Insourcing of business organization functions
Literature review
Introduction
This section examines previous academic material on insourcing of business organization functions. The section reviews why businesses are moving from outsourcing activities towards developing own competencies and capacity to handle various functions that were previously handled by contracted firms. Critical examination is made of journals, books, and other reliable literal material to establish reasons behind the growing trend of insourcing as opposed to outsourcing. In this respect the section draws upon previous materials to evaluate the reasons firms are shifting from outsourcing to insourcing.
This is followed by an examination of the benefits for insourcing as compared to outsourcing. The section then examines the implementation process as the organization moves from outsourcing to insourcing. This is done by examining how implementation is conducted for continuous improvement in the organizations. The section draws on diverse theoretical underpinnings to develop critical review of the concepts and establish the common understanding about the insourcing phenomenon.
The concept of insourcing
Insourcing is defined as the performance of business functions internally rather than contracting them to outside parties (Schniederjans et al., 2005). Insourcing may be conducted with the help of third parties that may be contracted to work on-site or are allowed to perform the task independently. Insourcing therefore is viewed as the opposite of outsourcing as the business decides to conduct all functions within the premises.
Foerstl et al. (2016) argue that insourcing is usually a business decision that is usually taken by the organization with the primary aim of maintaining control of important functions, tasks and competencies. Moreover the authors argue that businesses usually use insourcing as an avenue for reducing costs such as transport, labor and taxation especially for production firms. Agreeing with these opinions, Stille and Narayanan (2016) posit that insourcing involves bringing a third party outsourcer to an organization’s facility to work from within.
For instance, an organization may hire IT firm personnel to work within their department or within the company’s facilities. In another instance, an organization may hire outside experts as consultants within the company to help improve various processes and internal functions. Such experts work with the organization staff to implement recommendations through an insourcing program.
Stentoft et al. (2015) posit that insourcing also involves assigning projects within an organization such as research, or manufacturing to its subsidiary or another company within the same industry or location. Some authors argue that this is outsourcing but Chorafas (2003) states that these organizations are hired to perform these services in house and therefore is insourcing in a broader sense. According to the author, insourcing also involves bringing back activities that were previously performed outside the country to an organization within the country whether inside or outside.
In this regard the author argues that this is insourcing since the company has greater control over the processes and tasks being carried out through regular monitoring of progress and performance updates. Warner and Hefetz (2012) supports these arguments, positing that insourcing includes reshoring which is the practice of bringing back home projects that were previously being performed by organizations in another country.
Through reshoring, an organization is therefore able to better meet its needs by stipulating the ideal terms under which such projects are performed in accordance with its needs. In this regard the authors caution against confusing insourcing of this kind with other types such as onshoring or backsourcing.
Accordingly, onshoring involves bringing back jobs from overseas while backsourcing involves conducting all jobs and processes in-house. In order for an organization to be considered to insource its jobs and processes therefore it has to meet the criteria of involvement of a third party that is performing duties within the organization. Therefore in other cases where organizations make decisions to bring back jobs to the home country but do not conduct them internally that cannot be considered to be insourcing (Schniederjans et al., 2005).
Insourcing has therefore become a common trend in the modern business world with organizations increasingly bringing back jobs that were previously outsourced and hiring individuals and organizations to work internally. According to Červinka et al. (2012) this trend is driven by the changing market dynamics as well as the increased need for internal monitoring and control as businesses seek to reduce uncertainties from the external market environment. Moreover businesses are able to cut down labor costs through insourcing further driving the trend up across multiple industries.
Reasons why firms shift from outsourcing to insourcing
Multinational firms are continually moving production and other processes back home from the outsourced facilities abroad. This recent trend is attributable partially to the problems encountered in the foreign countries and partially by the business changing needs preempting them to focus more on the local customer needs. Bovaird (2016) observes that the most recent recession has tipped scales in favor of domestic manufacturing.
Accordingly, issues such as wage deflation increased labor supply and political sentiments have all forced American companies to shift their manufacturing operations back home from their outsourced locations mostly in Asia. The author posits that one of the leading reasons for organizations moving back their operations to America is the increased labor costs in China.
Furthermore the author opines that the shipping costs have risen over time thus minimizing the benefits gained from outsourcing these activities. In support of these assertions, Candelaria et al. (2015) point out that the average wages in Asia have nearly doubled over the past decade. According to the author the increased labor costs between 2000 and 2011 have therefore reversed the low cost benefits that outsourcing firms operations used to gain.
Moreover, organizations have suffered from the negative publicity of their outsourcing partners in Asia further driving the need to insource these jobs. For instance, Nike suffered from sweatshop allegations, Apple was criticized for suicides inside Foxconn’s facilities and Mattel had several toy recalls. According to Lejeck (2016) these issues tied to outsourcing are the result of low degree of control and lack of monitoring by the firms. On the other hand, consumers have become more conscious of organization’s behaviors and rely on such information in their decision making.
As a result firms such as Apple and Nike have suffered from negative consumer behavior and purchase patterns thus prompting the firm to reconsider outsourcing. As aforementioned, insourcing is viewed as the opposite of outsourcing and rightfully so in application. For instance, where outsourcing limits organization control and monitoring over processes, insourcing allows the business oversight of all tasks and activities and as such they are able to assess all functions and take appropriate actions to remedy any issues that arise (Chaudhury et al., 2015).
To this end, businesses are increasingly moving towards insourcing as they seek to regain control of their operations and minimize any negative issues that may arise from their outsourcing partners’ actions.
Drauz (2014) agrees with these assertions and points out that businesses are increasingly insourcing their activities to benefit from the expertise and competencies of third parties while ensuring that they are in control of all operations. In this regard therefore, the author points out that the organization is able to adhere to standards and quality due to the increased oversight of domestic operations.
Another reason that firms are moving towards insourcing is the growing availability of skilled personnel and competent third parties domestically at competitive pricing. Due to globalization, pricing of labor is continually evening across multiple markets across the globe. Therefore the cost incentives that used to drive organizations towards outsourcing are slowly disappearing thus making insourcing a more viable approach for business enterprise. Any disparities in the labor costs is made up for by the higher degree of control further prompting businesses to return jobs and operations back home.
The benefits firms gain from insourcing
Insourcing helps firms save time and money. According to Jong Chul (2015) insourcing is more efficient as compared to outsourcing and as such helps businesses save time and minimize on labor costs through effective management of the insourced staff. In this light the author argues that often, outsourcing includes some hidden costs that eventually increase the operational expenses for the firm.
Accordingly, these costs can be avoided by contracting third parties to work from within the organization thus raising efficiency and minimizing the overall expenses. In support of these arguments Šmite et al. (2013) aver that outsourcing is quite a hectic procedure that consumes organization time, resources and money and therefore is quite costly. For instance, the author points out that the vendor selection process is quite involving with lengthy and tedious processes.
Furthermore the problem is intensified where organizations outsource activities to individuals thus translating to multiple negotiations and lengthy vetting processes. Also the firm incurs substantial resources in training the outsourced firms and individuals to aid them understand the functions of the organization amongst other things. Such activities are resource intensive and may lead to high productivity lags during the transition periods.
Insourcing enables firms to better utilize the internal talent rather than use outsourced labor. Flinders (2016) argues that often organizations have a substantial talent pool within its ranks that can be developed to boost the overall performance. The author posits that often organizations cite skills gap as the major reason for outsourcing whereas this might actually be a failure of evaluating the existing employees’ capabilities and competencies.
Insourcing allows the organizations to utilize the existing talent pool through professional development in a continuous basis thus ultimately raising the overall productivity of its workforce. Agreeing with these assertions, Pinheiro and Sarmento (2013) posit that outsourcing often overlooks internal talent which in turn may result in negative impacts on the employees and organizational culture.
Therefore underutilized employees are less engaged, will be less productive and subsequently are more likely to leave the organization. Therefore insourcing allows organization to tap into these underutilized employees and their skills thus maximizing the return on investment in the talent pool.
Insourcing allows organizations greater control over the operations as activities are performed in-house. Evans (2015) argues that insourcing provides management with direct oversight and better control through the direct supervision of the workers and functions. Accordingly this is a distinct advantage over outsourcing that involves hiring external employees such as IT experts to handle the organizational infrastructure.
Stentoft et al. (2015) concur with this position and opines that using an in-house team provides organizations with greater oversight of the employees thus helping them achieve higher quality of production. Moreover the authors are of the opinion that insourcing can help boost the employees morale as it is a positive sign that the organization is willing to invest and develop their staff further enhancing their productivity.
According to the authors, it is the combination of these factors that provides multiple benefits to the organization and boosts their performance and quality as compared to outsourcing. Accordingly, the greater degree of control afforded to the management coupled with augmented employee skills and morale helps the firm develop synergies between teams and departments which results in higher quality production. As such, firms are increasingly shifting from outsourcing to insourcing so as to realize these benefits that can provide competitive edge over their rivals in the market.
Implementation process from outsourcing to insourcing
Organizations need to effectively manage the transition from outsourcing to insourcing to guarantee continuous performance. Proper management of the change from outsourcing helps the firm to benefit from efficient flow of processes as well as create environment for improvements as the organization continues adapting to the changing internal environment (Yoong and Huff, 2007).
Some of key IT services which a firm can consider to change from outsourcing to insourcing include computer programming‚ adopting digital security checks and website design services among others. These services can be successfully implemented within the enterprise. Organizations need to invest in human capital thus helping its employees learn and embrace the changes required.
Moreover enterprises can elect to improve the existing employees and talent pool through training and development to facilitate smooth implementation of insourcing for multiple activities. Utilizing the philosophy of Six Sigma and Lean Management can be very much useful in training the staff to be self-dependent thus improving performance in the enterprise (Drohomeretski et al., 2014). According to Silverstein et al. (2008) management works effectively given well-structured decision-making model in the enterprise while at the same time upholding high level of autonomy and coordination among various departments to be insourced.
To achieve successful improvements of services which were initially being outsourced systematic approach will be paramount. It is categorically phased into three steps and management should first understand the system and approach in which it operates. The first step in the implementing changes from outsourcing to insourcing is determining the flow of the communication in the enterprises which can either be vertical or horizontal (Warner and Hefetz, 2012).
All processes linked to supporting processes should be evaluated to determine the extent of adjustment needed before acquiring new resources or employees, or training the existing staff to equip them with necessary skills set. For instance, when a firm is considering establishing in-house facilities, it will still need IT company supplier in order form links with IT services providers to ensure smooth running in case there internal failures within the organization.
The second step will involve planning and implementing the insourcing program to improve the process where a team of professionals should be utilized (Mark, 2015). At this stage, the organization should conduct proper evaluation of their outsourcing programs to identify major processes that can be easily insourced as well as those that require significant changes internally to ensure success.
Moreover, at this stage, the organization will need to identify the factors that led them to outsource in the first place. By so doing they will be able to develop appropriate plans to mitigate the negative effects of these factors as well as establish solid structures to facilitate the success of subsequent insourcing.
The third step is implementation and will include integration of the previously outsourced tasks with the internal processes in a well-coordinated approach. Williamson (2013) posits that existing programs should be integrated in such a way that they cross cut the project to enhance effectiveness upon implementation. All interested parties must be included in this stage with the integration required to adhere to the established plans in order to facilitate the evaluation process.
Lastly‚ actual performance is measured against the planned performance hence ensuring continuous improvements (Lima et al., 2013). All facilities in place should be carefully evaluated at this stage to establish the actual performance against the initial plan. Where the current program is weak, the management should consider adopting remedial measures to ensure successful implementation of in-house facilities (Pichler, 2012).
Six Sigma is an ideal systematic approach that can be adopted by organizations shifting from outsourcing to insourcing to ensure effective implementation and continuous improvement of the organizational functions (Desai, 2010). DMAIC cycle is one of the well-known elements of six-sigma projects and entails define‚ measure‚ analyze‚ improve and control. This data driven cycle seeks to optimize, improve and enhance business stability and processes (Besseris, 2011).
It plays a significant role in ensuring the delivery of high-quality projects within an enterprise and as such its main purpose is mainly to articulate the issues affecting the business prospected resources together with project timeline or scope (Chen, Li & Shady‚ 2010). Subsequently, correct facts are drawn out of charter project record.
The second step is measuring which involves considering present performance level hence establishing areas which need to be improved that can include product and service differentiation (Blazeska & Ristovska, 2016). Upon completion of the project, performance appraisal is carried out to evaluate whether the project has achieved its intended purpose.
The next step involves analyzing which is aimed at finding out the cause of the discrepancy for elimination (Laureani et al., 2010). The problems and their corresponding causes are arranged according to management criteria with the procedure helping understand the correlation of how outputs are affected by the inputs. The next step involves providing the solutions to the identified problems through improving the current processes and ways of doing things which entails changing from outsourcing to insourcing of vital IT services solutions to the firm.
Lastly‚ is control which is geared towards ensuring sustaining the business processes and implemented changes in future hence achieving high excellence in enterprise (Corbett, 2011). At this stage management will need to provide positive reinforcement through motivation and rewarding the best performing department hence ensuring intended changes achieves their purpose (Antony, 2011).
Lean management can also be employed in aiding organizations manage the transition from outsourcing to insourcing. According to Post (2013) lean management is a long term approach of running organizations by supporting continuous improvements. Therefore under leans management the organization seeks small but consistent and incremental changes in its processes to raise efficiency and improve quality. In this respect, lean management is therefore an ideal approach for managing the change from outsourcing to insourcing by identifying the various steps in business processes and finding suitable remedies for minimizing wastage.
Fishman (2012) asserts that lean management follows four guiding principles. Firstly it involves defining value from a customer’s perspective thus helping the organization identify the most useful processes that enhance customer value. Secondly the approach entails identifying all business processes and elimination those that do not contribute to value addition.
Third involves enhancing value by making the value adding processes to occur in tight sequence. Fourth involves repeating these steps until all wastage is eliminated. Therefore lean management is a suitable approach for implementing insourcing since the organization will be able to analyze the processes as performed by the external firms. Subsequently the organization will be able to identify those processes that do not add value or those that create wastages within the value chain and subsequently eliminate them (Pezziardi, 2010).
By so doing the enterprises will be able to enhance the value offered to customers at the same time recording continuous improvements that boost their performance in the market. Through lean management the organization will be able to develop internal competencies by utilizing internal resources and minimizing wastage leading to time and cost saving.
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