Insourcing

Insourcing is a business strategy where a company takes direct control over a process that was previously outsourced to an external party. This approach contrasts with outsourcing, where tasks are delegated to external entities to allow a company to focus on its core competencies. For instance, a business may decide to insource its IT functions by hiring staff instead of relying on an outside firm. The motivation for insourcing often includes a desire for greater efficiency, improved control over processes, and the potential for cost savings when certain functions can be managed more effectively in-house.

Insourcing can also be implemented in various ways, including hiring employees in different countries, which introduces the concept of offshore insourcing. While insourcing can sometimes involve higher upfront costs due to the need for equipment and personnel, it may ultimately lead to better control and integration of expertise within the company. Additionally, companies may adopt insourcing as a public relations tactic to counter negative perceptions associated with outsourcing. The practice is increasingly relevant as businesses seek to adapt to changing market conditions and public sentiment regarding job creation and economic responsibility.

Published in: 2021

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Subject Terms

Insourcing

Abstract

Insourcing is a business practice that involves a company deciding to exercise direct control over a process that either previously had been or could have been assigned to an outside party. The term is intended to be the inverse of outsourcing, in which a company shifts a task to a separate entity so that it can concentrate its attention on areas of operation at which it has greater expertise. An example of insourcing might be a company that previously outsourced its information technology functions, deciding to instead hire staff with the appropriate skills and employ them permanently.

Overview

Business places a high premium on efficiency. Because companies are often in close competition with one another for the same clients, the market tends to become crowded with multiple actors each performing the same tasks. The determination of which actor succeeds in a given effort can come down to relatively minute differences in how these tasks are performed. For example, if two companies are competing in the same region and one of them is able to reduce its annual shipping costs by two percent, this will give it an edge over the other firm. Although these differences can seem miniscule, they can add up to substantial amounts over the long term, or by combining many small savings (Chaudhury, Gerdemann & Kapoor, 2015).

One of the most popular ways for businesses to maximize their efficiency is for them to concentrate on their core areas of expertise. This means that they identify those tasks that they are better than anyone else at performing, whether the task is generating sales, creating marketing campaigns, or manufacturing. The company then directs the bulk of its resources into those activities, and for other necessary functions, the company outsources them to third parties. So, a company that makes crackers for soup would concentrate on making the best crackers it possibly can, and to make sure the product gets to retail stores for consumers to buy it, the company would outsource shipping services instead of developing its own fleet of trucks and planes. Obviously it would be very expensive to purchase so many vehicles, license them, maintain them, hire drivers and pilots, and so forth. The much more sensible option would be to outsource the service to a firm that specializes in shipping and already has all the necessary equipment and personnel in place (Won, 2015).

The easiest way of explaining insourcing is by describing it as the same as outsourcing, but in the opposite direction. Businesses are constantly monitoring their own bottom lines, comparing their revenues against their expenses, and also comparing their expenses against market rates for similar services. Janitorial services, for example, would periodically be reviewed to see if the price being paid under the current arrangement is higher or lower than the average rate in the area. From time to time, these reviews may bring to light the fact that a company could do a better, that is, more cost-effective, job of managing a process itself than it could by outsourcing it. When this happens, and when conditions seem to support the possibility that the process could be brought back within the company for a reasonably long time, then the company may decide to insource the function, either by assigning the duties to existing employees or by hiring new employees (Kai, Jon & Lydia, 2016).

Further Insights

While insourcing may seem a simple enough concept, there are a surprising variety of ways in which it may be implemented. Many assume that insourcing requires the insourced employees to be housed within the facility or facilities used by the rest of the company's workforce, but this is actually not the case. The primary characteristic of insourced employees is that they are employed by the company that is paying for the task to be accomplished, rather than being paid by a firm that has been contracted. Because of this, it is possible for a company to insource a function by using employees in another country. All that has to be done to accomplish this is for the insourcing company to directly hire the staff being insourced (Arvanitis, Bolli & Stucki, 2017).

For example, an electronics manufacturing company based in Mexico determines that outsourcing its accounting functions to a firm in the United States has become too expensive, so they decide to hire a full-time accounting team directly, by recruiting in Canada. Once they complete their hiring process, they will have insourced their accounting department, even though the accountants they hired are not based at their facilities in Mexico.

The above scenario highlights the difference between two different types of business process decisions: sourcing and shoring. Sourcing refers to who will do the work—the parent company itself or an outside firm. Shoring refers to where the work will be done, whether within the same country as the parent company or in a different country. Sourcing offers the options of either insourcing or outsourcing, and shoring has the options of offshoring or inshoring. In the example of the Mexican electronics company, the parent company has decided to use offshore insourcing to resolve its accounting dilemma.

Efficiency is not the only reason that a company may decide to explore insourcing. Another major source of motivation is control. It often happens that companies outsource functions only to discover that the party they have contracted with is not exercising adequate supervisory control over the processes they are responsible for. This could be due to negligence or to a lack of sufficient technical expertise. The first cause could be corrected to resolve the issue, but the third would require the parent company to either find a third party with the necessary expertise, or to insource the work to make sure that it is done properly. This can occur with work that is highly technical or that requires special training to perform.

Some insourcing is smaller in scale and limited in duration. These incidences are usually special projects that existing staff are asked to assist with, as in the case of a private college that wishes to undertake an effort aimed at re-establishing contact with its alumni and encouraging them to donate to the school. One option would be for the college to outsource the project to a call center that could efficiently make the calls and request the donations, but this approach would have at least two drawbacks. First, it would cost money to hire the call center staff, and this could be a problem for an institution that is seeking donations from alumni in the first place. Second, outsourcing the function could create an impression among those receiving the phone calls that the college does not really care about them, and only wants to contact them in the hope of obtaining donations from them. Obviously, this could be counterproductive for the fundraising campaign.

One option would be to insource the project to existing staff at the college. Some institutions that have done this assign each employee to call a certain number of alumni, so everyone involved feels that they are sharing the task equally. Since the people making these calls are already being paid as employees, there is no additional cost, apart from the impact of the additional assignment on their regular workload. In addition, using college employees for the project could actually encourage alumni to donate, since it creates the impression that everyone at the college is pulling together to work cooperatively. In this instance, then, insourcing could be the most cost-effective option as well as the one that produces the most positive impression on potential donors (Drauz, 2014).

Some companies use insourcing as a means of planning for the long-term survival of the company. A side effect of outsourcing is that it tends to encourage the parent company to continue the outsourcing once it has begun. This is because once a process is outsourced, the expertise that is needed in order to complete and manage that process no longer exists inside the parent company. This means that if the parent company wishes to return to insourcing the process, it will have to acquire the necessary knowledge and experience first. Since there is always a cost involved with doing this, there is effectively a continuous barrier to taking back control of the work. Insourcing avoids this situation entirely, by causing the expertise to remain inside the company where it can be used both to manage the work and to train others (Bovaird, 2016).

Issues

Insourcing is sometimes used as a public relations strategy, although this is rarely the sole reason for the measure to be adopted. Generally this occurs when a company has received negative exposure in the media for previous policies of outsourcing offshore, which tends to upset residents and local governments of the company's home country. Offshore outsourcing can be perceived as a company placing a greater value on its profits than it does on loyalty to the country that is its primary base of operation. It can also inspire feelings of resentment on the part of people who feel that their own jobs, or jobs that they might have been eligible to apply for, are being sent overseas instead. When these perceptions exist, a company may wish to counteract them by making a public demonstration of insourcing in which local jobs are created or expanded. This can create better relations with the local community, which in turn can benefit the company by resulting in higher sales and improved relations with government agencies responsible for setting tax rates and creating regulations that may affect how the company conducts business (Hartman, Ogden & Hazen, 2017).

Somewhat ironically, insourcing can often cost a company more than would outsourcing the same functions. Insourcing requires a large initial investment to acquire equipment, personnel, and expertise. If insourcing were undertaken in this type of situation, then it would most likely be for reasons other than financial savings, such as the need to manage public perceptions of the company, or the need for the company to exert tighter control over the processes in question. Still, there are some situations in which insourcing may be the most economical option. These tend to involve processes that do not require large amounts of equipment or personnel. One example might be a company that decides to use insourcing for its computer programming needs after years of outsourcing its coding projects to consultants who charge higher fees (Osborne, 2016).

Many insourcing arrangements start out as outsourced consulting projects. When a company has a need for a type of employee that is readily available through temp agencies or by recruiting independent consultants—administrative assistants, filing clerks, computer programmers, and so on—there is actually a disincentive for the company to start out by hiring a candidate. To start with, recruiting and interviewing prospective employees is incredibly time consuming and difficult to do with any real guarantee of success. Then, once a candidate is hired and their probation period comes to an end, the employee is protected by labor laws that can make performance correction or termination extremely complicated, should either become necessary. For these reasons, companies may find it preferable to fill a vacancy with a temp from an agency. Under the terms of the contract between the company and the agency, if a temp shows signs of not being a good fit with the firm, then the temp can be quickly and easily replaced. On the other hand, if a temp shows signs of being an asset to the company, then after a suitable interval the temp may be insourced (Cervinka, Stverkova & Humlova, 2012). The company will pay a fee to the agency, and the temp will then be hired by the company as a regular employee. Although this may seem convoluted, in practice it is rather straightforward, and in effect it allows both the company and the temp to "take each other for a test drive," by working together in a manner that keeps both parties free from commitments. Insourcing, when used in this way, functions as a sort of upgraded version of the traditional hiring process.

Recently insourcing has been much discussed in the media as a potential means of restoring the economy of the United States to its former glory, before large scale outsourcing sent American jobs overseas. While there may be cases where insourcing has a positive effect in the United States, the assumptions upon which this narrative are based have more than a few faults. This is because, despite many years of news reports, U.S. jobs in the manufacturing sector (the part of the economy where outsourcing has supposedly done the most damage) have declined not because they were sent overseas, but because they were made obsolete by technological advances in the areas of automation and robotics. In other words, these jobs were not outsourced, they were simply eliminated, making it impossible to use insourcing to restore them. Rather than relying on insourcing to solve this type of problem, economists suggest that there be increased support for job retraining programs and other forms of adult education, so that workers whose skills are no longer required may learn other ways of making a living (Kate & Laurie, 2012).

Terms & Concepts

Backsourcing: A synonym for insourcing, specifically used in cases where a task has been outsourced and is now about to be insourced, so that it appears that the work is coming "back" to the company.

Business Process Control: The monitoring, evaluation, and guidance of major task areas within an enterprise. Insourcing generally has the advantage of providing greater control over business processes than would be available if the work were outsourced, because the parent company has direct oversight of the work being done.

Knowledge Transfer: The process of training employees in specific skills needed to perform their jobs, as well as imparting to them the accumulated insights of those who have worked extensively in the role. Knowledge transfer is time consuming and expensive, adding to the costs of insourcing in many cases.

Offshore Insourcing: Insourcing that occurs in a country other than the one where the parent company is based.

Onshoring: When a company brings jobs that had been sent to another country back to the company's home country; the jobs are considered back "on shore."

Outsourcing: The practice through which a company arranges for one of its processes to be handled by a separate entity.

Bibliography

Arvanitis, S., Bolli, T., & Stucki, T. (2017). In or out: How insourcing foreign input production affects domestic production. Management International Review (MIR), 57(6), 879–907. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=126403992&site=ehost-live

Bovaird, T. (2016). The ins and outs of outsourcing and insourcing: What have we learnt from the past 30 years? Public Money & Management, 36(1), 67–74. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=110838260&site=ehost-live

Červinka, M., Štverková, H., & Humlová, V. (2012). Insourcing as a key factor of competitiveness in aviation. Issues of Business and Law, 86. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=78124118&site=ehost-live

Chaudhury, R., Gerdemann, D., & Kapoor, B. (2015). Innovation advantage: Insourcing engineering. Strategy & Leadership, 43(6), 3–9. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=111062212&site=ehost-live

Kate, T., & Laurie, G. (2012). Six successful efforts to curb insourcing. In Insourced: How importing jobs impacts the healthcare crisis here and abroad (p. 138). Hanover, NH: Dartmouth College Press.

Drauz, R. (2014). Re-insourcing as a manufacturing-strategic option during a crisis—Cases from the automobile industry. Journal of Business Research, (3), 346. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=93267351&site=ehost-live

Hartman, P. L., Ogden, J. A., & Hazen, B. T. (2017). Bring it back? In examination of the insourcing decision. International Journal of Physical Distribution & Logistics Management, (2–3), 198. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=121169724&site=ehost-live

Foerstl, K., Kirchoff, J. F., & Bals, L. (2016). Reshoring and insourcing: Drivers and future research directions. International Journal of Physical Distribution & Logistics Management, (5), 492. Retrieved January 1, 2018 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=116003733&site=ehost-live

Osborne, J. (2016). Outsourcing vs. insourcing. MLO: Medical Laboratory Observer, 48(11), 44.

Won, J. C. (2015). Insourcing or outsourcing: The entrepreneurship approach. Academy of Entrepreneurship Journal, (1), 13.

Insourcing

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Subject Terms

Insourcing

Abstract

Overview

Further Insights

Issues

Terms & Concepts

Bibliography

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