Is Outsourcing Losing Its Appeal?
By Samuel Greengard
The last two decades have brought forth wave after wave of outsourcing initiatives. Today, it's next to impossible to find a Global 2000 company that isn't outsourcing some type of business or IT function. Nevertheless, a just-released report from Deloitte Consulting, "From Bangalore to Boston: The Trend of Bringing IT Back In-House," indicates that some organizations are beginning to reel in the concept and bring certain functions back into the company.
Dane Anderson, a director at Deloitte Consulting, describes the situation as a "small but growing trend." At the heart of the matter is a return to insourcing as a result of poor customer service, or perceived lapses or breakdowns related to outsourcing. In many cases, the promise of savings hasn't matched the diminishing returns of dissatisfied customers.
The consulting firm, which received responses from 22 primary industries in 23 countries, found that 48 percent of respondents have terminated an outsourcing agreement early for cause or convenience. More importantly, 34 percent of those who terminated a contract for these reasons chose to bring the work back in-house. In fact, insourcing has emerged as a viable option, particularly when outsourcing does not meet expectations.
Overall, 62 percent of respondents said that it was "very important" to improve customer service or the customer experience, and the remaining 38 percent said that it was "important." But 77 percent of respondents indicated that cost also was a driver for insourcing.
"It seems counter-intuitive since cost reduction is often the main reason for outsourcing in the first place," Anderson notes. "However, the response can be understood in the context of outsourcing contracts that did not meet client expectations of cost reduction or other objectives."
Other key factors for brining work inside included improving controls (77 percent); gaining access to more flexible human resources models (77 percent); a desire to consolidate assets (69 percent); an attempt to gain a competitive advantage (62 percent); the goal of leveraging new technologies (54 percent) and the ability to gain a tax advantage (38 percent).
Overall, 21 percent of the companies that have returned to insourcing say they are "extremely satisfied" with the results; 58 percent are "satisfied," and 21 percent describe the situation as "neutral."
Deloitte notes that several challenges exist when companies return to an insourced model. One of the biggest problems is sub-optimal knowledge transfer. This often occurs when a company terminates a contract with cause, but doesn't have a provision to hire in-scope staff from the outsourcer.
Other key hurdles include the need to build internal capabilities, such as delivery management systems, and the realization that a cost increase could occur, particularly in the early stages of re-establishing internal capabilities.
"Outsourcing is still the dominant trend in the marketplace," Anderson concludes. "However, there is a small but growing reversal of this trend in specific situations and with respect to specific functions.
"Those that pursue an insourcing model should fully understand the challenges and how they can be mitigated during contract termination. Any plans to insource should start with a thorough business case of the transition costs and the future support model."