Management Insourcing vs Outsourcing

Amity School of Business
Management In Action:
Social, Economic And Ethical Issues
Jitendra Tomar
096-505-123-00
jitendratomar@hotmail.com
In-house Management vs Management Outsourced
1

Insourcing:
• In practice, insourcing is used to describe a task or function that a
company could have outsourced to a third party.
• Insourcing provides companies with more control over decision
making and the ability to move more quickly and precisely,
especially if institutional knowledge factors into some elements of the
job.
• Insourcing assigns a project to a person/group/department within the
company instead of hiring an outside person or company.
• It utilizes developed resources within the organization to perform
tasks or to achieve a goal.
3

Insourcing:
• For example, an organization might insource technical support for a
new product because the company already has existing technical
support for another product within the organization.
• Further, insourcing generally places new operations and processes
on-site within the organization.
• For that reason, insourcing sometimes can be more expensive
because it often involves the implementation of new processes to
start a different division within the organization.
• In many instances, the employees’ time costs a company more than it
would pay a third party to do the same work, insourcing can produce
higher expenses.
• Lately, companies have increasingly outsourced rather than insource,
seeking cheaper labor in developing nations.
4

Insourcing:
• EXAMPLE: A large snack company is putting out a new brand of candy.
Its strategy includes a social media campaign that it hopes will help its
brand to effectively reach its audience.
• The company has its own marketing department that has the product
and industry knowledge to run the campaign. It already implements the
rest of the company's social media strategy although it has never
actually launched a new product on social media.
• Should the company hand over the project to its marketing team or go
outside?
5

Insourcing:
• EXAMPLE: A large snack company is putting out a new brand of candy.
Its strategy includes a social media campaign that it hopes will help its
brand to effectively reach its audience.
• The company has its own marketing department that has the product
and industry knowledge to run the campaign. It already implements the
rest of the company's social media strategy although it has never
actually launched a new product on social media.
• If the marketing team is fully booked up with its current projects, the
company may well decide to hire the outside social media outfit to
launch the social media campaign for its new candy bar. For the initial
phase, outsourcing could be the right choice. Once the campaign is up
and running, the company may well reverse its decision and insource it.
6

Outsourcing:
• Outsourcing is the business practice of hiring a party outside a
company to perform services and create goods that traditionally were
performed in-house by the company's own employees and staff.
• Outsourcing uses the developed workforce of an outside organization
to perform tasks and also the resources of an outside organization for
services and manufacturing products.
• Outsourcing is a practice usually undertaken by companies as a
cost-cutting measure. As such, it can affect a wide range of jobs,
ranging from customer support to manufacturing to the back office.
• Outsourcing is now recognized as a business strategy and has
become an integral part of business economics throughout the
globe.
7

Outsourcing:
• When a company uses outsourcing, it enlists the help of outside
organizations not affiliated with the company to complete certain
tasks.
• The outside organizations typically has a different compensation
structures with their employees than the outsourcing company,
enabling them to complete the work for less money.
• This ultimately enables the company that chose to outsource to
reduce its labor costs significantly.
• Businesses can also avoid expenses associated with overhead,
equipment, and technology.
• In addition to cost savings, companies can employ an outsourcing
strategy to better focus on the core aspects of the business.
8

Outsourcing:
• Outsourcing non-core activities can improve efficiency and
productivity because another entity performs these smaller tasks
better than the firm itself.
• This strategy may also lead to faster turnaround times, increased
competitiveness within an industry and the cutting of overall
operational costs.
• The practice of outsourcing is subject to considerable controversy.
Those opposed argue that it has caused the loss of domestic jobs
across various sectors where in the supporters say that it creates an
incentive for businesses and companies to allocate resources where
they are most effective, and that outsourcing helps maintain the nature
of free-market economies on a global scale.
9

Outsourcing:
• Outsourcing's biggest advantages are time and cost savings. When
used properly, outsourcing is an effective strategy to reduce expenses, and
can even provide a business with a competitive advantage over rivals.
• A manufacturer of personal computers might buy internal components
for its machines from other companies to save on production costs.
• A law firm might store and back up its files using a cloud-computing
service provider, thus giving it access to digital technology without
investing large amounts of money to actually own the technology.
• A small company may decide to outsource bookkeeping duties to
an accounting firm, as doing so may be cheaper than retaining an in-
house accountant.
• Other companies find outsourcing the functions of human resource
departments, such as recruitment, payroll, and health insurance, as
beneficial.
10

Outsourcing:
• Outsourcing does have shortfalls.
• Signing contracts with other companies may take time and
extra effort from a firm's legal team.
• Security threats occur if another party has access to a
company's confidential information and then that party suffers
a data breach.
• A lack of communication between the company and the
outsourced provider may occur, which could delay the
completion of a project.
11

Key Takeaways
Insourcing vs Outsourcing
12

Key Takeaways – Insourcing vs Outsourcing:
• Outsourcing enlists the help of outside organizations not
affiliated with the company to complete specific tasks.
• Insourcing, on the other hand, is a business practice performed
within an organization's operational infrastructure.
• The organization's control over operations and decisions will
differ when using outsourcing and insourcing. Organizations that
use outsourcing for a particular service or process have minimal
managerial control over the methods of the outside
organization that was hired for the project.
• Insourcing generally places new operations and processes on-
site within the organization, while outsourcing involves an
outside organization that is separate from the primary
organization's operations.
13

Key Takeaways – Insourcing vs Outsourcing:
• Companies use outsourcing to cut labor and overhead costs,
including salaries for its personnel, overhead, equipment, and
technology.
• Outsourcing is also used by companies to dial down and focus
on the core aspects of the business, spinning off the less critical
operations to outside organizations.
• On the downside, while outsourcing, communication between the
company and outside providers can be hard, and security
threats can amp up when multiple parties can access sensitive
data.
14

Insourcing
Advantages & Disadvantages
15

Insourcing – Advantages:
• Direct control over the entire development process - Easy access to
the team doing the job. There are no communication issues that may
arise while working with remote teams.
• Familiarity to company’s culture - Ensures that employees see the
bigger picture & are dedicated to the company’s growth. They share
the same vision & values, which makes cooperation easier.
• Personal involvement - As a general rule, the staff is more attached
to projects their company works on. Therefore, they are more
interested in its success.
• Possibility to raise the company’s profile - All of the achievements
reached with the help of organizational resources remains under the
organization’s ownership and control.
• Developing allied areas - Along with the core process handling, the
allied processes could also be developed and applied effectively.
16

Insourcing – Disadvantages:
• Higher expenses required – The direct and indirect costs needs to
be calculated carefully. The value addition and return on investment
could be harder to achieve. Not every organization can afford it.
• The hunt for employees – The appropriate league of employees
and team constituent needs to be incorporated with right
competencies. The additional workload may lead to depleted efficiency
and high churn rate.
• Limited expertise - Organizations may not have as much expertise
and variety when it comes to the pool of experts who can work on the
project.
• Competency enhancement - Organizations need to manage the
training and development of the team in order to enhance their skillset
and technical abilities resulting in higher investments.
17

Outsourcing
Advantages & Disadvantages
18

Outsourcing – Advantages:
• There are many reasons why a business may choose to outsource a
particular task, job or a process. For example, some of the
recognized benefits of outsourcing include:
• Improved focus on core business activities - outsourcing can
free up your business to focus on its strengths, allowing your
staff to concentrate on their main tasks and on the future
strategy.
• Increased efficiency - choosing an outsourcing company that
specializes in the process or service you want them to carry out
for you can help you achieve a more productive, efficient
service, often of greater quality.
19

Outsourcing – Advantages:
• Controlled costs - cost-savings achieved by outsourcing can
help you release capital for investment in other areas of your
business.
• Increased reach - outsourcing can give you access to
capabilities and facilities otherwise not accessible or
affordable.
• Greater competitive advantage - outsourcing can help you
leverage knowledge and skills along to your core process with
a holistic view.
• Outsourcing can also help to make your business more flexible
and agile, able to adapt to changing market conditions and
challenges, while providing cost savings and service level
improvements.
20

Outsourcing – Disadvantages:
• Outsourcing involves handing over direct control over a business
function or process to a third party. As such, it comes with certain
risks. When outsourcing, you may experience problems with:
• Service delivery - which may fall behind time or below
expectation.
• Confidentiality and security - which may be at risk.
• Lack of flexibility - contract could prove too rigid to
accommodate change.
• Management difficulties - changes at the outsourcing company
could lead to friction.
• Instability - the outsourcing company could go out of business.
21

Outsourcing – Disadvantages:
• Just a client - In addition, you may be just another vendor to
the service provider.
• Stringent focus - The service provider may be focusing on
specific aspect and allied services may remain under
developed.
• Offshore outsourcing, although potentially more cost-effective,
may present additional challenges such as hidden costs of
provider selection or handover, and severance. Even simply
managing the offshore relationship can prove challenging due to
difference in time zones, languages, cultural preferences, and so
on.
22

Outsourcing
Key Considerations
23

Outsourcing – Considerations:
• Like other business decisions, outsourcing requires careful
planning and consideration. You shouldn't rush into outsourcing
without carefully examining a wide range of possible issues.
• Most of the complexities associated with outsourcing fall into five
broad categories:
• Productivity - e.g. it can fluctuate and doesn’t always match that
of internal staff.
• Communication - e.g. problems cause errors, delays and lower
productivity.
• Culture - e.g. lack of cross-cultural understanding can lead to
miscommunication.
24

Outsourcing – Considerations:
• Organizational readiness - e.g. weaknesses in internal systems,
processes etc.
• Costs - including labor, overheads, travel, management required,
etc.
• Cost savings are one of the most common reasons companies
outsource. However, the total cost of outsourcing isn't always
easy to work out. Organizations must make sure to fully consider
all costs, and reflect on other key areas, before outsourcing
business-critical functions.
25

Outsourcing
Avoiding the Pitfalls
26

Outsourcing – Avoid the Pitfalls:
To avoid common outsourcing pitfalls, consider the following:
• What are your core strengths and what are secondary? What
processes are you thinking of outsourcing and why? Is the function a
key task which your business needs to control directly to ensure its
future competitiveness?
• What are the costs of doing it in-house? Include hidden costs such
as office space and staff costs. Also, what are the costs of not
outsourcing? Will your business suffer if it doesn't invest in the
expertise or the facilities that an outsourcing partner might provide?
• Check the return on investment (ROI) - ask potential service
providers for help, as many offer an ROI calculator.
27

Outsourcing – Avoid the Pitfalls:
To avoid common outsourcing pitfalls, consider the following:
• Would it be helpful to use a consultant to help you find a service
provider?
• Are you prepared to spend the time and energy required
to manage the outsourcing relationship?
• Be sure that you are ready to outsource, and clear on the benefits of
doing so, before you take the plunge.
28

Outsourcing
Choosing an Outsourcing Partner
29

Outsourcing – Choosing an Outsourcing Partner:
• Outsourcing is about creating a successful partnership. Choosing
a company to outsource to is very different from choosing an
ordinary supplier. You're embarking on a long-term, contractual
relationship, so take time to carefully examine potential service
providers.
• One should check the credentials and track record of the service
provider
• Referring to the customer base of the service provider is of great
help to analyze the track record.
• There are certain questions that need to be answered for
shortlisting a consultant for outsourcing.
30

1. Checking the track record:
• Does the provider have a track record of service commitment?
• Has it been recognized within its own industry?
• Does it track customer satisfaction levels?
• Is the business expanding?
• How good are the service level agreements it offers?
2. Find out Customer Reference:
• Who the provider's existing customers are?
• How satisfied their customers are?
• What the provider's strengths are?
• How they deal with problems?
31

Speak to the provider's existing customers with an industry profile
similar to yours and review the given:
• Current and future capabilities
• Financial stability
• Communication and cultural discrepancies
• Ability to collaborate and innovate
32

Current and future capabilities
• Visit each potential service provider. Look at the working environment
and ask about staff retention and turnover. Check their systems and
equipment, management processes and quality assurance
procedures. Is their company known for driving innovation and
keeping up with emerging technologies?
• Ask your potential service provider if they plan to subcontract any of
your work and apply the same checks to any subcontractors.
Financial stability
• Check that your potential provider is financially stable. If it is a limited
company, get copies of its recent accounts, ask for banker's
references and consider getting a report from a credit checking
agency.
33

Communication and cultural discrepancies
• If you choose to outsource to a company outside the demography,
remember that distance and time zone differences will make
communication and control more difficult. Language barriers and
different business cultures can also present problems. You may
also need to allow for exchange rate fluctuations in your costings.
Ability to collaborate and innovate
• You will want someone who can manage change when necessary,
be resourceful in meeting your goals and requirements, and willing
to commit to building a strong relationship. Relationship
management will be critical in outsourcing. “How will your
relationship be managed and how it will be developed”, is a
crucial dimension.
34

Consultants
Skepticism in Hiring a Consultant
35

Consultants – Skepticism in Hiring:
Though organization may know their strategic gaps but are skeptic in
hiring the consultants. There are numerous reasons behind the
decision on not hiring the consultants. The prominent ones are listed
here:
• I've been burned by consultants in the past - The lack of
experience on the part of the consultant could have significantly
affect the outcome of a consulting effort. Organizations should hire
seasoned professionals to work on account and shepherd their
solutions into your company.
• We can do it ourselves - Really? Do you have enough capacity in your
business that can you free up the "right" people to successfully run
a project on a full-time basis? These needs to be answered prior to
every project. If doubtful, hiring a consultant may help to streamline the
project more effectively.
36

• We know more about "it" than you do – There is no doubt on this.
But consultant are hired not for what you already know and how to
do. Instead, consultants bring a process for thinking that may help you
to improve or change your current paradigm and position you to
continue to flourish within your industry. They can give new
dimensions on what and how to diversify.
• What if "it" fails? - Projects can fail but why not improve your
chances for success by hiring a professional that has worked on
numerous similar projects which are at his core. This could minimize
the risks.
• If I hire a consultant, I may be perceived as incapable - If you fail to
meet expectations, as a manager, you will be deemed incapable.
However, using an outside expert to get the job done shows the world
that you do whatever it takes to make your business a success.
37

• If I hire you, organization wouldn't need me? - The consultants don’t
take the manager’s job. But what if the organizations delegates the
responsibility to a manager and he doesn't have the experience (or
the time) to deliver it, he won't be around long enough to know who
replaced him anyway.
• Consultants costs too much - Yes, consulting fees can add up.
However, it is also expensive to hire a team of experienced people
on payrolls whom organization may only need around for a short
duration. Successful organizations maintain the overhead of retaining
the outside specialized talent, while they focus on the core of their
business. A new concept of on-demand talent is rising in outsourcing
and consultancy.
38

Consultants
The value addition
39

Consultants – The value addition:
• A consultant has the right expertise - This is where it pays to have a
consultant. He is having right competencies to identify a gap and
suggest appropriate action that otherwise was out of sight.
• A consultant may be hired to identify problems - Sometimes
employees are too close to a problem inside an organization to
identify it. That's when a consultant rides in on the white horse to save
the day.
• A consultant can supplement the staff - Sometimes a business
discovers it can save thousands of dollars a week by hiring
consultants when they are needed rather than hiring full-time
employees. They also can save additional money because they don't
have to pay benefits to the consultants they hire. Even though a
consultant's fees are generally higher than an employee's salary, over
the long haul it makes good economic sense to hire a consultant.
40

• A consultant can act as a catalyst for change - No one likes change
as it impacts the culture. But sometimes change is needed, and a
consultant may be brought in to implement the changes. A benefit
to the company is that the consultant can do things without
worrying about the corporate culture, employee morale, or other
issues that get in the way when an organization is trying to institute a
change.
• A consultant provides much-needed objectivity - Who else is more
qualified to identify a problem than a consultant? A good
consultant provides an objective, fresh viewpoint without worrying
about what people in the organization might think about the results and
how they were achieved.
41

• A consultant may be hired to teach - Consultants are called on to
teach many skills. Of course, it's the consultant's task to keep up
with developments in their field of expertise so they're always ready to
teach new clients what they need to stay competitive.
• A consultant may be hired to do the “ignored task” - Let's face it:
No one wants to be the person who has to plan cuts in the staff or to
eliminate an entire division. An impartial outside consultant is the
perfect person to handle such unpleasant tasks.
• A consultant can bring new life to an organization - If you
appreciate ideas that work, then you won't have any trouble finding
appropriate consultants and working with them. At one time or
another, most businesses need someone to administer "first aid"
to get things rolling again.
42

• A consultant may be hired to create a new business – The
unsighted allied areas needs to be discovered and analyzed for
business to grow and diversify. The consultants who are experts in the
allied disciplines are hired to give the prospects in the domain in
which you are novice and need exploration.
• A consultant may be hired to influence other people – The
consultants could influence your potential partners as they have
prominent business relationships. They could divert you to necessary
potential partners for your business in current domain or the new
vertical that you plan to starting.
43

Consultants & Outsourcing
Why the Projects Fail?
44

Consultants & Outsourcing – Why the projects fail?
The first step in finding a partner that is right for you is to understand
the reasons why so many outsourcing partnerships fail.
• Choosing the lowest price and squeezing the provider's profit
margins –
If your main contract criterion is to choose the cheapest company, you
will almost certainly get what you pay for. Many businesses opt to
outsource to cheaper offshore companies without considering the
problems that may lie ahead, in terms of communication issues, quality
of staff, and cultural aspects.
Rather than simply choosing the lowest bidder, you should award the
contract on the basis of the company's ability to do the job. You
should take into account their previous track record, the quality of their
staff and whether you feel they are a good fit in terms of personal
relationships
45

• Failure to ensure that the technical specifications are an
integral, comprehensible part of your contract – Know what you
are paying for, and don't leave it to the company to throw the specs
together in an incomprehensible technical rider full of technical
jargon. It is essential that you fully understand what you are paying
for, precisely what is being provided and why. Don't be afraid to
discuss and ask until you are satisfied.
• Poor Communications - Miss-communication often occurs if you
opt to outsource the project or a service offshore. As well as
language issues, there are time-zone differences, which means that
you and your staff will have to work extended hours in order to keep
in touch, which will lead to fatigue, bad morale and mistakes.
46

• Failure to recognize and accept the need for flexibility – The
infrastructure can be out of date - even obsolete - within months of
implementation. Technical advances and new developments happen
so fast that you have to decide from the outset whether you are
going to be flexible or inflexible on what is being delivered.
In the long-term, failure to agree to common sense changes as the
contract plays out could spell failure and a huge waste of money.
'Contract flexibility' as the project develops will ensure that you keep
up with the latest advances and that your project remains relevant.
47

• Micromanaging the Service Provider - If you have selected the
right contractor who has all the necessary skills to execute the work
as defined in your contract, it makes little sense to continually tell
them what to do. Having built good communications and working
relationships, you should allow them to use their skills to manage
the project or service for you.
By all means keep yourself regularly informed. Understand what is
being done and discuss any problems with their senior
representatives, but let them get on with it.
Micromanagement can lead to bad morale, even resignations, which
will result in a less than 100% effort. In extreme cases, it can lead to
failure of the project.
48

• Expectation mismatch - It is essential that you and the contractor
are in total agreement on what is to be delivered. There may be
many variables, different service level agreements, and
personalized solutions that are discussed prior to signing the
contract. Make sure you understand what you’re getting.
• It's also important to become an integral part of the delivery process
and to be kept informed at every stage. The successful transition
from requirement to solution depends on both parties meeting
expectations at each stage of the process.
49

• Failure to recognize the Service Provider as a strategic partner
- In long-term projects and provision of services, your service
provider can become a valuable partner in helping your business to
grow. Let them know that they are contributing to the success of
your business, and they are valued as the partners. The rewards of
this approach can be considerable.
• Outsourcing the wrong functions - Make sure that you
understand what functions are better kept in-house and which ones
can be successfully outsourced. Which areas of your business will
offer the best value for money if outsourced? Which areas will
benefit by being managed by external professionals for
spearheading key changes and new implementation? A good
contractor will be happy to discuss these options with you, and
advise you accordingly.
50

• Failure to properly manage any changes in requirements -
Many project failures can be attributed to the inability of
management to manage add-ons and any re-definitions of the
contract.
A flexible contract will help in this approach. But changes to the
contract are often based on changes in the business model or
aspects of business that weren't properly considered at the outset.
Delays and uncontrolled cost increases can often spell not only
doom to the project, but also to your business as you fall behind
your competitors. The solution is to get the contract as relevant as
possible from day one, and if changes become necessary, it is
essential that they are well managed and that costs are controlled.
51

• Failure to recognize and manage the service contracts – The
management often try to mirror the successful contracts of other
companies to deal with the service providers. While in some respect,
it could be an admirable aim, but the organizations should also
understand that there are some key differences in the culture of
various organizations.
The above points are key concerns when awarding outsourcing
contracts to an external company and consultants.
52

Cost versus Value of Advice
53

Cost Based Pricing:
• Per Hour basis - The charges for the service are managed on hourly
basis.
• Time basis – The consultant may charge Rs. 5000/hour. Or, the
charges might be set as daily rate to Rs. 15000. It’s based on your
time spent.
• Fixed charged – These are charged by the project i.e. for complete
project.
The above charges are It’s based on the project and is most often
calculated by the number of hours and days the consulting project will
require.
54

Value based pricing
• Value-based pricing is a pricing strategy where the price you charge
is determined by the value you create.
• The consultants might identify through deep conversation with an
organization’s management that overcoming a solution will add what
value to their existing process. A training of sales team may increase
the total sales figure by 15% and will increase the value of sales
process. The consultant shall charge value-based fee for that.
• These fee by consultants is seen as an investment by the
organization rather than a cost.
• During consulting value conversations, through deep and
meaningful consulting questions, the management shares with the
consultant the value for their company as a result of solving the
problem.
55

Value based pricing
• The consulting fee is determined by the value a consultant creates
for an organization and what the management sees as a fair ROI
• The compensation and fee are based on the value that is created for
an organization of the consultancy project and not on the amount of
time that a consultant spend on the project.
• Once the value is decided, the time required by the project is
considered to ensure the profitability for the consultant.
• Not only is it profitable for the consultant, but it’s also the most
ethical pricing strategy for the organizations. It allows the
organization and consultants to discover, quantify, and agree on the
value that is going to be created for them.
56

Value-Based Pricing vs Cost-Based Pricing
• With value-based pricing, the consultant starts with the customer’s
needs.
• The actual service comes last. Only once the consultant discovers
the value the organization wants and his ability to deliver on it.
• Once a consultant discovers the value that he can create for the
clients, they fix the price based on value.
• With cost-based pricing, consultant start with the product. They price
the product based on how much it costs to produce.
• Cost-based pricing is not nearly as flexible. Since the product’s
price is based on how much it costs to produce (and not the value it
creates), the consultant must convince buyers that it’s worth the
price.
57

• Value-based pricing is a powerful pricing model for consultants
because you’re working on custom projects for individual clients.
• Consultants can price each of their projects independently, based on
the value it creates for a particular client.
58

Questions to guess the value:
Direct questions as given are avoided during the conversation to
access the value:
• So tell me a little about your business?
• Who is your target market?
• What is your budget for this project?
• Who will be making the final decisions on this project and who will
be in charge of implementation?
• What would that cost you?
• What was the main reason that you wanted to meet with me?
• What is unique about your business compared to your competitors?
59

The preferred way of framing the questions to access the value:
• What is your number one priority for this business unit during this
fiscal year?
• Is there anything that you or your employees are doing that may be
getting in the way of achieving this result?
• What do you believe needs to be strengthened in order to support
achieving this?
• Many companies in this market are currently facing the issue of X,
are you also finding that a challenge, or is there a bigger more
pressing issue on your mind?
• If you don’t fix it, how long can you manage and stay with things as
they are?
60

Management Insourcing vs Outsourcing

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