23 Jan 2014
Among the issues most often forcing chief executives to consider bringing outsourced services back in-house of recent are: changes in business strategy; lower-than-expected vendor performance; and smaller-than-anticipated cost reductions.
"Insourcing" and managing the entire work infrastructure is a sourcing strategy that offers its own benefits and drawbacks. To help you in making the right business choice, today we provide some points to keep in mind when considering the need for a transition; and we also reveal some hidden costs of the insourcing model that must be considered in order to make a legitimate evaluation.
Is an insourcing transition required?
Despite its popularity due to being often seen as a company’s best financial option, outsourcing has its own sharp edges. For example, examining cost reduction — one of the major driver to outsourcing — shows that only 42% of companies experienced a significant decrease in costs after turning to outsourcing. Furthermore 53% of companies were disappointed with actual cost reduction results from outsourcing.
Image 1. What were the anticipated and achieved cost reduction percentages as a result of your most recent outsourcing experience?
Naturally, as a competent specialist in your field you are well aware that changing the sourcing strategy can be highly disruptive to an organization without a thorough analysis of the current situation and careful planning.
In your strategy plan, we suggest for you to:
- Formulate the main reasons for and benefits of bringing a service in-house.
- Evaluate accurately the current state of the service, its overall price and performance efficiency.
- Define the desired state of the service.
- Demonstrate how much more effectively your organization would deliver the service compared to outsourcing.
Hidden costs of insourcing
Ok, so you’ve evaluated the current and would-be service quality and expenses and made a decision that using internal teams would be more profitable in your situation. Although this certainly often may be the case, let’s first at least highlight several areas requiring special attention that could potentially bring considerable costs.
- Examine the technical specification of the service you plan to insource and the requirements for its implementation; check if the hardware (servers and data centers) and networking services are up for their new tasks.
- Check if the software (platforms, ERP, CRM, etc.) resources will handle an increased workload.
- Define any increased security requirements needed for insourcing to determine whether the existing security system needs any major upgrading.
- Check if there is a sufficient available workforce in your area with the skills required for your new projects. You may need to consider opening an extra office or relocating.
- With your company now fully in charge of wooing talented specialists to its team, are you able to offer suitable benefits packages to a new group of employees in a highly competitive job industry?
- Stepping into a new sphere, the HR department may need further training to deliver efficient recruiting, onboarding, and talent management efforts.
- A comfortable workplace plays a major role in employee productivity; your sourcing strategy may require some planning for expansion costs and delays.
Further hidden costs to evaluate
- Monthly service charges
- Asset costs
- Project fees
- Early termination fees
- Discuss the upcoming transition within the organization and develop a realistic schedule for its implementation.
- Make a list of ‘what-ifs’ that could put the whole project at risk such as a key employee leaving, and prepare possible alternatives.
- Wait to declare success and stay focused early in the transition; unexpected problems will invariably arise that you’ll need to be ready for.
Making your right choice
Insourcing is not a solution that works in every case and of course it all depends on the situation. After a preliminary analysis, you might decide that the potential savings aren't worth the effort. And there are advantages other than cost savings, such as quality, or a particular innovative solution that could never be afforded to be deployed within your organization.
But seeing that something made you consider changing the sourcing strategy in the first place — unreasonably rising costs or poor quality — there still remains a need for change.
There are two more options besides insourcing: one is to enhance your business relationship with your current vendor which in most cases is easily done by simply increasing the account team’s communications; the other is to opt for a new vendor.
Image 2: What actions are you currently taking to improve satisfaction with your most recent outsourcing initiative?
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