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Insourcing: When Does it Make Sense to Bring Services Back Home?

by ISG

While outsourcing continues to grow at a solid pace each year, a number of companies have needed to insource a part of their formerly outsourced services portfolio. The drivers behind these decisions include: a CEO-mandate to change corporate sourcing strategy, a way to remediate a troubled outsourcing relationship, or a healthy look at an old sourcing decision to find the right mix of in-house and outsourced services based on current business goals.

Mergers and acquisitions can also drive insourcing decisions. A sound post-acquisition integration plan should include a common sourcing strategy between the two companies, which may require the outsourcing of service functions that are in-house at one company and the insourcing of a service function that was previously outsourced at the other.

While successfully executing an insourcing project is very achievable, it’s important to keep in mind that it can be more difficult to insource a service than it was to originally outsource it. The complexities of making this transition may require rebuilding services and leveraging capabilities from the ground up that were once fully owned by the service provider. If business events have led you to consider insourcing, here are the ISG Top 5 things to keep in mind:

  1. Ensure you have an accurate business case. Compile a fully documented base case, target operating model, and costs to achieve the transition. Be sure to document the goals and objectives of the project and clearly identify risks and impacts. Before undertaking the project, test and validate the business case to ensure that the objectives are attainable and the cost, benefits, risks and impacts are fully understood. Then you can take your case to upper management for approval and buy-in.
  2. Have a clear end state defined. Insourcing is like building an office campus; it requires a very clear picture of the end state in order to build or re-claim the services. This “blue print” is your target operating model and should include all eight operational aspects of service delivery with an end state cost model. Ambiguity or missing detail will cause confusion and introduces significant risks to the project’s success.
  3. Engage with your service provider. The service provider will need to be very active in your project.  Negotiate a transition and “wind down” agreement with consideration for a reverse transition of staff, asset repurchases, transition costs and incentives and penalties to drive service stabilization during the project. Keep in mind that the service provider is the “home” organization and in-house will be the receiver.
  4. Design a comprehensive service impact plan. To avoid service disruptions and level or service degradation, be sure your service impact mitigation plan focuses on anticipating and mitigating the known issues that cause service degradation. Build in communications and escalation triggers as well as considerations and costs for post-cutover stabilization efforts.
  5. Use it as an opportunity to improve the services. An insourcing project can represent an opportunity to build a new operation or capability from the ground up. Realize this “green field” environment to improve the services, their underlying processes and enabling service delivery tools.

While navigating the risks and complexities of insourcing can be challenging, ISG can help you with the proven experience, objective advice, knowledge and data to achieve success. Contact Kyle Spencer to learn more.