangle hardware and software licensesHire new personnelTest performance 
Prepare environment Remove provider access 
Execute communications plan Run and test for complete transformation 

Mitigating Risk through Automation

Labor is the common thread running through most of the major risks associated with insourcing. As such, automation is a powerful option for reducing the burden of staffing—for at least one ISG client (a large multinational enterprise) automation was the deciding factor that made the business case for insourcing viable.

Enterprises that can use automation to reduce their human capital footprint can offset the previously mentioned risks by:

  • Reducing the overall costs needed for workers
  • Lessening the managerial burden
  • Lessening competition for workers or more resources with highly-sought-after skills
  • Improving throughput
  • Increasing quality
  • Standardizing processes

Of course, automation is not a one-size-fits-all solution. A careful assessment must be done to ensure the opportunities to automate processes exist and that the cost of automating makes it worthwhile.

How to Prepare an Insourcing Plan

After weighing the risks and rewards, enterprises need to begin the hard work of preparing a plan to make it happen. Consider the following flowchart as a broad structure:

Evaluate environment> Assess sourcing options> Build/release requirements> Evaluate responses> Renegotiate> Implement change


The following 12 factors will likely impact your readiness:

  1. Assess the original outsourcing decision. Were all the relevant issues resolved?
  2. Assess the provider relationship. Can the provider re-price or otherwise influence your decision?
  3. Calculate the current costs of delivery. Are your price benchmarks current?
  4. Evaluate the feasibility of your goals. Will insourcing deliver similar or greater results than a provider?
  5. Prepare for transition. Do you have the process, experience and resources to manage a transition?
  6. Build a business case. Have all costs been accounted for post-transition, and do they justify the move?
  7. Assess readiness. Are stakeholders prepared for repatriation in terms of skills and resources?
  8. Prepare to communicate. Do you have a comprehensive change management plan?
  9. Measure scope. Can in-house talent cover all the services being repatriated?
  10. Restructure the organization. What will the new team look like, and how will it be managed?
  11. Prepare for escalations. Has the organization accounted for intangible services the provider handled, like problem escalation, process maturity or resource flexing?
  12. Upfit infrastructure as needed. Is the data center up to date and prepared for repatriation?

Human Dynamics of Insourcing

Enterprises should consider two crucial points when they are designing an insourcing strategy for their organization.

  • Change management: Employees need to be well informed about how and why insourcing is happening. Again, the motivation for the decision is key. Stakeholders who supported the original outsourcing decision should be made to understand the current motivations for change. Parties who opposed outsourcing should be similarly informed to avoid any potential “I told you so” bitterness. For all audiences, it will be helpful to highlight details about what has changed in the company’s circumstances since that original decision.
  • Skill evaluation: Bringing in a long-outsourced service may mean employees have been neglecting skills related to that function. An early step should involve taking an account of which workers are available to pick up that work or train others. It also means ensuring managers are well-educated about the best methods for organizing the new work.

Do the Risks of Insourcing Outweigh the Rewards?

Like so many other complex business decisions, the answer to this question is “it depends.” In isolation, it’s hard to guarantee that insourcing or outsourcing will lead to the hoped-for outcomes. What can be established is that an enterprise's thinking on the issue needs to include a broader strategy to decide how IT operations can best support the business. And this needs to consider how the company’s workers are organized to support that IT operating model. In the absence of an overall sourcing strategy, enterprises will find the decision to insource is difficult to tie directly to a business case. 

It’s also important to keep in mind that a decision to insource may be an intermediary step in a broader outsourcing strategy. Some organizations will choose to bring a service area back in house, fix it, change the sourcing scope to some degree and give a piece back to the market. Enterprises should not make insourcing and outsourcing decisions that remain static for 10 years. Instead, sourcing decisions should be part of a continuously evolving strategy designed to accomplish specific business goals.

The motivations of the enterprise will always be the greatest consideration. There are a great number of legal, contractual and international delivery model approaches to achieving an outcome – but enterprises must identify their goals and their motivations for those goals as a first step.


Share:

About the author

Alex Bakker

Alex Bakker

Alex leads the Primary Research Team where he focuses on study design, panel research, and interview based research for ISG. In addition to leading the Primary Research practice at ISG, Alex also serves as the lead analyst on provider pursuit effectiveness, and helps IT service providers understand how they can improve performance in the competitive process. 
 
LinkedIn Profile