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Let Backsourcing Be A Strategic Move, Not a Tactical Remedy

by Martin Winter

Backsourcing may be a better term than insourcing for bringing outsourced services back in-house. Though it will probably never develop into a major trend in the IT services industry, and indeed happens relatively infrequently, backsourcing remains a valid option in certain circumstances. But those who find backsourcing attractive often do so for the wrong reasons and tend to underestimate associated costs and risks. If backsourcing is on your agenda, consider the following Top 5 steps first.

1. Design your strategic intent. Tactical considerations alone are not good reasons to backsource. Contract terms that have gone bad, an exaggerated cost of services, or a deficit in internal capabilities to manage the provider should all lead to measures like renegotiation, provider switch, or a revamp of the retained organization. Strategic reasons to backsource should stem from the business side of the enterprise: a need for faster reaction to market demand or strong external influences, such as changed legislation.

2. Ensure skill availability. Personnel with deep knowledge about the services being outsourced often transfer to the external provider, switch to other functions or leave the company. Backsourcing, therefore, can imply a need to retrain existing personnel, search the market for the talent that is not available internally and transfer knowledge from the existing provider back home.

3. Build in service integration. In today’s multi-sourcing environments, switching providers means reconfiguring technical, contractual and service management arrangements. In cases where the retained organization has primarily dealt with external providers, backsourcing may compound this task. Prepare to build up the internal capability for providing the backsourced service and simultaneously integrate it with other services that are outsourced.

4. Shape up transition management. Building skill and re-integrating the backsourced services are core tasks of the transition team. While transition is actively supported by the new provider in the case of outsourcing or provider switch, transition to backsourcing requires support from the client organization. Given the risks of service interruption and the potential implications of not achieving the intended strategic effects, a highly professional transition management must be in place for ultimate success.

5. Write a complete business case. The cost of steady state operation for an insourced service is most often higher than the same services provided externally. Therefore, design the business case to include the costs and risks incurred by skill availability, service integration and transition management. Don’t forget to express the expected value gained or business risk avoided through the strategic move, which should be the actual driver behind the backsourcing initiative.

Before taking the plunge into backsourcing, consider the alternatives, and base your decision on a sound sourcing strategy. ISG is well positioned to support its clients in their sourcing considerations. Contact Martin Winter for information on the ISG services that can help you achieve your sourcing goals.

About the author

Martin Winter contributes a wealth of professional experience to ISG client projects, which he has gained in over 20 years as an IT-expert, project manager, and management consultant. Founded on a sound academic background in technology as well as in business, his specialized knowledge and skills focus on IT service performance and IT sourcing strategy. His technological strengths within IT outsourcing lie in the area of server infrastructure, including datacenter and Cloud.