Insourcing trend gathers pace

Nearly a quarter of firms with outsourcing contracts have brought work back in-house

Doubts about the merits of outsourcing IT functions were highlighted again last week when a new survey revealed almost a quarter of large UK firms have moved outsourced IT services back in-house.

The survey of 100 financial services, manufacturing and retail firms with sales of over £100m found 43 percent felt their outsourcing supplier had failed to meet expectations. Fifty-nine percent had renegotiated outsourcing contracts, and 23 percent had bought services back in-house.

Simon Lindley of sourcing advisory firm Orby Consulting, which carried out the research, said the findings underlined the problems that arise when firms fail to develop a comprehensive outsourcing strategy. "Firms have improved the outsourcing contracts they are now signing, but too many are still failing to think about how they manage the relationship on an on-going basis, which is contributing to a high level of dissatisfaction [with outsourcing deals]," he commented.

The survey also revealed that only 57 percent of firms were formally monitoring their suppliers' performance against the rest of the market, while 40 percent experienced static or declining service levels, loss of price competitiveness or supplier inertia.

As a result firms seem increasingly willing to terminate failing deals. However, Lindley argued that they should think carefully before deciding to move work back in-house, or “insource”. "If you have previously decided a function is non-core you are probably better off trying to make the deal work or even looking for an alternative supplier, rather than brining it back in-house," he claimed. "I wouldn't be surprised to see many of the functions that have been insourced being outsourced again in the future."

Outsourcing experts insisted that this high rate of insourcing does not indicate that interest in outsourcing is waning, and said the market continues to enjoy solid growth.

A spokesman for Accenture, which saw a major outsourcing deal with Sainsbury's terminated last year, said contract renegotiations are not a new phenomenon and are inevitable as customers' requirements change. "We have canvassed the analysts - Gartner, IDC, Forrester - and they do not believe that there is any trend towards cancellations [and insourcing]," he added. "The negative press surrounding some of the big deals that have been brought in-house skew [perceptions], as they have garnered disproportionate mind share."

The Orbys survey also revealed that large firms are increasingly embracing a "multisource" approach - all those surveyed used four or more different IT service providers to handle various IT functions. Experts claim this best-of-breed strategy increases competition between service providers and offer firms more specialised services. However, Lindley warned that companies using multiple service providers need to invest heavily in managing and integrating these different outsourcing relationships.