Recently, a number of organisations have begun to re-examine their outsourcing arrangements and are bringing outsourced functions back in-house, a process called "insourcing". Insourcing is not always the answer to the problem of a "failed" outsourcing, but it is certainly an option to consider. However, bringing outsourced functions back in-house may not be a straightforward task.
Over the past few years, much has been made of the trend towards outsourcing business process and information technology functions to third-party providers. Recently, however, a new trend has started to emerge (both in the public and private sector) whereby outsourced functions are being brought back in-house (so-called "insourcing").
The reasons for deciding to bring services back in-house probably have much to do with why the services were outsourced in the first place: for example, lowering costs, accessing "best practice", and creating greater flexibility. In a well-run outsourcing project there is no reason why the supplier should not be able to deliver these objectives, but in reality not all projects live up to expectations, and this can lead customers to consider insourcing. However, "taking back" services which are being provided by an external provider may not be a simple task. This article highlights the most important issues the customer needs to consider.
First, the terms of the outsourcing agreement will be of key importance. Unless the agreement is due to expire naturally there is the question as to whether the customer can terminate early for convenience and, if so, whether any early termination fees are payable to the supplier. The costs of the supplier’s assistance in transferring the affected service must also be taken into account.
Secondly, the customer needs to consider what is required to take over responsibility for service provision; for example, what assets and contracts need to be transferred from the supplier to the customer; can they actually be transferred and, if so, at what cost? Hopefully the outsourcing agreement will have pre-empted such questions – if not, the customer will need to consider what alternatives are available if such a transfer is not possible. Another issue is the extent to which the customer will need to rely on the supplier’s own proprietary materials in order to deliver the service. Where the supplier has been providing the services for several years, the supplier’s materials may have become embedded in service delivery such that the customer needs the right to use the supplier materials, at least until the customer can transition over to other materials. The question of a licence fee would then arise.
Finally, and perhaps most importantly, there is the question of knowledge. As the years go by, the supplier, rather than the customer, will have the service delivery knowledge. The customer will need to consider whether staff are to transfer to the customer (this may be difficult in relation to an offshore outsource and the terms of the outsourcing agreement are obviously key) or whether the customer can procure alternative staff who can get up to speed quickly (perhaps assisted by the supplier providing knowledge transfer services as part of transition).
Conclusion
Insourcing is not always the immediate answer to the problem of a "failed" outsourcing but is certainly one of the options the customer should consider, particularly where day-today control of service provision is a higher priority than cost/labour arbitrage. Outsourcing agreements should always be drafted to ensure that, if the insourcing option is chosen, the transition is as painless as possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
