Insource or Outsource? 3 key steps to decide the best route

By Allan Watton on April 9, 2018

Indource or inhouse Credit-AndreyPopov iStock-838945764.jpg

While large single supplier outsourcing relationships were all the rage a few years ago, we are definitely seeing a trend to either multi-sourcing or bringing services back in-house.

The perception is that ‘in-house’ seems to be ticking the boxes

On paper, the high-level business case often stacks up to recommend bringing services back in-house. After all, the perception is that all of the margin the vendor is making could be removed as a cost of service delivery. This would immediately cut out 20% or more of the overhead, wouldn’t it? So why not bring the services back in-house?

The problem is that perceptions can sometimes be stronger influencers than they should be. Some, for instance, would give weight to the perception that outsourced service providers could not possibly be as committed to the quality of service delivery as those who are ‘closer’ to the outcomes of the customers who are in receipt of those services.

They may even cite the extreme analogy of “What would happen if we outsourced the country’s defence forces to soldiers of a different country? Would the outsourced soldiers fight with the same spirit, given that the costs of operating the forces are lower in the outsourced country? Would money and technology overcome passion and belongingness?”

However, this is an overly simplistic view of a very complex question, and as with most effective business cases, the key is not in the answer to the question: the key is in asking the right question in the first instance. Getting the right answers to the wrong questions leads you on a path of confusion, poor assessment and ultimately, increased costs of delivery and declining service outcomes.

In reflecting on how to decide whether to insource or outsource, the consideration should be made not just at an individual service level, but after reviewing the benefits, or otherwise, of the entire range of services under review, as well as how productive and innovative the working relationship between yourselves and the vendor has been.

Below we have listed some of the most common considerations for and against both insourcing and outsourcing, and summed up our view of the three key steps to deciding which may be best for your particular situation:

In-sourcing key considerations

Perceived benefits:

  1. Direct control: The biggest advantage of internal service delivery is the ability to quickly change and stabilise operating processes, as direct employees are able to understand the environment rapidly due to the familiarity of the organisation’s policies and processes.
  2. Passion about the organisation’s values and corporate goals: The commitment to deliver ‘better’. Personal belief and corporate belief are often better aligned with an insourced service and your own team members. You assess the business case and impact and if it is the right thing to do, you just get on with it. No contractual change variation necessary in this scenario or contractual escalation process to worry about if it doesn’t get done.
  3. Innovation: Innovation can be much more rapid-fire. If you have the capacity and skills to innovate internally, you can really accelerate the creation of ideas, and the experimentation, piloting and implementation of those innovations. If managed correctly, your own team are able to understand various inter-functional processes and are able to implement them more easily than in an outsourced model.

Perceived challenges:

  1. Cornflake management – a new idea every breakfast: The biggest threat to internal service provision is the number of ad hoc change requests that are received. Whether this is from a direct manager/director, or a councillor who has had frustrated citizens banging on their door about the fact they aren’t getting a timely or sensible response from the call centre, constant changes in direction without a clear service outcomes roadmap can create enormous inefficiencies in operations. This is mostly because it is easier to reach out to colleagues in an insourced service delivery process than it would be in the case of an outsourced one. Internal colleagues would expect the insourced service to support them more quickly, the consequence of which may well affect the delivery of other projects that the senior person who is causing the disruption has no personal accountability for.
  2. People Dependency: It is not uncommon for internal employees to take ownership of certain processes over time, restricting wider knowledge of that process which could be a problem if they decide to move on or leave the organisation. This issue can be further compounded if the correct process documentation has not been created or maintained, making a handover more difficult than it should be. If the internal service does not have a strict control mechanism, then it runs the risk of losing knowledge that is undocumented when staff leave.
  3. Redundancy: Most of the work that is done in a typical back office internal service can be very process oriented. This opens the door to easier automation, should the available technology and budget allow. Hence, over a period of time, you may see the implementation of new and more appropriate IT systems taking over roles that people once delivered. The inevitable redundancies that follow may well make managing remaining staff much more difficult.

Outsourcing key considerations

Perceived benefits:

  1. Possibility of lower cost: The logical – and most convincing – argument here is the concept of the low(er) cost of operations in an outsourced model that the vendor sells to you. However, it is essential to recognise that ‘best value’ can only be established with clear evidence. And, no matter the volume of case studies demonstrating their business case for outsourcing, vendor arguments must always be stacked against research into the value you can offer through managing the service internally.
  2. Process driven: The outsourced model is definitely going to be more process driven, as exceptions to processes will be rare. Policies, processes, and knowledge documents will (or rather, should…) be very detailed, as neither party will want misinterpretations to occur.
  3. Less responsibility for handling HR issues: With technology increasingly being used on more repetitive processes, the onus of managing people when redundancies follow the implementation of technology to handle tasks rests with the company running the outsourced service. Thus, the difficult part of managing people (in this scenario: making redundancies) will not be your responsibility, as it would be if you managed the service internally.

Perceived challenges:

  1. Slower initial momentum: Getting everyone up to speed at the outset of a project, or when there are any changes in ‘business as usual’, can often take more time in an outsourced arrangement. It is not uncommon for both vendor and client to be slower in managing this process as both parties tread carefully to ensure that issues do not crop up from their own end. Taking ownership for resolving issues will often also be slower, as neither side wants to admit responsibility for something that went wrong.
  2. Caution over innovation: Despite the fact that innovation is one of the primary reasons why you might go into a strategic partnership agreement in the first place, we often find that, at least in the early days of an outsourced arrangement, innovation actually slows down. It’s common for contractual terms to be misaligned because they were not designed holistically to achieve reshaping in the wake of innovation that will change business outcomes. Vendors, ultimately, will try to maximise their profit out of an agreement. Clients, likewise, will try to get more for less. To achieve this you can expect either side to interpret the contract to hold the other to account, to ‘relax’ interpretation or completely ignore the contract when it suits them to do so. Also, for the outsourcer, the result of a successful innovation usually means a reduction in headcount and less of a service to deliver due to fewer transactions and issues. Therefore it’s not surprising that a vendor can be hesitant about driving and implementing innovation if it means a potential reduction in their revenues and profits.
  3. Vendor attrition rate: This is the bane of every vendor as people easily tire of doing the same thing, over and over, and there is a tendency for staff to leave. When this happens, a dip in service delivery follows, as the new incumbent is bogged down by having to read up on relevant documentation, whereas the customer still has the same expectations of service.

What to do about it? 3 Key considerations

Ask yourself some important questions about how you might go about service delivery in the future?

1. Why did you outsource or commission services in the first place?

You might not remember it now with the passing of time, but often it was to reduce costs, improve services or to have access to wider and more holistic innovation from a vendor that represented it could give you this. But is that what you received? Can you recall why you didn’t decide to try to innovate and change service delivery internally? If you can, you need to check whether those factors are still inhibitors to insourcing.

2. What evidence do you have to ‘prove’ insourcing would offer better value?

We used the word ‘value’, not the phrase ‘lower cost’. For organisations that have had a poor experience of outsourcing and are determined to bring services back in-house, it is all the more important to get answers to the right questions.

A bad outsourcing experience doesn’t necessarily mean you can deliver the services better in-house. One way of sanity checking yourselves at a preliminary stage as to whether you have internal capability to deliver the services better in-house, is to ask yourselves (and check the evidence), what major projects have you completed internally (either construction, large IT systems, transformation) that have (a) achieved the business outcomes you expected at the outset and (b) been completed on time and on budget?

And be honest with yourselves. If the answer is more on the side of “Well, they didn’t”, you need more introspection to check the causes of why you were unable to achieve initial expectations, before deciding to insource. There are more common synergies between managing an outsourcing vendor, managing the transition of bringing services in-house and maintaining excellent service delivery and delivering on major projects, than might be immediately apparent.

If the answer is more on the side of “Yes, they did”, then insourcing services should be seriously considered.

3. Check your starting point

Knowing your starting point before you change methods of service delivery is critical. Do you have evidence (as opposed to subjective opinion) of what the service is costing overall to deliver now and the service levels being achieved? This applies whether they are insourced or outsourced. If you have already outsourced, you should ask your vendor these questions so you can check and benchmark value for money.

If the provider cannot answer them, or gives a whole range of excuses as to “Why these questions can’t be answered right now”, then this should sound very serious alarm bells to you about whether their management process is fundamentally flawed. This may also lead to questions about what else may not be working as it should. How can a provider improve services and reduce costs if they don’t know what the starting levels are in the first place?

Likewise, if you are operating insourced service delivery the same questions apply. Do you know your starting point? Can you quantify the service levels being achieved, taking into account all of the relevant costs of delivery? Are these broken down into each area of service?

Although not an exhaustive list of key considerations, when you factor these questions and answers into your decision-making process it should provide greater clarity on the path you should follow.

Summary

The biggest factor in favour of outsourcing, as of today, is the perceived low cost of operations. Given that technology which supports outsourcing services is rapidly transforming the way vendors operate, we can expect major change on the horizon.

In fact, if you look at the newly emerging technologies, we may not even remain for very long with the outsourced or insourced model as it is today. Instead, we may end up leveraging ‘Centres of Excellence’ that design policies and operations so well that we may not even need an outsourcer – or a traditional shared service, whether internal or external – but instead purchase the support of these services as a utility.

In this model, a central provider offers services such as IT support, administration or payroll, finance, procurement and so forth to all, focused on the quality of their narrow service offering rather than the bespoke development of a solution for any one client.

Photo credit: iStock, Credit-AndreyPopov

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