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The supply chain industry is one that’sconstantly in a state of flux, with nothing ever seeming to stay the same forvery long. Globalisation, ever-changing customer needs and other market forcesserve to maintain a state of liquidity, requiring companies to frequentlyre-evaluate strategies and business models.
8 Reasons Companies Bring Outsourced Processes BackIn-house
Perhaps for that reason, companies that outsourcelogistics and other activities, sometimes recognize the need to bringcompetencies back in-house. That’s no bad thing of course, provided thereasoning behind the decision is sound and the consequences thoroughlyevaluated.
So what might drive companies to return toinsourcing, especially after the painstaking exercise of finding an outsourcingpartner, drawing up complex contracts and service level agreements and buildinga relationship which at the outset, is foreseen as a long-term partnership?
Here are eight of the most common reasonswhy companies may bring outsourced processes back in-house.
1.Expected Cost Savings Not Realised
One of the primary reasons to outsource isto achieve cost savings. It’s generally expected that a third-party providercan perform its function at lower cost than the client company could otherwiseachieve. If the expected cost reductions fail to materialize or, if the costsof outsourcing increase over time, the client may bring the outsourcedactivities back in-house.
Unfortunately, sometimes the client is asmuch to blame for this problem as the provider. In order to set up anoutsourced operation which reduces client costs, the client must be totallytransparent from the very start of the relationship.
Some client companies though, fail toenable the required transparency, often citing confidentiality as a necessity.However, this is seldom a fruitful approach, since an outsourcing venturereally requires the full collaboration of client and provider, sharing informationfreely as trusted partners.
2.Service Levels Not Met by Provider
This is another common reason why companiesbring outsourced processes in-house. When a savvy client company decides tooutsource, it will draw up a comprehensive service level agreement, sometimeswith the involvement of its customers, which will bind the third-party providerto meeting specific, agreed standards.
A service level agreement will oftencontain a termination clause, providing for the client to exit the outsourcingrelationship if the provider consistently or frequently fails to meet theservice levels. Even without an exit clause, client companies will sometimesshoulder the expense incurred by bringing services back in-house if theprovider cannot maintain standards above cited service level KPIs.
As in just about every industry, thecustomer is master of the supply chain arena. Even if a third-party provider ismeeting service level expectations, there are times when one or more customersof the client company become dissatisfied with an outsourcing arrangement.
There could be a number of possible reasonsfor customers to object to outsourcing. For example:
Ø Customer expects higher service levels than those agreed betweenclient and provider
Ø Customer’s supplier policy no longer supports, or is amended tooppose supplier outsourcing
Ø Customer perceives that third-party provider is not effectivelysupporting products or services
Ø Customer negotiates new SLAs which a third-party provider is unableto commit to.
When any of these or other reasons cause anoutsourcing agreement to conflict with customer needs, the client may find itnecessary to bring the outsourced processes back in-house. If a continuedbusiness relationship with a valued customer is at stake, there may indeed belittle choice but to do so.
4. Politicsand Public Relations
In some cases, political pressures andespecially public opinion regarding overseas outsourcing (offshoring) might persuadea client company to yield and bring outsourced processes or services backin-house.
5.Forces in the Outsourcing Marketplace
Another offshoring issue that mightultimately force a company to return to insourcing is the impact of changingpressures in the overseas marketplace. Wage inflation in particular can createstaffing challenges for outsourcing providers. This, in turn, can leadproviders to take cost-cutting action in relation to the workforce, with aresultant downturn in service quality.
When these marketplace pressures begin todestabilize the outsourcing partnership or impact customer service, the clientmay revert to in-house control of previously outsourced activity.
6. Breakdownof Outsourcing Relationship
Outsourcing partnerships are very much likemarriages. In order to survive, both parties must prove themselves trustworthy,communication must be continuous and effective and a fully collaborativeapproach must be taken to solving problems. However, just like marriages,relationships between clients and providers sometimes break down.
When an outsourcing arrangementdisintegrates, typically as a result of poor management by one or both parties,the client has little choice but to look for a new partner. In such a situationthough, some companies may prefer to bring the expertise and processes backin-house.
7.IT Integration Issues
Business information systems are playing anever more pervasive part in relationships between suppliers, partners andcustomers. In some cases, the inability to align and integrate IT solutions canresult in a company’s decision to take back their outsourced businessactivities.
This situation is most likely to occur whena client and customer have the means to integrate, but the cost of integratingthe 3[SUP]rd[/SUP] party’s IT solution is prohibitive. Fortunately, asinformation technology continues to develop, it’s becoming easier to alignsystems in an interoperable, if not fully integrated way, meaning technology isbecoming less of a limiting factor in outsourcing arrangements.
8. ConcernsAbout Provider Security
Occasionally, in logistics especially, aclient company’s management may feel it has no option but to bring outsourcedwork back in-house as a result of security problems within the provider’soperation.
For example, if a third-party logisticsprovider repeatedly suffers theft, damage, spoilage or tampering of a client’sproducts and appears to be unable to get control of the situation, the clientmay decide that returning to an insourced operation is a more secure solution.
Betterto Have Loved and Lost?
Sometimes eventhe best relationships have to dissolve, but parting company with outsourcingpartners and taking back direct control of logistics or other businessprocesses, should not be considered as failure. Continuing to outsource whencustomer retention, competitiveness, profit or even corporate image are atstake, would be a far more regrettable folly. Fortunately,most outsourcing partnerships, if planned carefully and managed professionally,flourish and add value to the client company’s business for a lengthy andindefinite term. If you are ever in the situation where you need to bring anemployer’s business operation back in-house, consider the experience one fromwhich your company can grow. It’s better to have tried a venture than toforever wonder if outsourcing might be the perfect way to strengthen yoursupply chain strategy.