Backsourcing Best Practices

Backsourcing—that is, bringing IT functions back in-house after they’ve been outsourced—may be the right move to make for some companies, such as JPMorgan Chase. But it isn’t easy. “There isn’t a lot of quantitative data out there on how to do this right,” says Jeff Kaplan, senior consultant with the Cutter Consortium’s Sourcing and Vendor Relationships Advisory Service and the managing director of ThinkStrategies. But some best practices are beginning to emerge.

Ironically, the best time to think about backsourcing an IT function is before you outsource it. Smart CIOs make sure they have a sort of prenuptial agreement in their outsourcing contracts. “Otherwise, it becomes very messy, just like a bad divorce, where decisions are made based on pure emotion rather than in a rational way,” Kaplan says. Such provisions clearly state the terms by which the company can terminate the outsourcing contract and regain control of their operations in the event that outsourcing fails.

JPMorgan likely had such provisions in its contract with IBM, Kaplan says, but still had to pay millions to end the contract early. Even so, a “prenup” does help mitigate some of the risks and ensure a smooth transition of IT functions back to the enterprise, he says. The following steps may not reduce the costs of bringing a big outsourcing deal back in-house, but they can ensure that the investment pays off in the long run.

1. Notify the outsourcer of the initiation of the backsourcing process. This may be necessary, not only to comply with contractual obligations but also to help foster a morecooperative climate.
2. Perform an operations audit and needs assessment. In the best outsourcing scenarios, this kind of documentation will already have been created on a regular basis. In the worst, the lack of such documentation may lead to a failure to meet expectations.
3. Establish a backsourcing plan and schedule. Include provisions to ensure that the outsourcer returns all enterprise-related property, continues to support the company’s staff for a specified period of time, provides services until the company can reassume full control of operations and maintains satisfactory service levels during the transition.
4. Quickly determine staff reassignment and responsibilities. It’s best to do this as soon as possible to minimize staff uncertainty and related productivity and morale issues.
5. Develop security policies to protect proprietary information. Procedures for implementing new technical and password protections should be established to minimize the risk associated with disgruntled employees accessing protected data or disrupting IT systems.
6. Make business continuity part of the backsourcing plan. It’s important to include disaster recovery procedures for possible business disruptions during the transition.
7. Communicate the backsourcing plan, goals and objectives to the enterprise and affected third parties. This will help gain the support and cooperation of internal and external customers, partners, vendors and shareholders affected by the change.