Goodbye Outsourcing, Hello Insourcing: A Trend Rises

More IT groups are ending outsourcing deals and bringing certain work back in-house. Is this the answer to your cost, control and quality issues?

CIO, By Stephanie Overby, Thu, February 17, 2011

CIO — Looking back on the last twelve months, most outsourcing analysts agree that the level of IT services deals sealed has held relatively steady, year-over-year. The total value of outsourcing contracts signed in 2010 was $62.4 billion, according to outsourcing consultancy TPI, a figure that's pretty consistent with their last five years of total contract value data. The number of IT services deals inked in 2010 grew by six percent, according to outsourcing consultancy Everest, noting that eight of them were so-called mega-deals of $1 billion or more. About half of IT service providers polled by outsourcing consultancy EquaTerra reported growth in their business pipeline, despite expectations for a much stronger year-end close. Deal flow was uneven in the fourth quarter, EquaTerra reported, and subject to delays.

But what's most notable to David Rutchik, partner with outsourcing consultancy Pace Harmon, is not the deals that are getting done. It's the deals getting undone.

Rutchik says he has seen insourcing decisions gaining steam within the last year and expects that trend to continue to increase in 2011. "Companies are still outsourcing significant projects and transactions," he says. "But they are strategically assessing subsets of broader outsourcing relationships and determining whether to pursue a best-of-breed provider approach or take it back in-house completely."

Why to Pull the Plug

Among the reasons IT leaders cite for pulling the plug on outsourcing deals—or subsets of their contracts—are poor service quality, failure to meet business objectives, and the desired for more control over the future direction of the IT function, according to Rutchik. "Another reason is that some companies were working with more generalist outsourcing providers who had been managing areas outside their core competencies," Rutchik says. "In some cases the results were less than stellar."

Not all "backsourcing" will remain in-house ad infinitum. While some IT leaders are intent on a more permanent insourcing arrangement, others are employing insourcing "as a way to get a fresh start before pursuing a new outsourcing engagement," Rutchik says.

Some IT leaders report big savings bringing outsourcing IT back in-house. But repatriating IT services can be as complex and costly process as outsourcing them in the first place; it's not for every company or function.

For more advice on when to insource, see CIO.com's "Questions to Consider Before Insourcing Outsourced IT"

End-user computing support and network management are most likely to be successfully "backsourced" — or brought back into the corporate IT fold, Rutchik says.

While there's no lack of data on outsourcing deals each quarter—total contract value and number of deals broken down by any number of variable from corporate size to geographic location to IT function—insourcing information is virtually untracked by sourcing consultancies who may or may not be involved in corporate backsourcing decisions. Rutchik says his analysis is based on the collective activity he has seen in the industry rather than any formal research or data.