H. Narayana Swamy
Director, Global Vendor Governance Services -Alsbridge
Offshoring remains a big-ticket spend item, with offshore outsourcing contracts typically consuming large chunks of an organization’s total vendor spend. And while cost reduction is usually cited as the primary reason for going down the path of offshoring, the actual savings achieved have oftentimes been well short of the targeted savings that originally made the business case.
As existing outsourcing contracts come up for reconsideration, the eroded cost savings model is being reviewed in a variety of ways, discussed below.
Why is Insourcing considered?
In existing outsourced relationships, especially where there have been service delivery or customer satisfaction issues, whether real or perceived, the option of bringing some or all of the work back in-house may look attractive, if the premium to do so is reasonably low. Insourcing is especially a preferred approach when existing relations with outsourcing providers have been consistently poor, or the ability to suitably govern the outsourcing relationships has been a constant challenge. Or, companies that have “over outsourced” certain activities over time may decide they would either like to de-risk or be better off retaining those highly customized functions that are unique to their operations and not easily commoditized.
Sometimes the answer is not blanket insourcing, but by “tower”, or type of service, where a company may continue to outsource those services for which providers can deliver greater efficiencies—usually through a shared support or center of excellence model that would be costly for companies to replicate individually.
In this model, the insourced activities are completely removed from the scope of the service provider. This usually requires the contracted scope of work and the associated terms and provisions to be renegotiated, with special care taken to ascertain that resulting hand-offs between newly insourced and remaining outsourced functions are well defined and no ‘grey’ areas of responsibility remain.
Despite the potential benefits, insourcing has its own set of planning and transition overheads and risks, so the decision must be weighed carefully. Its success relies on the cooperation of the previous provider for termination assistance and the company’s ability to attract and retain its own key resources.
Most insourcing strategies require moving the work back to the home country and re-establishing processes and operations therein. This is fraught with risks and costs. Quite often these processes are substantially different from when they were offshored in the first place.
Secondly, getting similar skill sets in large numbers in the home country can pose its own challenges.
Nevertheless, the reasons for insourcing can be compelling. Hence companies may wish to look at an alternative that could address the primary reasons to insource as well as reduce the transition risks associated with this move. And that is to go the Offshore Captive way.
Retain Offshoring benefits when Insourcing
The use of captive offshore centers was pioneered by a few household name multinational companies and has been occurring since the 1980s. While the primary objective is to reduce costs, this model has also offers companies the mechanism to retain and protect key processes, data and skills that give them a competitive edge. The model also enables companies to own the strategic direction of their operation, rather than depending on a third-party’s leadership, for example, to make future strategic investments.
There have are some examples of extremely successful captive centers, yet many other companies have found it challenging to compete with global outsourcing providers to hire labor for their captive shared service offshore centers and to provide matching efficiency and quality of service. As a result, the captive units sometimes fail to keep up with demand or provide a quality service to their parent business units that is comparable to that of outsourcing providers.
Companies such as CaptiveAide (www.captiveaide.com) have emerged to assist clients with establishing their own captive units through a combination of consulting and operational services They act as a seed team and provide a local management layer, as well as a seed operational team, until the unit takes off and is able to operate on its own. In addition, they identify transformational opportunities for more mature captive operations that can result in increased value for the parent organization.
Importantly, they de-risk the many risks associated with setting up, running and scaling a captive entity and help achieve insourcing goals at optimal costs.
While this model may not work effectively for very small-scale operations, it is well suited when anticipated increases in future demand provide the offshore unit room to grow. It is also an attractive model for multinationals that have plans to establish or grow their marketing presence in the offshore location and is a great way to absorb the business culture of that geography into their own operations.
Conclusion
If the benefits generated by your outsourcing are coming into question, insourcing should be evaluated, alongside other options to de-risk, repair and improve the outsourcing option. Each option presents its own set of potential benefits and risks and must be considered carefully based on an organization’s overall needs, scope of work and business culture.