Insource or Outsource? 5 key steps to decide the best route

By Allan Watton on

insource or outsource

What started on a small scale in the 1980s and was championed by the Labour Party in the early 2000s), has become the £280bn+ business of outsourcing in the UK.

While large single supplier outsourcing relationships were all the rage a few years ago, we are definitely seeing clients increasingly opting for either multi-sourcing or bringing services back in-house. So the question remains for many organisations: whether insourcing, outsourcing or some form of hybrid service delivery (a mixture of insourcing and outsourcing) is the best route for them?

The perception for some 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, some would consider that if all of the margin the outsourcing supplier is making, could be removed as a cost of service delivery, it would immediately cut 20% or more from the overhead. 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.

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.

Outsourcing still remains popular

Outsourcing remains popular (and in some service areas, is increasing) across many public and private sector organisations. Common areas for increasing trends in outsourcing include IT support, payroll, accounting, software development, recruitment and so forth.

According to a YouGov poll over 70% of B2B decision makers said that they had outsourced some function of their business, with the leading reasons for choosing to do this being:

  • They couldn’t afford to do it in-house
  • That it reduces the risks
  • Hope that it will reduce staff costs
  • Believe that it will deliver better results
  • So resources can be focused on other areas of the business
  • It’s cheaper
  • It’s more efficient
  • They don’t have relevant in-house talent to handle the project.

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 supplier 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 five key steps to deciding which may be best for your particular situation:

In-sourcing key considerations 

Perceived benefits:

  • 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.
  • 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. Although there is no contractual change variation necessary in this scenario, you still have to undertake internal performance escalation if internal service levels are found wanting.
  • 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 teams are able to understand various inter-functional processes and are able to implement them more easily than in an outsourced model.

Perceived challenges:

  • Cornflake management – a new idea every breakfast: One of the biggest threats to internal service provision is the likely number of ad hoc change requests that may be 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.

  • 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 process control mechanism, then it runs the risk of losing knowledge that is undocumented when staff leave.
  • Potential role 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.
  • Resources: Projects, whether conceived as deliverable by in-house means from the outset or moving from outsourced suppliers, can often be heavier on resources than expected. A full assessment should be carried out to identify whether you have the skills and resources in-house and if they would extend to the considerable demands of running the project in-house. If you do not currently have the resources in-house, what would be the cost of sourcing, onboarding and retaining those resources? And if you outsourced to start off with, has there been a genuine and significant shift in your capacity to run the project in-house?

Outsourcing key considerations

 Perceived benefits:

  • Possibility of better value: The logical – and most convincing – argument here is the concept of better value cost of operations in an outsourced model that the supplier 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, supplier arguments must always be stacked against research into the value you can offer through managing the service internally.
  • Process driven: The outsourced model is definitely going to be more process driven. Policies, processes, and knowledge documents will (or rather, should…) be very detailed, as neither party will want misinterpretations to occur.
  • Less responsibility for handling HR issues: With technology increasingly being used on more repetitive processes, the onus of managing people if 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.
  • Regular benchmarking exercises to keep costs fair: When working with strategic suppliers, it’s important to run periodic like-for-like benchmarking exercises to compare what you’re paying against the cost of those services from other suppliers in the wider market. If there is a significant difference (in your favour) then this can be justification enough to look to enter into discussions with your supplier to bring their pricing more in line with the market. Many of the better written outsourcing contracts already make provision for like-for-like benchmarking, considering the commercial risk profile of the services being delivered.
  • Use of performance measures to incentivise results: If you have accurate and considered KPIs on your project, then you can identify when and where they are not being met. These performance measures can be used to justify a renegotiation on pricing, but also to drive greater productivity from your strategic supplier. 

Perceived challenges:

  • 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 supplier 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 often wants to admit responsibility for something that went wrong.
  • 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 contract and/or service reshaping in the wake of innovation that will change business outcomes.

    Suppliers, 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 both sides 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 supplier can be hesitant about driving and implementing innovation if it means a potential reduction in their revenues and profits.

  • Supplier staff attrition rate: This is the bane of every supplier as their staff can either easily tire of doing the same thing, over and over, or they are poached by competitive organisations. As a result, there can be a tendency for staff to leave. When this happens, a dip in service delivery often follows, as getting replacement staff can be a challenge, and where new staff do join the team, the new incumbent is bogged down by having to read up on relevant documentation, whereas the customer still has the same expectations of service.
  • Supplier failure: Many outsourcing giants have been considered ‘too big to fail’ in years gone by, but Carillion changed all of that. Many have suggested that warning signs were ignored by those who continued to award the company new contracts which cost the public sector (and some estimated 30,000 subcontractors, suppliers and creditors) so dearly. This did become a catalyst for change that the market had needed for some time, but we should still be aware of the possibility of supplier disruption and/or failure.
  • Ideological issues with private sector motivations: Although rarely raised by private sector companies that outsource their operations, one of the most common objections to public sector outsourcing that’s cited is that it should not be paying the profits and ‘fat cat’ salaries of a private sector entity to deliver something that could be done in-house.

    However, this can be an oversimplified view as we should often be looking at ‘value’ rather than cost. When a private sector specialist can a) deliver something the public sector client has neither the skills or resources to deliver, b) drive greater innovations, or c) complete the task at a lower price point, the value they deliver may well be saving the public sector time and/or money. This is the value they are being paid for.

Insource or Outsource: 5 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, or it may be the lack of ‘corporate memory’, but often it is to reduce costs, improve services or to have access to wider and more holistic innovation from a supplier that represented it could give you this. But is that what you received? Can you recall why you thought an external route might be better than deciding to try to innovate and change service delivery internally? If you can, you need to check whether those factors are still inhibitors to insourcing.

  1. 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.

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 supplier, 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.

  1. 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 supplier 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?

  1. Change can sometimes be prohibitively costly

If you are part-way through an outsourcing relationship then to make a change now may be more costly than you’d imagine. To start off with there are likely to be provisions in your contracts which require you to compensate your supplier should you walk this path. Always better to check your contract to see what the cost of change may be. Secondly, there are the costs to reputation if disgruntled suppliers speak their mind to enough of their peers. And then there are the unintended costs of change, in delays and challenges during handover, and in the cost of procuring the resources you’ll need to handle the outsourced tasks in-house.

  1. Can a realignment be achieved?

Change is inevitable. Even the most floundering relationships can be reset, given the time and will to do so. Not all, but some can be redirected. Performance issues, missed KPIs and benchmarking exercises to determine fair market price can all be levers you can pull, to push for change. However, there is another that is a little more subtle and that’s the use of a ‘review and refine’ process. Hopefully, you have built this into your agreement, a bi-annual meeting between you and your supplier to assess progress and the way contractual requirements and reality needs are aligned. This is your opportunity to guide change for the good of all parties. Gather your reasoning and evidence for change, build your case and prepare for that meeting. You may find that this is all that’s needed to set your relationship and its results back on course.

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

Summary – Insource or Outsource?

Project success is often much less about whether you chose in-house or outsourcing, and more about the approach you take to analysing the needs of the project, the effort you put into building a truly collaborative partnership with all those involved and your ability to source and adopt best advice.

The biggest factors in favour of outsourcing, as of today, are the perceived low(er) cost of operations and ‘as-required’ access to more strategic thinkers. Given that technology which supports outsourcing services is rapidly transforming the way suppliers operate, major change is already being implemented and further change is 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.