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Outsourcing vs Insourcing

, April 18, 2013, 1 Comments

insourcing-outsourcing“Do what you do best and outsource the rest,” said management guru Tom Peters. It is mostly unclear whether he was pro or anti outsourcing when he uttered this.  But we know for sure that outsourcing is a reality to which more than half of the world has woken up, for around a couple of decades now at least. But is outsourcing driving business benefits as much as it should always?

It would help us to analyze its viability vis-à-vis emerging options like ‘insourcing’, cloud computing, internships etc. Several weeks ago, we touched upon the significance of cloud-based IT.

We’ll dwell on cloud as a powerful and economical way of operating businesses in the days to come. Let us now look at how ‘insourcing ‘is being increasingly talked of, especially in the developed world.

Is insourcing the exact opposite of outsourcing? Wikipedia defines insourcing as “cessation by a company of contracting a business function and the commencement of performing it internally,” and also “bringing a third party outsourcer to work inside a company’s facility”, while Investopedia, says it  is simply “assigning a project to a person or department within the company instead of hiring an outside person or company to do the work”  This way, it is clear that it carries no one standard definition . However we can safely wager that it refers to an economically viable and more supervisory alternative to existing methods of operating processes.

Thomas Friedman, the award-winning NY Times columnist, references ‘insourcing’ in his all-time bestseller ‘The World is Flat’. When UPS, the world’s leading logistics organization came up with the tag line ‘your business synchronized’, Tom’s interest was piqued and he decided to visit their headquarters in Atlanta, USA. What he discovered was that the company now not only did shipping, but also focused heavily on end-to-end supply chain management. Let’s say for instance, a broken laptop needed to be dropped off at the user’s nearest UPS facility for repair. While one would correctly assume that the UPS folks would ship the problem PC to the manufacturer, say, Toshiba, it was in fact UPS that actually repairs the computer in a UPS-run workshop at its Louisville hub.

It turns out that Toshiba had approached UPS to design a better solution for their faltering after sales service, and the latter came up with this idea of managing the repair and maintenance along with laptop shipping. This process, Tom came to discover, was called ‘insourcing’, a whole new form of collaboration and creating value horizontally. It was ‘insourcing’ because the UPS engineers came right inside the client’s facilities, analyzed the manufacturing, packaging and delivery processes and then designed, redesigned and managed the entire supply chain process. UPS oversees the whole journey from factory to warehouse to customer. It was insourcing because UPS was managing key processes but not remotely, which is characteristic of outsourcing.

Consider this.  A technology firm has historically been outsourcing technical documentation to a technical writing firm, and now decides to have its engineers spend some of their work hours and get into technical writing. Insourcing again. Here, the engineers might have to take technical writing courses at a local college or institute before being able to complete the task successfully.

This probably has given us a better idea about how businesses are opting for insourcing today. So, what drives businesses to insource?  Fundamental economic principles, the same factors that made many companies outsource work in the first place. Outsourcing destinations that offered cost advantage a decade ago cease to do anymore. Economies like India and China have grown exponentially and created higher wage requirements.  While this appears to be the biggest deciding factor in favor of ‘insourcing’, there are other strategic and long term imperatives that are making companies look this way.  Need for greater control over key production and quality, limited reliability of suppliers, increasing demand for locally sourced products in advanced countries,  need to preserve design secrecy are some of the most prominent drivers of insourcing.

A recent survey by consulting major Deloitte, has found a small but growing number of instances of companies bringing home the IT work they had outsourcing to third-party vendors for several years. Close to 50% of the respondents in the 2012 survey said they had terminated an outsourcing contract before completion, “for cause or convenience,” the audit and consulting firm said. And among those who terminated the agreements midway, 34% chose to get the work done in-house.

“Though insourcing is a small trend as compared to the global outsourcing juggernaut, given the maturity of the outsourcing industry, we are seeing more and more clients wrestling with the question of whether an outsourcing deal that isn’t meeting expectations should be re-tendered or ‘insourced’,” Deloitte said in its 2012 report. Similarly, General Electric (GE), despite being one of the pioneers of offshore production, is moving much of its remote-managed appliance-manufacturing operations back home. Consider 787 Dreamliner, Boeing’s newest passenger plane, which has been in the news for equipment failures.

Analysts have blamed extensive outsourcing for the repeated fuel leaks, batteries catching fire and other teething problems. As much as 70% of the design and assembly was outsourced all these years, bestowing the knowledge and profits to the suppliers, and away from Boeing.  Consequently, the company is running billions of dollars over budget, has malfunctioning parts and is grounded by the Federal Aviation Administration. Conversely, many other successful companies in the industry are now bringing manufacturing and design back in-house, back from China.

So, if insourcing is indeed the panacea for operational inconsistencies across manufacturing and IT, why aren’t businesses quickly falling in line and kissing offshoring and outsourcing goodbye? What’s making insourcing work, and what fails this concept against the current favorites that include cloud computing? Insourcing offers a higher degree of control over manufacturing inputs, provides increased visibility over the processes and delivers economies of scale and scope.  Imagine the amount of effort and expenditure required for GE to monitor quality and timeliness at the workshops in various parts of China. While the decisions would be made at the headquarters, the foot soldiers of quality would have to traverse several thousand miles and stay put, to ensure that the appliances continue to be as good as they always were. On the contrary, a major prerequisite of insourcing is the need for higher volumes of production.

Some of the other disadvantages include higher investment on equipment, limited use of dedicated equipment, challenges with supply chain integration, loss of several man-hours in re-training the workforce etc. Outsourcing, all along, has continued to offer cost considerations from newer destinations, to businesses across industries, and not just manufacturing and IT. Added to that, lower end business processes will not have to be a responsibility of the company again.

Enterprises looking at ‘insourcing’ as defined by their business agenda, and as an entirely new way of doing business may realize significant returns, but for those simply wanting to ‘insource’ what is currently outsourced, it may well serve to research and analyze deep before deciding to stop milking the cash cow.

  • Ramesh

    Very interesting perspective. However, I believe it is a bit more involved than saying “Do what you do best and outsource the rest”.

    I think it is more like “Focus on your core functions and shift your non-core functions to partner(s) who have that as their core function”.

    I think there are some distinct advantages of doing the above
    (1) Transaparency – Does it allow you to understand what it costs to run those functions?
    (2) Predicitability – Does it allow you to forecast the cost?
    (3) Controllability – Does it allow you to control the cost?

    I believe in a nutshell it is about achieving comparative advantage to gain competitive advantage.