Today outsourcing, tomorrow insourcing?

My first experiences with sourcing dates some eight years or so back when a large telecom operator bought way overpriced 3G licences and had to sell off non-core activities to evade a chapter 11 situation. One day Joe was a colleague of John and the next day John was suddenly the ‘client’ which did not even offer Joe a cup of coffee anymore unless Joe (now suddenly ‘one of the many suppliers we can pick from’) would agree to a 20% price cut for the same services they delivered the day before. This example of ‘outsourcing’ (‘throw-over-the-fense’ describes it better) was one of the first I was involved in (as a non-executive) and learned me a thing or two about how not to do it. The funny thing in this example is however that the activities that were then considered non-core are now being considered core. Even worse, the same telecom provider has an active acquisition strategy in the area it outsourced less then ten years ago. In other words, is outsourcing just another business cycle? Today outsourced tomorrow back at your old desk?

Expanding your internal (supply) capabilities is called an acquisition by the fast M&A boys and girls and typically ‘insourcing’ in my world (I will elaborate more on all the conflicting and overlapping terms in another post). There are various definitions floating around on the internet for the term insourcing, but two are to me worth mentioning here. The first one is very simple: activities are being brought back in house after a period of outsourcing them. The other is more theoretical and comes from Thomas L. Friedman’s (writer of among others The World is Flat): Insourcing is using your department’s expertise to add value in a horizontal manner. So making your products and services more appealing by collaboration with other companies in the value chain. This allows small companies (e.g. the dentist) to use a sophisticated application to manage the patient administration without needing an elaborate IT department. A larger company provides this part of the dentists ‘value proposition’.

In my opinion is the term ‘insourcing’ gaining more popularity due to three reasons:

1. It a sign that outsourcing is maturing as a method to optimize the value chain and companies which initial thought that outsourcing was some magic money generator which had no downside woke up to smell reality. In certain the contracts were not being renegotiated or resourced to another supplier, but the choice was made for a re-transition (= another word for insourcing after first having outsourced. Confusing vocabulary isn’t it).
2. The second reason is related choosing another strategic direction resulting in re-labelling non-core to core or changing the desired level of control the organisation wants to exercise over the outsourced activities. See the telco example mentioned before and the following link for outsourcing and insourcing within the Pharma industry in Asia: the Pharma industry in Asia (PWC site, no login required)
3. The last reason is related to the book The World is Flat in which Friedman uses UPS as a prime example and in which this companies employees perform services (beyond shipping) for another companies. For example, UPS itself repairs Toshiba computers on behalf of Toshiba. The work is done at an UPS hub in the United States, by UPS employees.

Some of the other supply options which are related to insourcing‘ are the creation of a joint venture (shared equity with the vendor) or a Build Operate Transfer (BOT) engagement where the supplier builds and runs a shared service centre/ captive for a pre-agreed period before handing it over to the client which will run it as a shared service centre. All models have their pro’s and con’s and should be used accordingly (also more on this in future postings).