This edition of 4xi Industry Insights goes through the differences between Insourcing and Outsourcing, the Pros and Cons, and the opportunity for organizations to make an informed decision on which is the best route for you and for your business.
Each organization is unique and has its different needs. Every business has a set of core competencies and focus and a series of support services it requires to operate. The dilemma becomes when considering which to manage yourself versus hiring external partners, and expertise.
It’s hard to imagine a university outsourcing its curriculum, a hospital outsourcing its surgery, or a car manufacturer outsourcing its vehicle production. But think about those organizations, like Nike, Apple, and Google, who all outsource what for many might be considered as core, retaining only the critical business elements in-house.
But then in the world of support services, its difficult to comprehend how such activities as facilities services, food service, conference center management, fitness, even childcare, and employee transportation can be considered as anything but a distraction to the core focus of many businesses – and that is why there is a high level of outsourcing in these areas – but is that right for everyone?
DEFINING INSOURCING VS. OUTSOURCING
These are the methods of dispersing work among different departments internally or with different companies externally. Insourcing is typically done solely from the organization's own operational infrastructure, while Outsourcing leverages external expertise and infrastructure to perform a specific task or tasks. One leans on external expertise, the other on internal resources.
"There is a reason why many organizations decide to outsource and mainly around the question of risk and reward. What are the risks associated with Insourcing, and what is the upside?"
For some organizations, insourcing is an important source of cultural pride. No matter what department of the organization, employees all belong to the same organization, they get the same name on their paycheck, retirement benefits, opportunities for career progression. The organization is one and fully aligned.
Outsourcing may be seen as hiving off profitable dollars to external organizations, increasing the risk of breaches in confidentiality, conflicts of interest, or just simply being separate organizations, a fundamental misalignment.
"Many of these perceptions are unfounded and should not get in the way of your decision."
Professional outsourcing partners
From all-encompassing, multi-service integrators to individual service specialists, the choice for outsourcing is wide and varied. These organizations have the necessary expertise and experience to deliver in their chosen fields of specialism.
"Outsourced service providers exist for a reason, but the selection of the right provider, the right relationship based on trust, and the parameters of how you engage are the critical elements for success."
STICK TO THE KNITTING: WHAT IS CORE, AND WHAT IS NOT?
The biggest dilemma for organizations is understanding what is core business and not, what is a focus or distraction, what to Outsource versus Insource. Now that is the question!
What is your core business?
This may seem a fundamental question but an important point of departure to understand. What are the essential elements of your organization that are required to run, grow, develop and thrive for the long term?
Create a matrix and list all those activities that are essential today, those that are important, and those that are necessities. Somewhere between essential and necessary, you will find the road signs for your path to Insourcing vs. Outsourcing.
What are the risks and opportunities?
Alongside your matrix, highlight all those functions that are high risk to the business performance, low risk, and leave those that are neither blank. This will add a further layer to your analysis of those things that you probably shouldn’t outsource versus those that you could.
Do you have the infrastructure and expertise?
Then for each of the services mark which you have the internal infrastructure or expertise to manage directly, and those that you don’t. Use the 4xi 5-Light Assessment & Risk traffic lights to help you.
Understanding the risk and opportunity is fundamental to your outsourcing decision.
SO, WHAT ARE THE PROS, AND THE CONS?
It’s a big decision, right? There are lots of Pros and Cons but what does that mean for me and my business, and how do I assess which is the right path? Hopefully, this will give you some clues for your journey and decision map.
- Allows focus on core business and avoid distractions
- Access to a larger talent pool
- Reduce direct headcount and direct labor costs
- Transfer of operational, financial, and sometimes reputational risk
- Hire specific discipline experts to fill experience gaps
- Contractor focus on profitability more likely in control
- Access to innovation and subject matter experts
- Feeling of lack of ownership and control
- Perception of losing ownership and control
- Potential misalignment between cultures
- Risk of confidentiality breaches
- Partner drive for profits can lead to shortfalls in service
- Poorly aligned operating agreement can lead to mutual frustration
- Once you outsource is often difficult to reverse
A carefully drafted Partnership Charter and a mutually vested approach to success can ensure the best outcomes for all parties. What is the expectation (from both parties), identify the measures of success (not just KPI’s by Value Performance Indicators), identify the partnership vested leaders, the rules of engagement, the cadence of communication, and governance.
- Allows you to stay in complete control of all your business activities
- Flexibility and nimbleness to do what you want when you want
- Possible integration with other departments
- Ability to leverage resources such as HR, IT, Marketing & Finance
- Sense of pride, one company, one team, one culture, together
- Deeper connections and trust between leadership and imperatives
- Attracting and retaining top talent is difficult and time-consuming
- Empire building over time can lead to overspend
- Lack of focus can lead to operational and financial inefficiencies
- Insourced teams can have a lack of career progression
- Potential isolation from the latest trends and opportunities
- Support departments can relegate priorities to core business
When considering Insourcing, or already Insourced, regular benchmark exercises to understand market factors, trends, and commercial considerations will ensure that you have a regular sense check and validation of your position.
THE OWNERSHIP OR TRANSFER OF RISK IS A BIG THING
"Whether financial, operational or in some cases reputational risk (or opportunity), it may come down to this analysis that will help you get to your conclusion."
What is the difference in cost?
The cost differential between Insourcing and Outsourcing is ultimately the total cost to the business but that is often a cloudy calculation.
On the face of it, Outsourcing presents a better cost assessment with isolated costs detailed within your contractual agreement with your partner, however, this often doesn’t include the internal partnership management resources that in almost all cases is needed.
Then, in the Insourced option, it's equally cloudy. How do you capture the real costs of the internal resources dedicated to supporting the operations?
According to the Houston Chronicle, the ultimate cost differences (when the historic cost is fully identified) can be significant and estimated to be a 15-20% saving when appointing outsourced providers versus self-operated services.
"Probably the most important considerations are, do you have the internal expertise to successfully deliver the services, in line with expectations, and on budget?"
7 STEPS TO SUCCESS
If you are considering your options from either side of the fence, to get a clearer picture, think about the following 7 Steps to Success:
1. Complete the Risk/Opportunity Matrix
2. Identify the cultural and human impact of change
3. The financial impact of change
4. Test the market for innovation and cost
5. Analyze total cost, quality, and impact
6. Either improve existing or Outsource
7. Revisit at least every 3 years
FORTUNE FAVORS THE WELL-INFORMED
To Insource or Outsource for many is a big decision with lots of complexity. Don’t be alone, there are others who have been on the same journey, and we’re happy to help.
Food for thought
Whether you currently operate the services in question, or you contract out, a well-informed point of view is always the best point of view. There will be scaremongers along the way, whichever side of the fence you are on, but ultimately, you need to do what’s best for your organization.
There are many well-appointed, professional outsourcing organizations in the market from complete Integrated Facilities Management, to food, conference centers, fitness, mailroom services, to transportation, and childcare.
There are also organizations that provide full back-of-house and support services and coaching designed to support Insourced operations and mitigate the risks.
4xi Global Consulting & Solutions would be happy to engage with you and take you through this assessment of opportunity and risk, market match you with appropriately qualified outsourcing companies and support self-operated operations too.
4xi: Inspiring the future, together.
An article by Simon Elliot, Managing Partner and Co-founder of 4xi Global Consulting & Solutions. Simon has spent his career in the food and facilities management sector across six continents in Business & Industry, Education, Healthcare, Government, and Remote Site services.
Today, 4xi helps and supports organizations seeking to advance their businesses, gain efficiency and improvement through technology and solutions.
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