FD Intelligence

Insourcing versus outsourcing: an intelligent approach

Tim O'Connell Tim O'Connell

Whether to insource or outsource work is an emotive topic. Read our three steps to help keep subjectivity in check and ensure the right decisions are made.

It’s helpful to start by clarifying the definitions of terms that are widely used but often confused. Simply put, outsourcing is the provision of specialist skills by a specialist third party service provider who focuses solely in this area. Offshoring relates to the provision of those services by an outsourcing provider based in a different country (or continent) to that of the purchaser. Finally, insourcing is the provision of those services by an in-house team.

Why outsource? Why insource?

Whether outsourcing or insourcing, the key drivers are essentially the same: the search for increased efficiency and reduced cost.

Since the turn of the millennium the trend towards outsourcing has gathered pace, initially for highly transactional activities in IT and HR but increasingly for accounting, procurement, facilities management and even legal process. The Grant Thornton International Business Report on outsourcing indicates that the appetite for outsourcing shows no sign of abating, with 40% of businesses open to it in one form or another.

In the last few years, meanwhile, a small but noticeable trend has emerged within larger organisations towards bringing activities back in-house. Recent high profile examples have included the UK Cabinet Office 'backsourcing’ its core IT function and IBM hiring 1,000 designers globally to take its design capability in house. Similarly, in the aftermath of the credit crunch and the payment protection insurance (PPI) scandal, banks have shown a desire to bring functions involving client interaction back in-house in an effort to put the customer at the centre of what they do.

Typical justifications for insourcing

  • Closer collaboration for functions like IT, which are increasingly entwined in every aspect of the business.
  • The need to drive innovation, which directly benefits the business (rather than benefiting the outsourced provider).
  • Lower real costs of internal resource for large ongoing contracts (no third party margins).
  • The opportunity to invest in internal capability.
  • Political and cultural sentiment against offshoring.
  • Wage deflation and increased labour supply.
  • Cloud computing and big data acting as enablers for effective and affordable internal provision.
  • Accountability and the need for greater control.

Other reasons cited are due to issues that could arguably be alleviated with better planning and management of the relationship, such as:

  • A need for greater control driven by a stricter regulatory environment.
  • Reputational impact, particularly the backlash from a customer and colleague perspective against outsourced call centres.
  • The failure to realise promised cost savings, often because costs such as oversight are not properly factored in.
  • Expected performance levels not being met.

Towards an intelligent approach

In our experience, the right provider for a particular resource depends on a range of factors, including but not limited to business size, sector, market and growth stage. Taking each scenario on its own merits and adopting a measured approach is therefore vital to finding the right solution in each case.

It is worth remembering that outsourcing has evolved significantly over time to create a mature market offering increasingly sophisticated solutions. Your potential providers should be experienced and professional enough to engage in a conversation regarding the best approach, bearing in mind that there are points in any company’s life cycle where it is most appropriate to bring a particular service or discipline back in-house.

As a guide to that the shape of that conversation, keep in mind the following steps.

Step 1: What are your drivers?

Having prepared your business case and secured internal buy-in, you should find these processes mean you are clear about the drivers behind the decision. Some of the questions included in these stages are:

  • Is there a definite need being met? For example if your business case is based around increased control, why is this needed?
  • Is the change feasible in terms of potential disruption to the business?
  • Is the change sustainable over the long term?
  • Are you just taking a problem and putting it out of your reach?
  • Is this a core capability for your business or a peripheral function?

Step 2: Ensure quality is achievable

Any good service provider should be able to supply you with appropriate case studies and testimonials, and help you in answering the following questions:

  • What are your requirements in terms of the necessary checks and balances to benchmark the performance of your provider?
  • Is the contractual relationship defined clearly and is it flexible enough to provide effective control and cope with changes in requirements?
  • Does your chosen provider have the capability to deliver your requirements?

Step 3: Consider secondary impacts

A common mistake for businesses considering outsourcing for the first time is the failure to account for the secondary impacts that the change to an outsourced provider will have. Make sure you have considered the following:

  • Have the potential resource requirements for managing the provision been factored in?
  • What effect will there be on career progression and talent retention in your business?
  • What will be the impact on your ability to innovate and evolve?

Finally, the transition needs to be planned carefully to minimise disruption. As much as 40% of your time should be spent on this, although a good provider will do much of the work for you – ensuring that a detailed plan is in place, all transition costs are budgeted for, and appropriate KPIs and metrics are agreed.

However, it remains vital that there is clear oversight from within your business and that overall responsibility for managing the relationship with your provider and retaining knowledge of the outsourced resource is clearly delegated to a specific individual internally.

A portfolio approach

There is no one-size-fits-all solution to the insourcing/outsourcing issue: any decision, whether to engage an external provider, bring a function back in-house or simply leave things as they are, should be judged on its own merits. A portfolio approach, using a range of specialist providers with core services provided internally, is usually the best answer, but the precise profile will vary from business to business.

As your business grows and matures, the need to have different elements under control in-house or outsourced to specialist providers will always change, so it is important to review your requirements regularly. Grant Thornton can help you with this process. For further information please contact your usual adviser, or contact Tim O'Connell.