Backsourcing,why? Here you can find top reasons!
Backsourcing is defined as bringing services outsourced to a third party back in-house. Lately seems to be a strategy implemented by more and more companies. Backsourcing may occur when an outsourcing or offshoring initiative is terminated by either the client or the vendor, or when the contractual end date has come. If the client company decides that from this point the best option is to recall the outsourced operations back in-house, then it can be referred to as backsourcing.
The issue of backsourcing has become a hot topic, both politically and economically, since the global financial meltdown. Outsourcing work to lower cost countries became a popular resource for companies seeking to cut costs and free up resources. IT services in particular became a popular back-office function transferred overseas. As the trend for companies to outsource grew, many Multi National Enterprises began to question the wisdom and true cost-effectiveness of their decisions. Some companies have faced more problems than they anticipated, raising the real costs associated with outsourcing. The unstable world economy and market uncertainty have pressured companies to refrain from engaging in long-term outsourcing agreements. Furthermore, companies tend to choose smaller deal sizes and outsource less strategic activities in order to minimize the risk of failure and potential loss
Main backsourcing reasons. According with various specialists, the main reasons for companies to backsource include: high outsourcing cost; poor service quality; loss of control;changes in management; changes in company strategies; IT resource accessibility; changes in IT role; changes in organizational structure; power and politics and changes in vendor organization or strategy.
Note: Considering that the nature of a failure implies negative publicity for all the parties involved, it is understandable that only a few firms share honest justifications outside closed doors.
There are three major categories of reasons for backsourcing:
1. Contract problems:
- The costs involved with outsourcing initiatives tend to be substantially higher than planned because hidden costs tend to be overlooked and are hard to identify, as they grow over time;
- Cost savings are often overestimated by the client company and tend to vanish eventually as the client adds outsourcing activities to the outsourcee and increase expectations;
- Another important factor associated with contract problems is the gap between the received service levels and the expected service levels, which is referred to as poor service quality.
- A major factor critical in many backsourcing decisions is the loss of control of certain functions that were key in creating strategic value. Mostly, this involves Information Systems functions that are outsourced and later identified as a key contributor to gaining or maintaining a sustained competitive advantage.
- The loss of control component causes a lock-in feeling, which may result from a know-how mismatch where the vendor ‘knows more’ than the outsourcer. Vice versa, the vendor might not be familiar enough with the outsourcer’s industry and to provide adequate services .
2. Opportunities from organizational changes:
- Changes in executive management within the outsourcing company are generally combined with shifts in the power distribution. When companies introduce new executives, these new members are three times more likely to provoke changes;
- New CIOs and CEOs often ‘reconsider the value being obtained from the IT outsourcing contract’ and might find a different strategic value of the outsourced activities and backsource accordingly.
3. Opportunities from external environmental changes:
- Most backsourcing companies report structural changes just before the backsourcing decision is made. These changes constitute external business changes and include mergers and acquisitions ;
The decision to backsource has several significant implications for an organization, as it requires the organization to manage organizational change, reintegrate knowledge, and develop new capabilities and competences.
Taking into account there is very limited empirical evidence on how to successfully accomplish the backsourcing process, sharing examples from our Romanian outsourcing industry will be a learning point for our entire community.
Romania remains stable as an outsourcing destination in Eastern Europe (Tholons Dec 2012) and currently there is just a limited evidence of backsourcing stories – even so, this doesn’t mean that this cannot happen. As it was mentioned above, backsourcing can be the result of a strategic decision which can be influenced by all the factors mentioned here. Backsourcing can impact your business too as outsourcing provider, consultant or professional.
Share your backsourcing stories and your main learning points with our Outsourcing Advisors community at firstname.lastname@example.org