Five Scenarios Where Insourcing Makes Better Sense Than Outsourcing

By Bianca Wright The case for nearshore is clear: increased cultural affinity, technical skills in sought-after areas, acceptable English language skills and, of course, labor cost savings. Painful …

Charles Arnold of KPMG said integration is an important consideration in the decision to insource or outsource.

By Bianca Wright

The case for nearshore is clear: increased cultural affinity, technical skills in sought-after areas, acceptable English language skills and, of course, labor cost savings. Painful as it may be for the industry to admit, there are times, however, when outsourcing of any kind, even nearshore, is not the best option. The trick is determining when that might be the case.

While insourcing might not fit every circumstance or every company in that circumstance, here are five scenarios in which insourcing – taking the IT function back in-house – can make better sense than outsourcing:

  1. When flexibility is crucial

Outsourcing IT functions and delivery may allow companies to tap into needed skills pools and cut labor and other costs, but it can result in unwieldy processes. Charles Arnold, Principal, Management Consulting at KPMG explained that where in the past the decision to insource or outsource would mainly have been a conversation about core vs. non-core, these days companies are focusing on other variables.

These include issues such as the ability to access talent, the ability to tap into the latest technological advancements, and, of course, the ability to drive innovation cost-effectively. “And cost-effectiveness is not just a low-cost labor calculation, but an effective – and cost-effective – integration of a service or tool into the company’s existing environment,” he said.

Arnold added: “The answer will lie in the network of related services and the ability to better control ongoing change. The most common insourcing decisions we see these days are driven by that desire for greater flexibility.”

  1. When brand/reputational value is important
Esteban Herrera highlighted competitive advantage as one possible scenario in which insourcing may make more sense.
Esteban Herrera highlighted competitive advantage as one possible scenario in which insourcing may make more sense.

Esteban Herrera, Partner at global sourcing insights and advisory firm Information Services Group (ISG), noted that many consumer brands in the CPG, Banking, Healthcare, and Automotive industries have announced large insourcing initiatives.

“Although it may not sway some purchasing decisions, most people would prefer to buy from a company that creates local jobs, all else being equal. There can be marketing and goodwill value far beyond the modest increase in cost that insourcing might represent,” he said.

  1. When you’ve tried and failed

Given that the Aberdeen Group reported 50% failure rates with offshore developers, failed IT outsourcing projects are not unexpected.

Learning from mistakes is part of the business process and that holds true of outsourcing operations as well. “It almost always makes sense to allow a specialist to do what is core to them and not to you. But perhaps your company has cultural antibodies to outsourcing, or you’ve created a better process. If you’ve given it an honest try, and can demonstrate your results truly were better in-house, why not bring it back?” Herrera said.

The knowledge gained from failed outsourcing attempts can strengthen insourcing initiatives as the company has learned where the deficits are.

  1. When there is true competitive advantage at stake

As technology becomes more and more intertwined with business, it is certainly possible to create differentiation in the market with it. “You may have a better chance of protecting your intellectual property by keeping key, differentiating capabilities in house,” Herrera said.

He cautioned, though, that most of what people inside an organization will call “strategic” or “differentiating” really isn’t. “If you can win in the marketplace with something that is uniquely yours and difficult to imitate, insourcing may be the way to go,” he said.

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Mary Patry explained that companies are insourcing certain functions related to industry-specific business expertise and intellectual capital.
Mary Patry explained that companies are insourcing certain functions related to industry-specific business expertise and intellectual capital.

Mary Patry, Managing Consultant at Alsbridge added: “We are seeing situations where clients insource certain functions related to industry-specific business expertise and intellectual capital. These can include thought leadership functions such as architecture and business analysis. Some clients find that outsourcing those areas creates a challenge for knowledge retention and competitive differentiation.”

Patry cited the example of one large firm in the pharmaceutical sector that announced plans last year to bring IT service in house in order to reduce their dependence on service providers and to gain a competitive edge through intellectual property retention.

  1. Areas where you want to build a leadership bench

Cultivating talent in a company can be difficult; cultivating leadership talent even more so. Herrera said: “I haven’t had a single client in years who thought access to talent, particularly leadership talent, was easy or plentiful. Outsourcing compounds the problem by taking the junior, high potential people out of your organization and into someone else’s. Keeping some things in house in order to build tomorrow’s leaders could be a good idea, as long as you know how to recognize, retain, and reward them.”

Deciding whether your company’s situation matches any of these identified scenarios is not always straight forward and determining the criteria under which the decision to insource or outsource is made will likely vary from company to company. Herrera said that essentially it comes down to two key questions: can I do it better/faster/cheaper than the market? And should I worry about doing it better/faster/cheaper than the market?

“Most things that get outsourced need to be stable, reliable, and compliant, but not top notch. Paying for best in class is often a waste of money because the market may not reward you for it,” he said.

Arnold added that CIOs are having to embrace a new role as “Service Integrator”, owning the way in which all the IT delivery engines such as as-a-service offerings, managed service providers and internal delivery teams work together to fuel business growth. “Many of these components are not only new, but are also shorter term than the five to seven-year outsourcing deals of only a few years ago. This means that change happens faster now than in times past, and the most-effective Service Integrators actively seek to manage and steer that change.”

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