by Stephanie Overby

9 Questions to Consider Before Insourcing Outsourced IT

Jul 01, 2010

IT leaders are increasingly considering bringing outsourced functions in-house. While IT can be repatriated, the insourcing process can be costly and complex. Here are nine questions to help you determine whether insourcing is right for your organization.

Insourcing—the process of bringing back in-house IT work that had been outsourced—is in style. Bob Mathers, principal consultant with Compass Management Consulting, points to recent high-profile IT and business process outsourcing initiatives that were brought back inside Chrysler, Delta Air Lines, Barclays and AT&T as evidence of the insourcing trend.

“We expect more organizations to seriously consider repatriation,” Mathers says.

Mathers credits the increased interest in insourcing in part to a maturing outsourcing market. “Clients and vendors are becoming smarter and more sophisticated about what services lend themselves best to outsourcing,” he says.

Insourcing is also a sign of the economic times, according to Adam Strichman, an independent outsourcing consultant based in Mechanicsville, Va. “A lot of companies are looking at their options,” Strichman says. “Executives move on and new management must find creative ways to try to save money. If it is in, they look at pushing it out. If it is out, maybe they look at bringing it back in.”

But bringing IT back in house can be as complex as transitioning services to an outsourcing provider. And sometimes, insourcing is even costlier than outsourcing. Termination fees, facility build-outs, shared assets, application migration, personnel training and transitions, new hiring, and software license transfers can quickly add up.

The decision to insource should not be made lightly. It requires a thorough assessment of current and future objectives and options.

“You’ve got to understand the gap between your current capabilities and what you’ll need to do it right and understand whether you’ve got the wherewithal to close that gap in a reasonable period of time,” says Mathers.

Use the following nine questions to help you determine whether insourcing is right for your organization.

1. What are my goals?

A good place to start is to ask yourself what you hope to achieve by insourcing, says Ruckman. Cost savings? Improved service? Faster innovation? Once you’ve identified your goals, assess your existing costs, service, quality, process efficiency, and personnel requirements against competitive market standards. Keep questioning your assumptions to make sure they’re realistic, says Ruckman. “A good business case will take at least two to three months and involve 20 to 30 reviews,” he says.

2. Do I have a solid business case?

Complete a detailed calculation of insourcing costs. Organizations often underestimate the time and effort involved in bringing IT operations back in house, says Mathers. Some insourcing expenses include hosting facilities, separation of shared assets, application migration, staff training and transfer, new hires, and hardware and software investments.

Legal issues can be particularly challenging, Mathers says, like working through employment contracts, maintenance agreements, and software licenses.

“The transfer costs [for software licenses] are shockingly high,” Ruckman notes.

As a general rule of thumb, Ruckman says you can plan to spend at least five to ten percent of your monthly outsourcing costs on transition until you are fully insourced in a low complexity transfer and as much as 15 to 25 percent on high complexity situations.

Also calculate your ongoing cost for in-house support. “Again, businesses underestimate the internal staffing and expertise requirements to manage the operation,” Mathers says.

It can be especially difficult to evaluate in-house skills, quantify the new resources you’ll need, and factor in the cost of recruiting and relocating qualified staff. Replacing skilled offshore staff is especially difficult.

3. What are my termination rights and responsibilities?

Factor in fees for early termination if your contract is not near its end. “Most contracts have prohibitive contract clauses regarding termination so early, and rightly so,” says Strichman. “The vendor usually makes seven-figure investments to transition environments, and it is costly to undo that so soon.”

4. Who the heck knows what’s going on?

When a company makes the decision to outsource, both client and vendor bring their technical teams together to define requirements. When you insource, you’re on your own. And most of your technical experts who were on your staff when the original outsourcing deal went into effect are now employed by the outsourcers.

“[The vendor team may] clam up on the helping front. They’re not getting paid to develop a new solution for you,” says Strichman. It’s not that they’re trying to be difficult, he adds. They simply can’t offer to help.

Find out who knows where the bodies are buried and create incentives to help with the transition, if possible.

5. Can in-house IT support my future state?

Whatever the sourcing strategy, you have to consider future requirements, says Mathers. Develop a future state vision statement that reflects your economic and business assumptions in order to consider what sourcing approach will yield the most benefits long-term.

6. How much of this is my fault?

If you’re considering insourcing because outsourcing has yielded disappointing results, take a long, hard look in the mirror.

“Never forget that the client is always part of the reason things are the way they are,” Mathers says. “Unless you are honest with yourself about your role in the current state, you risk spending a lot of time and money and not fixing the underlying problems.”

7. Do I have business buy-in?

Nothing will kill an insourcing project faster than a lukewarm reception from business leaders, says Ruckman. Get key stakeholders involved in the discussion early. And make sure to assess what impact insourcing will have on major projects that are mid-flight in order to address business users’ concerns.

8. How long will insourcing take?

“There are about 20 to 30 variables that are unique to each sourcing deal,” says Ruckman. “At a macro level, the complexity of an insourcing project must factor in what functions were outsourced and what percentage of the staff is still local to the client.”

For example, if the client systems remained in their data center and weren’t moved to the sourcing provider’s delivery center, the project will be less complex. Plan on a four to six month transition for low complexity transfers, says Ruckman, and nine to 16 months for high complexity situations.

How long it will take to see a return on insourcing is an even greyer area. “I have seen deals reach a positive ROI from insourcing in less than 10 months, and some take ten years,” says Strichman. “There are no simple rules. I know that sounds like what a consultant would say, but it’s true.

9. Who can help me?

Third party help can be invaluable in assessing the insourcing option and tackling the transition in-house. But should you hire the same sourcing consultant that worked with you on the outsourcing deal? Maybe not.

Some sourcing consultants are better suited to insourcing situations. “Many firms view outsourcing as the solution to all problems. They don’t have a process tailored for insourcing,” says Strichman. “And it is not just ‘outsourcing in reverse’.”

Many consultancies shy away from insourcing because outsourcing is where the money is, and with a multi-year deal, it can keep flowing in. “When we do an insourcing gig, we are essentially working ourselves out of a job—if done right,” Strichman says.

Research your advisor options carefully and ask for current references.