Insourcing

When an enterprise “insources” a business function, it makes a decision about the comparative value and risk relating to how the function is performed.

Control.
An insourced function represents a decision to retain control over the function. To some extent, insourcing represents absolute control, since the enterprise has the authority to direct and redirect all internal resources in response to changing markets.

However, where such internal resources become ill suited to respond to changing markets, the enterprise can only retain “absolute” control by retooling. This requires retraining personnel, selling or disposing of depreciated or technologically obsolescent equipment and real estate improvements, and investing in new resources (people, processes, technology) that enable process improvement.

Absolute control is therefore a myth. The switching costs of retooling are not always transparent, since they may be done incrementally and not part of an overall change management plan for the enterprise. As enterprises adapt and react to markets, such lack of transparency may be normal.

By evaluating business processes within a change-control framework, decisions about insourcing and outsourcing, and the relative degrees to true and “absolute” control, become more apparent.

Cost.
The costs of insourcing can be reduced by effective use of purchasing power for the constituent elements of labor, real estate, capital, technology and process. Traditional cost-savings techniques can reduce costs, such as through group purchasing by cooperatives and buyers’ alliances, skillful negotiations with suppliers and timing of markets to buy when demand is low. At some point, however, the costs needs to added up, including all indirect costs that include overhead and administration. A detailed analysis of classic insourcing can thus lead to changes in the sourcing process, leading either to “shared services” centers, outsourcing or a combination.