Reasons to insource

Which way is better?

The supply chain industry is one that’s constantly in a state of flux, with nothing ever seeming to stay the same for very long. Globalisation, ever-changing customer needs and other market forces serve to maintain a state of liquidity, requiring companies to frequently re-evaluate strategies and business models.

Perhaps for that reason, companies that outsource logistics and other activities, sometimes recognize the need to bring competencies back in-house. That’s no bad thing of course, provided the reasoning behind the decision is sound and the consequences thoroughly evaluated.

So what might drive companies to return to insourcing, especially after the painstaking exercise of finding an outsourcing partner, drawing up complex contracts and service level agreements and building a relationship which at the outset, is foreseen as a long-term partnership?

Here are eight of the most common reasons why companies may bring outsourced processes back in-house.

 

1. Expected Cost Savings Not Realised

One of the primary reasons to outsource is to achieve cost savings. It’s generally expected that a third-party provider can perform its function at lower cost than the client company could otherwise achieve. If the expected cost reductions fail to materialize or, if the costs of outsourcing increase over time, the client may bring the outsourced activities back in-house.

Unfortunately, sometimes the client is as much to blame for this problem as the provider. In order to set up an outsourced operation which reduces client costs, the client must be totally transparent from the very start of the relationship.

Some client companies though, fail to enable the required transparency, often citing confidentiality as a necessity. However, this is seldom a fruitful approach, since an outsourcing venture really requires the full collaboration of client and provider, sharing information freely as trusted partners.

 

2. Service Levels Not Met by Provider

This is another common reason why companies bring outsourced processes in-house. When a savvy client company decides to outsource, it will draw up a comprehensive service level agreement, sometimes with the involvement of its customers, which will bind the third-party provider to meeting specific, agreed standards.

A service level agreement will often contain a termination clause, providing for the client to exit the outsourcing relationship if the provider consistently or frequently fails to meet the service levels. Even without an exit clause, client companies will sometimes shoulder the expense incurred by bringing services back in-house if the provider cannot maintain standards above cited service level KPIs.

 

3. Customer Dissatisfaction/Pressure

As in just about every industry, the customer is master of the supply chain arena. Even if a third-party provider is meeting service level expectations, there are times when one or more customers of the client company become dissatisfied with an outsourcing arrangement.

There could be a number of possible reasons for customers to object to outsourcing. For example:

  • Customer expects higher service levels than those agreed between client and provider
  • Customer’s supplier policy no longer supports, or is amended to oppose supplier outsourcing
  • Customer perceives that third-party provider is not effectively supporting products or services
  • Customer negotiates new SLAs which a third-party provider is unable to commit to.

When any of these or other reasons cause an outsourcing agreement to conflict with customer needs, the client may find it necessary to bring the outsourced processes back in-house. If a continued business relationship with a valued customer is at stake, there may indeed be little choice but to do so.

 

4. Politics and Public Relations

In some cases, political pressures and especially public opinion regarding overseas outsourcing (offshoring) might persuade a client company to yield and bring outsourced processes or services back in-house.

 

5. Forces in the Outsourcing Marketplace

Another offshoring issue that might ultimately force a company to return to insourcing is the impact of changing pressures in the overseas marketplace. Wage inflation in particular can create staffing challenges for outsourcing providers. This, in turn, can lead providers to take cost-cutting action in relation to the workforce, with a resultant downturn in service quality.

When these marketplace pressures begin to destabilize the outsourcing partnership or impact customer service, the client may revert to in-house control of previously outsourced activity.

 

6. Breakdown of Outsourcing Relationship

Outsourcing partnerships are very much like marriages. In order to survive, both parties must prove themselves trustworthy, communication must be continuous and effective and a fully collaborative approach must be taken to solving problems. However, just like marriages, relationships between clients and providers sometimes break down.

When an outsourcing arrangement disintegrates, typically as a result of poor management by one or both parties, the client has little choice but to look for a new partner. In such a situation though, some companies may prefer to bring the expertise and processes back in-house.

 

7. IT Integration Issues

Business information systems are playing an ever more pervasive part in relationships between suppliers, partners and customers. In some cases, the inability to align and integrate IT solutions can result in a company’s decision to take back their outsourced business activities.

This situation is most likely to occur when a client and customer have the means to integrate, but the cost of integrating the 3rd party’s IT solution is prohibitive. Fortunately, as information technology continues to develop, it’s becoming easier to align systems in an interoperable, if not fully integrated way, meaning technology is becoming less of a limiting factor in outsourcing arrangements.

8. Concerns About Provider Security

Occasionally, in logistics especially, a client company’s management may feel it has no option but to bring outsourced work back in-house as a result of security problems within the provider’s operation.

For example, if a third-party logistics provider repeatedly suffers theft, damage, spoilage or tampering of a client’s products and appears to be unable to get control of the situation, the client may decide that returning to an insourced operation is a more secure solution.

Better to Have Loved and Lost?

Sometimes even the best relationships have to dissolve, but parting company with outsourcing partners and taking back direct control of logistics or other business processes, should not be considered as failure. Continuing to outsource when customer retention, competitiveness, profit or even corporate image are at stake, would be a far more regrettable folly.

Fortunately, most outsourcing partnerships, if planned carefully and managed professionally, flourish and add value to the client company’s business for a lengthy and indefinite term. If you are ever in the situation where you need to bring an employer’s business operation back in-house, consider the experience one from which your company can grow. It’s better to have tried a venture than to forever wonder if outsourcing might be the perfect way to strengthen your supply chain strategy.

Best Regards

Rob O'Byrne
Rob O’Byrne
Email or +61 417 417 307