Driving Growth

Insourcing versus outsourcing: an intelligent approach

By: Samantha George and Jessie Carpio

8 February 2016

Management has always been in search of competitive advantages. In recent years, management has focused on resourcing – be it outsourcing or insourcing – as one of the aspects of competitive advantage.

Whether to insource or outsource work is an emotive topic.

It’s helpful to start by clarifying the definitions of terms that are widely used but often confused. Simply put, outsourcing is the provision of specialist skills by a specialist third party service provider who focuses solely in this area. Insourcing is the provision of those services by an in-house team. Offshoring relates to the provision of those services by an outsourcing provider based in a different country (or continent) to that of the purchaser or user.

Why insourcing and why outsourcing?

Whether outsourcing or insourcing, the key drivers are essentially the same: the search for increased efficiency, and reduced cost, fast adoption to changing standards and regulations, and risk management.

Since the turn of the millennium the trend towards outsourcing has gathered pace, initially for highly transactional activities in IT and HR but increasingly for accounting, procurement, facilities management and even legal process. The outsourcing of non-core functions has become prevalent that most Fortune 500 companies have adopted it and benefited from it.

In the last few years, a small but noticeable trend has emerged within larger organisations towards bringing activities back in-house. In the UK, recent high profile examples have included the Cabinet Office 'backsourcing’ its core IT function and IBM hiring 1,000 designers globally to take its design capability in house. Similarly, in the aftermath of the credit crunch and the payment protection insurance (PPI) scandal, banks have shown a desire to bring functions involving client interaction back in-house in an effort to put the customer at the centre of what they do.

Reasons for Oursourcing

  • Gives the business the competitive advantage (management can focus on core activities)
  • Improves efficiency in outsourced processes – management and provider agree on accuracy and timeliness at all times through service legal agreements (SLAs)
  • Faster turnaround on issues raised – management can demand this
  • Access to skilled advice and expertise (update on new rules and regulations and compliance with regulatory reporting requirements)
  • Risk management initiative – enhances control and transparency and allows continuity of processing
  • Cost reduction initiative – company has lower infrastructure / technology investments and lower operational labor costs

Typical justifications for insourcing

  • Closer collaboration for functions like IT, which are increasingly entwined in every aspect of the business.
  • The need to drive innovation, which directly benefits the business (rather than benefiting the outsourced provider).
  • Lower real costs of internal resource for large ongoing contracts (no third party margins).
  • The opportunity to invest in internal capability.
  • Political and cultural sentiment against offshoring.
  • Wage deflation and increased labour supply.
  • Cloud computing and big data acting as enablers for effective and affordable internal provision.
  • Accountability and the need for greater control.

Other reasons cited are due to issues that could arguably be alleviated with better planning and management of the relationship, such as:

  • A need for greater control driven by a stricter regulatory environment.
  • Reputational impact, particularly the backlash from a customer and colleague perspective against outsourced call centres.
  • The failure to realise promised cost savings, often because costs such as oversight are not properly factored in.
  • Expected performance levels not being met.

Towards an intelligent approach

In our experience, the right provider for a particular resource depends on a range of factors, including but not limited to business size, sector, market and growth stage. Taking each scenario on its own merits and adopting a measured approach is therefore vital to finding the right solution in each case.

It is worth remembering that outsourcing has evolved significantly over time to create a mature market offering increasingly sophisticated solutions. Your potential providers should be experienced and professional enough to engage in a conversation regarding the best approach, bearing in mind that there are functions or services that are better kept in-house.

As a guide to that the shape of that conversation, keep in mind the following steps.

 

Step 1: What are your drivers?

Having prepared your business case and secured internal buy-in, you should find these processes mean you are clear about the drivers behind the decision. Some of the questions included in these stages are:

  • Is this a core capability for your business or a peripheral function?
  • Is there a definite need being met? For example if your business case is based around increased control, why is this needed?
  • Is the change feasible in terms of potential disruption to the business?
  • Is the change sustainable over the long term?
  • Are you just taking a problem and putting it out of your reach?
  • Are the functions more efficiently done outsourced or in-house? Will the efficiency lead to cost reductions?

Step 2: Ensure quality is achievable

Any good service provider should be able to supply you with appropriate case studies and testimonials, and help you in answering the following questions:

  • What are your requirements in terms of the necessary checks and balances to benchmark the performance of your provider?
  • Is the contractual relationship defined clearly and is it flexible enough to provide effective control and cope with changes in requirements?
  • Does your chosen provider have the capability to deliver your requirements?
  • Has your provider invested in the proper communications and technology infrastructure to adequately serve you?
  • Is the provider willing to commit to service level agreements and KPIs?

Step 3: Consider secondary impacts

A common mistake for businesses considering outsourcing for the first time is the failure to account for the secondary impacts that the change to an outsourced provider will have. Make sure you have considered the following:

  • Have the potential resource requirements for managing the provision been factored in?
  • What effect will there be on career progression and talent retention in your business? Can these employees be reassigned to other departments or re-trained for other functions?
  • What will be the impact on your ability to innovate and evolve?
  • Should the outsourcing turn sour, how easy or difficult would it be to switch provider or bring functions back in-house?

Finally, the transition needs to be planned carefully to minimise disruption. As much as 40% of your time should be spent on this, although a good provider will do much of the work for you – ensuring that a detailed plan is in place, all transition costs are budgeted for, and appropriate KPIs and metrics are agreed.

In addition, it remains vital that there is clear oversight from within your business and that overall responsibility for managing the relationship with your provider and retaining knowledge of the outsourced resource is clearly delegated to a specific individual internally.

A portfolio approach

There is no one-size-fits-all solution to the insourcing/outsourcing issue: any decision, whether to engage an external provider, improve a function back in-house or simply leave things as they are, should be judged on its own merits. A portfolio approach, where functions are broken down and analyzed whether each function, using a range of specialist providers will be performed better and at reduced cost and, with core services provided internally, is usually the best answer, but the precise profile will vary from business to business.

As business grows and matures, the search for competitive advantage will always be present. Thus, the need to have different elements under control in-house or outsourced to specialist providers will always change, so it is important to review your requirements regularly.

Samantha George is the Head of General Compliance and Outsourcing at Grant Thornton UK. Jessie Carpio is Partner and Head, F&A Outsourcing Division, P&A Grant Thornton, and is also the President, P&A Grant Thornton Outsourcing, Inc. Grant Thornton International Ltd. is a leading global business adviser that helps dynamic organizations unlock their potential for growth. Punongbayan & Araullo (P&A) is the Philippine member firm of Grant Thornton International Ltd. For inquiries, you may direct them to 988-2288 ext. 760 or visit our website at grantthornton.com.ph

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Notes to editors:
About P&A Grant Thornton
P&A Grant Thornton is a leading professional services firm with a proven track record of high-quality work. P&A provides value-added services to clients through a client-caring team of audit, tax and business professionals who utilize leading-edge systems and technology and are guided by the highest standards of quality, integrity and competence.

About Grant Thornton International Ltd*
Grant Thornton is one of the world's leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to solve complex issues for privately owned, publicly listed and public sector clients. Over 31,000 Grant Thornton people, across 100 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work.

Grant Thornton International is a non-practicing, international umbrella entity organised as a private company limited by guarantee incorporated in England and Wales. References to "Grant Thornton" are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients.

*All references to Grant Thornton International in the press release and this “Notes to editor” section are to Grant Thornton International Ltd.  Grant Thornton International Ltd is a non-practicing, international umbrella entity organized as a private company limited by guarantee incorporated in England and Wales.

As published in The Philippine Star dated 08 February 2016