The challenges, risks, and benefits of Outsourcing vs Insourcing
Soon after the financial crisis of 2009, outsourcing gained drastic momentum as companies sprinted to gain competitive advantage and cost savings by sending their ‘non-core’ business operations offshore. While customer service and accounting departments bore the initial brunt of this master plan, things have started to change in the recent years. Enter X-aaS (Everything as a Service) models, AI and Machine Learning innovations and improvement in internal sourcing maturity resulting in cost savings, the pendulum of outsourcing has well and truly begun to swing the other way. Not exactly in Insourcing, but the new ‘smart-sourcing’ or rightly called “Right-sourcing”.
“Be careful when you focus on cost, you might get a cheap service but not a good or valuable one”, says Tim Palmer, former General Manager Workplace Technology, National Australia Bank, speaking at the recent CIO Leaders Summit in Melbourne. Based on his wide industry experience in outsourcing with companies like IBM, Telstra, Tech Mahindra etc. he said that the trend is now reversing, and his work has evolved to insourcing the same Technologies. According to a Deloitte survey, the #1 reason for outsourcing in 2016 was ‘Cost Cutting’ and in a similar survey in 2018, cost cutting has moved down to #5 as a driver for outsourcing. Several challenges have tainted the passionate movement of ‘outsourcing’, some of which are:
- Vendor’s ability and willingness to deliver – maturity (or lack of) / revenue generation focus
- Contractual Limitations – SLAs, Penalties/Rewards, Timeframes, Reviews, Exit/Unwind clauses
- Cost Increases – Hidden costs in Statement of Work (SoW) and no focus on Total Cost of Ownership (TCO)
- Poor time to market and change management ability – Speed of delivery
- Poor Quality of Service (QoS) and User Experience (UX) – Affecting customer satisfaction and brand image
- Difficulty of use – translating requirements into customer outcomes
- Regulatory Concerns – Disaster recovery issues, business process continuity and Data location
- Loss of Control – loss of IP, loss of technical muscle/knowledge gap, Lack of value-add/innovation
- Vendor Lock-in – Cost of unwind/portability, inability to match industry innovations
- Loss of Technology currency
- High attrition of offshore resources
Once the strategic capabilities are clearly defined and roadmap laid out, the ‘Right-Sourcing’ decisions will automatically fall into place. Lessons learnt from previous experience and industry stories will enable satirizing the old mindset and set the tone of becoming a ‘smart value driven customer centric organisation’ of the future. One of the best examples of Right-sourcing is the widely publicised policies of Donald Trump to bring back manufacturing to America. With rising cost of living and wages in China, the timing could not have been better for America to right-source manufacturing. Companies like Ford, GM, have quelled plans for offshoring production and committed to opening factories in the US. While Trump has clearly claimed the 312,000 job growth, the Obama camp says, of course the results of Obama’s work is now paying dividends after the logical 2 year cycle. But hey, let’s leave the politics for another article, shall we? Point was, cost cutting is no longer the strategy for companies or countries who want to win with their customers or citizens.
Improving customer service is the most important driver to Insourcing followed by increase in control and surprisingly cost reduction.
Customer facing roles and their importance have been clearly identified in maintaining brand equity. Cost reduction is an interesting driver as the entire point of outsourcing initially was cheaper contracts offshore. However, the ‘true cost’ of maintaining the operations and the huge hidden costs of change management threw the savings away, to a large extent. This calls for action on three possible ways to right source:
- Renegotiate the existing deals with outsourcers
- Insource core strategic systems and processes
- Re-Tender – alternate delivery models – ‘Cloud sourcing’ or XaaS-ing
Talking about pendulum swings, why not challenge your thinking right now. “What did the pendulum say when he left?”. Well done! if you guessed the right answer “I’ll be BACK” (yeap in the Terminator’s accent as well). While at this juncture we are talking about insourcing a lot more, there is no guarantee that it’s here to stay. The outsourcers will no doubt up their game and hit back with a vengeance to gain back that momentum. Success or failure of a strategy is, as they stay always relative.
Focus Network is a leading B2B event company that builds and creates C level communities throughout ASEAN, Greater China and ANZ for commercial connections to our clients to engage directly with C-level executives throughout a key number of verticals. Some of the excerpts in this article has been shared from one of our recent well-acclaimed CIO Leaders Summits Australia held in Melbourne
– Jilfy Joseph
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