By Bill Fowler

For many organizations, repatriation of outsourced services is becoming an increasingly attractive proposition.  Factors contributing to insourcing decisions include: increased confidence that in-house management can be more effective than outsourcing for some services and functions; general economic conditions and improved efficiencies; and political pressure to boost domestic jobs.

Despite these considerations, executives would be ill-advised to hop on the repatriation bandwagon too enthusiastically.  Indeed, despite the growing maturity of the marketplace, many organizations continue to pursue an almost schizophrenic approach to outsourcing, alternating between extremes of embracing it across the board on the one hand, and rejecting it outright on the other.

Effective organizations ignore the strategy du jour pendulum swings and take a measured and balanced approach, whereby sourcing decisions reflect business requirements, the nature of the services under consideration, and objective assessments of internal capabilities and external alternatives.

Repatriation Incentives

 The global economic downturn has contributed to renewed interest in repatriation in several ways.  Belt-tightening has increased internal efficiency for many firms, thereby making outsourcing less financially attractive. According to Ian Cramb, COO and CTO of Citigroup, “Whereas offshoring might have been 50% of the cost of in-house five years ago, that number is currently only 15% cheaper because we have made ourselves more efficient at home. A lot of excess fat has been trimmed off organizations.”

In addition, companies that outsource jobs despite high domestic unemployment rates face increasingly intense criticism and political pressure. According to Citigroup’s Cramb, “In the short term, public attitudes to rising unemployment and a growing protectionist outlook towards domestic jobs in the West could lead to fewer jobs being off-shored.”

Although the highly publicized Satyam scandal shook the confidence of India’s outsourcing industry, it does not appear to have become “India’s Enron” as originally feared. While the scandal and earlier information breaches have caused clients to increase their attention on information security and corporate safeguards, there have not been mass client defections across the industry.

Customer service concerns have also contributed to repatriation considerations.  In February 2009, United Airlines shifted its back-office operations from India to Chicago and Honolulu. According to a company spokesperson, “Sophisticated conversations with our guests are much better suited for us to handle instead of a third-party partner.”

Similar to United Airlines’ experience, Compass’ clients have also evaluated specific areas of general services that were outsourced and decided to bring them back in-house. In one case, relocation services were brought back in-house due to the difficulty of transferring the required knowledge and skill to a third party. Other HR services proved to be more well-suited for outsourcing and were left with the third party provider.

Look Before You Leap

Compass is encouraged by examples such as these in that they are more indicative of a maturing industry than of a failed agreement. The fact that clients are beginning to understand both the key drivers of a successful outsourcing relationship as well as the parameters of the specific service that must be considered bodes well for outsourcing in general.

Indeed, 20 years of benchmarking data from Compass shows that a large, well-run internal organization can consistently provide services more cost effectively than an outsourcer – and in some instances, more cost effectively than an offshore provider.  For commonly available IT services, the advantage of internal management is simply the ability to leverage economies of scale the same way an outsourcer can, without having to absorb a service provider’s administrative, overhead, and marketing costs.  For operations requiring extensive business knowledge, Compass analyses have found that the high levels of productivity of top-performing internal organizations more than offsets the cost advantage of offshore providers. 

Based on this evidence, a client organization might conclude that repatriation equals fewer headaches and cost savings. 

While repatriation does indeed provide potential benefits under certain circumstances, achieving those benefits requires investment of resources and effective management to implement the transition, as well as to oversee the new in-house operation on an ongoing basis.

First off, becoming a well-run or top-performing organization doesn’t happen on its own, and requires significant investment in management resources, adherence to leading practice, and a commitment to continuous improvement to consistently drive down costs year to year.  Second, organizations that repatriate often underestimate the costs and disruptions involved in transitioning away from established service providers, as well as the costs involved in managing operations on an ongoing basis.  

Another potential benefit of insourcing is increased flexibility and closer alignment between IT and the business.  But here again, simply making a change from an outsourced to an internally managed environment doesn’t magically make integration and responsiveness happen, nor does it resolve existing operational issues.  

Expecting an outsourcer to make management problems disappear is a mistake. Similarly, it’s folly to assume that repatriation will solve issues that are the responsibility of a service provider.

An effective approach to repatriation identifies the objectives of the initiative, defines the requirements of making the change, specifies the steps needed to get to the desired end, and quantifies the anticipated benefits of the new model.

Repatriation To-Do List

Define the Short-term and Long-term Objectives

The repatriation process should be based on a clearly defined business rationale and set of objectives.  Specifically, is the initiative designed to save money? Increase flexibility? Maintain closer control over mission-critical competencies?  A stakeholder analysis can facilitate communication within the organization, clarify objectives, and inform the change plan. It is critical to peg a timeline and set of economic and business assumptions to the objectives. This will ensure that, as business conditions and strategy changes, the impact on the objectives can be evaluated.

Baseline

The foundation of any repatriation effort should be a baseline analysis of the existing outsourced operation. Such an analysis should assess current costs (retained and third-party), service quality, process efficiency, and personnel requirements (both internal and from the service provider) in the context of competitive market standards. An assessment of user satisfaction is also essential.

One of the primary benefits of the baseline analysis is to identify the potential size of the repatriation prize. For example, if the analysis finds that outsourced costs are 30 percent above top-performer status, then 30 percent savings can realistically be anticipated – provided the repatriation plan includes a plan to make the necessary process and management changes needed to realize the improvement. Conversely, if the analysis shows that outsourced costs are comparable to or lower than top-performing internal organizations, then the business can conclude that significant cost savings from the repatriation exercise are an unrealistic expectation.

A baseline analysis can also help determine which particular service areas and functions should be brought back in house, and which ones are better suited to remain outsourced, whether to incumbent providers or to new vendors.

The baseline analysis will also provide insight into the organization structure required to support the repatriated services. This should reflect the company culture as well as the technical requirements to support the operations. This will be further refined in the cost of management analysis to account for appropriate governance structures (considering a “monarchy” versus a “federal” strategy, for example).

Cost of Transition

Another critical element of a repatriation plan is an accurate and detailed calculation of the cost of transition. This cost will be factored into the business case justifying the initiative. A complete cost model will include both the cost of transition and the cost of on-going operations.  

Often, organizations underestimate the cost, time, and effort involved in bringing operations back in house.  Representative expenses include potential build-out of hosting facilities, separating from shared assets, application migration, training, hardware / software investments, and transitioning of existing personnel from the service provider and / or hiring new staff.

Legal and contractual issues associated with software licenses, maintenance agreements, employment agreements, etc. can be especially daunting. Understanding the magnitude of the issue is important to determining the number of resources required to coordinate and manage the transition.

Cost of Management

A repatriation initiative must also assess the costs of managing the operation on an ongoing basis once the transition is completed.  Here again, businesses often underestimate requirements related to staffing and expertise, and fail to properly evaluate existing in-house resources and to quantify the resources that need to be added.

The cost model should consider staffing requirements, in terms of both numbers, skills, and corporate culture. Often, the outsourcing agreement provides the client with certain rights to recruit personnel in a non-competitive environment that are key to the client’s support. These rights are governed by the agreement as well as existing employment law. The business should understand its rights and also recognize that finding qualified staff to run the operation can represent a major challenge, and require significant resources devoted to recruitment or relocation. Another consideration is corporate culture which will influence organizational governance.

Future State

No analysis is complete without a view of the future based upon the set of economic and business assumptions supporting each objective. Whatever the sourcing strategy, a consideration of future requirements is essential. What approach to infrastructure management (consolidation, internal improvement, selective sourcing) will yield optimal benefits over the long term? How will the selected approach impact internal staffing and expertise requirements? How much of the future is based on the success of transformational activities?

Summary

A variety of factors are making repatriation increasingly attractive for many organizations. However, a decision to repatriate should be based on a thorough assessment of current and future objectives and alternative options, rather than on a knee-jerk assumption that in-house management is preferable.

A sound financial business case, based on an analysis of existing costs and service quality, as well as projected volumes and requirements, is essential to any client organization considering insourcing, and should be applied to assess and navigate various scenarios.

A repatriation initiative should be built around a fact-based analysis of options and their impacts over time, and should define a long-term price structure and identify the benefits of different strategies. 

Insourcing also requires a thorough assessment of internal skills and management capabilities. The new processes, procedures, and the support organization must be designed and completed before transition, and support groups must ensure at least the same standard of services as the outsourcers.  Service catalogues and dashboards should be used to communicate performance to the user community.

Bill Fowler is a Principal Consultant with Compass Management Consulting, specializing in sourcing management issues. Compass (www.compassmc.com) is a global firm that helps large organizations improve business and IT operational performance. Contact facts@compassmc.com for more information.