By Charlie Mayes, DAV Management
Outsourcing has become a strategy of choice for many organisations in the past two decades as they look to achieve economic gains. Indeed, it has seemed that little could stop the outsourcing juggernaut as companies moved manufacturing, IT and other business processes out to third party vendors. While outsourcing still dominates, recently there has been a growing number of companies who are bringing previously outsourced functions back into the business.
Recent research by Deloitte also shows a small but growing reversal of the outsourcing trend. In its 2012 Global Outsourcing and Insourcing survey released in March 2013, 48 percent of respondents said that they had terminated an outsourcing agreement early, either for cause or convenience. While the majority of those businesses subsequently chose to move their outsourcing contract to a different service provider, 34 percent said they decided to bring the work back in-house. According to Deloitte, the three main drivers were to improve customer service, to gain greater control over functions that were previously outsourced, and ironically perhaps, to reduce costs.
GE is one high profile company that had been outsourcing but recently brought its appliance design and manufacturing back in-house. To do so successfully however they had to effectively start from scratch, re-creating the manufacture of a product from an economy where labour was cheap to a more expensive market, which involved a complete product and processes redesign. No small feat but the end result was startling. GE managed to cut the work hours necessary to assemble the product from 10 hours to just two hours. The material and labour cost went down while the quality and energy efficiency went up. Time to market also improved significantly and the end cost to the consumer was reduced.
While GE has achieved much documented insourcing success, the truth is that few companies who look to bring functions back in-house in this way find that they are adequately prepared to do so. The challenges can be immense.
When a company outsources the main problem is that the internal knowledge and understanding of that product or process naturally fades over time. As a result companies face significant skill gaps if they try to insource. In GE’s case the company had to undertake a complete product redesign, which will also have required a change of business processes to support this change. The need to rebuild internal capabilities for a job that has long since been outsourced, and the potential for resulting cost implications, needs to be carefully examined and factored into the insourcing business case.
When organisations look to insource the benefits to the business have to be clear. One of the key areas of focus has to be how to structure the organisation to transition the delivery of that service or product in-house. Often organisations assume that this transition will happen naturally when new infrastructure or processes are implemented. However an organisation will generally have to completely restructure parts of its business to accommodate for that new service or product delivery. It’s a significant undertaking and one that has to be supported by the right skills and expertise.
One global corporation that we worked with decided to insource a business critical service when it embarked upon a major upgrade to its core IT systems in order to strengthen the organisation’s competitive position. It realised that while the original outsourcing contract made good economic and operational sense when it was put in place, the world had changed and, like GE, it felt that there were strong business benefits in bringing the development and delivery of a new service back in-house
On paper the business case for insourcing seemed sound. In reality, however, a number of organisational and operational reasons meant that it proved hard to get the transformation programme up and running.
The problem? Because the service had been successfully outsourced for so long the in-house team no longer possessed the skills to deliver the kind of service now required. And, crucially, it also lacked the skills and experience to tackle the programme of work needed to transform to a new, state of the art, insourced service. I’m delighted to say that DAV was able to help them get to grips with this and the programme is now on track to deliver. As a result, not only will the organisation be able to deliver a more cost effective, up-to-date and flexible service to its customers, it will also benefit from significant savings and greater profitability. It’s a perfect example of how a properly planned and executed insource can provide better returns than a more traditional outsource arrangement.
Whether to insource is a significant decision that has to deliver clear benefits to the business. The decision has to be supported by a strong business case and the organisation has to ensure it has the right skills in place to make the initiative a success. I don’t think outsourcing is on the way out anytime soon, but for those who believe that insourcing might be the right option for them, with a solid business case and the right approach, skills and expertise, insourcing can work to great advantage — just as it has for our client and GE.
About the author
Charlie Mayes — DAV Management
Charlie Mayes is a highly experienced Programme Director with an excellent track record of managing large-scale IT and business change to deliver tangible outcomes across many industry sectors including financial services, air transport, business support services and healthcare.