Mid-size companies are starting to reconsider IT insourcing as a viable alternative to sending IT services offshore.  The availability of unemployed local talent as a result of the recession and the desire to control domestic growth are two motivating factors for companies looking to insource their IT functions. While insourcing has advantages and disadvantages in the global marketplace, some mid-market companies may benefit the most from the practice in a continuing economic downturn.

There are several key advantages to insourcing that companies should explore. Deal agreements, changing strategies, flexibility and cost effectiveness are among the leading incentives to consider this shift.

Insourcing specific services, such as IT, generally entails growing the specialization within the organization, rather than outsourcing the function to other service providers. Developing a new service in-house can enhance a business model if it is a good fit for the company’s long term goals. This is one of the reasons why insourcing tends to happen in an unstable business climate. Companies that have undergone recent changes, such as M&A activity or restructured operations, may be more inclined to move away from outsourcing.

Companies may also choose to insource because they have grown tired of cumbersome Service Level Agreements (SLAs) or because they have had bad experiences with outsourcing deals. The SLA is the primary contractual component of IT outsourcing and it generally records a common understanding about services, priorities, responsibilities, guarantees and warranties.  It may specify the levels of availability, serviceability, performance, operation or other attributes of the service, such as billing or fulfillment.  Setting, tracking, and managing SLAs are important components of the Outsourcing Relationship Management (ORM) discipline.  Specific SLAs are typically negotiated up front as part of the outsourcing contract, and they are used as one of the main tools of outsourcing governance. 

Additionally, outsourcing involves the transfer of responsibility from the company to a supplier, and the management of a new outsourcing arrangement occurs through a contract that may include an SLA.  For all of these reasons, insourcing is generally a more flexible arrangement. It gives a company’s IT business unit the ability to vary the level of services up and down as needed, where this can be limited in an outsourcing capacity. 

Finally, the most compelling motivations to insource are the potential cost savings and ability to respond quickly to changing business needs. According to recent data, a company that moves IT functions back onshore has the potential to generate noticeable cost savings.  For example, insourcing in a down economy may be able to generate a cost savings of approximately 10 to 15 percent of the company’s IT budget.  As long as the process is controlled and managed, a change in IT management can be good for a growing company.  Pulling certain services back in-house gives a company the ability to innovate more rapidly, which makes the start to finish cycle time faster for various IT projects.  Also, analysts often comment on the more personal feel of IT insourcing. When talent feels attached to a project or a team, performance, efficiency and creativity can increase, which can positively impact any bottom line.

Despite these benefits, the decision to insource requires careful evaluation.  Due to the slowly recovering economy, companies are still under pressure to reduce headcount, so having the capacity to insource their IT functions might be an issue.  Some companies, having grown used to outsourcing IT functions, no longer have the resources in-house to perform those functions. This is especially true for companies with deeper and greater programming needs. 

Another challenge of insourcing IT stems from the fact that being in complete control comes with a price.  When a company decides to insource its IT, it immediately retains full control over something that was traditionally handled by a third party.  It is suddenly burdened with managing those activities, which may not be a core competency aligned with the organization’s strategic vision.  Over time, a company may grow to a point where it no longer has the resources or desire to focus on the detailed aspects of IT that were once managed by a specialized third party service provider.  Another factor to consider is the continued disparity in cost of labor, which may still outweigh the benefits of insourcing, even when the quality and customer service benefits are taken into account.  Also, even though a larger labor pool is available, this does not always suggest that the available talent will actually have the experience or expertise to perform the previously outsourced function.  

In the end, a company’s needs and its constraints are two of the most important considerations when thinking about IT insourcing.  The ability to grow with an insourced workforce is certainly becoming a more attractive option for middle-market companies. But, as times continue to change, so will needs. Therefore, a CFO should carefully weigh the advantages against the disadvantages when contemplating the feasibility of an IT insourcing plan.