Dr. O. Aly
Computer Science

Abstract

The purpose of this project is to discuss significant sourcing topics such as insourcing, outsourcing, offshoring, near-shoring, and captive center.  Executives and leaders are confronted with critical decisions to either insource or outsource and between make or buy. Various factors affect their decisions to go for insourcing such as design secrecy, unreliable vendors, maintaining core competencies. Other supporting elements that can aid Enterprises in their decisions to go for outsourcing instead of insourcing such as cost reduction for small projects, limited numbers of employees, the requirement for highly educated with specific skills professionals.  When organizations decide to go for outsourcing another critical decision to be made is to go for offshoring or near-shoring or captive centers.  Offshoring has various challenges such as cultural differences, language barriers, and distance, while near-shoring can be an appropriate option which does not have these challenges that off-shoring has.  Organizations decide to go for captive centers as an alternative for offshoring by developing an overseas subsidiary.  In summary, Enterprises are confronted with various sourcing options, and they must weigh the benefits and the drawbacks of each option based on the strategic goal and objectives of the business and the requirements to achieve these objectives.

Keywords: Sourcing, Insourcing, Outsourcing, Offshoring, Near-Shoring, Captive Centers

Introduction

Enterprises are confronted with various decisions challenges regarding insourcing or outsource which means to make in-house or to buy from external sources (Baldwin, Irani, & Love, 2001; Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  The decisions are challenges as they involve considerable complexity and business risks. Each approach has its benefits and drawbacks.  Organizations must carefully examine each method and determine the best fit for their business based on its strategic goal and objectives.  This project discusses the decision factors for each approach, and the discussion will expand to other related topics when organizations decide to outsource such as off-shore, near-shore and captive centers.  The discussion begins with the decision cycle framework for business sources, followed by the insourcing approach decision factors.

Business Decision Cycle Framework for Sourcing

In the mid-1990s, Cognizant Technology Solutions proliferated to become a $1.4 billion revenue company providing information technology (IT) outsourcing services (Pearlson & Saunders, 2001).  Outsourcing and insourcing are challenging decision-making process with which executives and leaders typically are confronted.  Careful examination and analysis are required before making the decision for insourcing or outsourcing. 

For Enterprises, sourcing involves many decisions evolving around the sourcing decision cycle framework (Pearlson & Saunders, 2001).  The sourcing decision cycle framework begins with the decision to make or buy, followed by outsourcing or insourcing.  When the decision is to outsource, then the next decision is to offshore or nearshore. The offshore decision is usually associated with cheap labor, or the required skills are more readily available.  The next decision will be to go to a close country or in a country that is quite far. Organizations then are confronted with other decision to go captive center, far-shoring or near-shoring. When organizations settle on the outsourcing provider, and after a while, it is confronted with another decision, as periodically the organization must evaluate the arrangement and determine whether a modification or shift is in place.  When the in-house work is not satisfactory, or other opportunities become available, the organization may decide to outsource.  When outsourcing arrangement is not satisfactory, organizations have several options to consider, either to correct the existing problems, or to continue outsourcing with its current provider, or to outsource with another provider or to back-source.  Figure 1 illustrates the sourcing decision cycle framework which organizations go through when making decisions to outsource or insource.

Figure 1.  Sourcing Decision Cycle Framework (Pearlson & Saunders, 2001).

Insourcing Approach and Decision Factors

When organizations delegate jobs to another entity within the organization, it is defined as insourcing. The in-house entity possesses a dedicated panel who will be expert in providing the requisite services. Insourcing is also described as transferring work from one organization to another organization which is located within a similar country and not outside the country (Kumari & Kumar, 2013).  Insourcing can also mean that an organization develops an innovative business center with a set of skills focusing on a particular service or product.  Insourcing is defined in (Lejeck, 2016) as the return of functionality to the company, increasing the number of resources and personnel in organizations.

Insourcing is the most traditional approach where enterprises provide information system (IS) services or develop IS on-premise or in-house (Pearlson & Saunders, 2001).  Factors which support insourcing, among which the most common factor is to keep the competencies inside the organization.  Some argue that if an organization outsource the core competency, it can lose control over that competency or lose contact with suppliers who can assist in staying innovative about competency (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  There is an increasing trend in the insourcing trend in insourcing approach to reducing the cost of labor and taxes amongst others (Kumari & Kumar, 2013).   

(Hirschheim & Lacity, 2000) argued that insourcing is the assessment process of the outsourcing option with the confirmation to continue the use of the internal IT resources to achieve the same objective of outsourcing.  Fourteen insourcing case studies were conducted to develop an in-depth understanding of IT insourcing decisions and outcomes.  The study indicated four archetypes for insourcing.  The archetype plays an essential role in conveying the fundamental differences that exist in alternative ways organization approach IT insourcing (Hirschheim & Lacity, 2000).  Archetype 1 is about senior executive to enable internal IT managers to cut costs.  Archetype 2 is about IT managers terminate failing outsourcing contracts.  Archetype 3 is about IT managers defend insourcing.  Archetype 4 is about senior executives confirm the value of IT.  The authors indicated that outsourcing evaluations often result from the frustrations caused by different stakeholder expectation and perceptions of IT performance. Different perspectives of stakeholder set unrealistic performance expectations for IT managers, leading to frustration, loss of faith in internal IT management, and hopes that outsourcing vendors will provide solutions.

Insourcing Decision Factors and Challenges

There are factors which support insourcing (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  The cost analysis between buying or making favors the choice of make.  The process and the operations are integrated part of the system and cannot be isolated, insourcing is preferred.  The use of available capacity to absorb fixed overhead is another factor supporting insourcing.  The operation must be in-house for better quality and production control.  Organizations prefer insourcing when the design secrecy is required; the insourcing is a better option (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  When there is a lack of reliable suppliers, insourcing is a wise choice (Kumari & Kumar, 2013).  When organizations have to develop long-term Core Competencies for the organization, it is better to go insourcing (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  When the decision for a process or product depends on the strategic decision for the organization, insourcing is the appropriate option (Kumari & Kumar, 2013).  Insourcing approach is preferred when the time is available in-house to complete software development projects, and the IT professionals are adequately trained, experienced and skilled to provide service or develop software (Pearlson & Saunders, 2001).

Insourcing has various challenges, some of which are dealing with inadequate support from top management to acquire needed resources (Pearlson & Saunders, 2001).  Another insourcing challenge is finding a reliable and competent outsourcing provider who is likely to stay in business.

Advantages and Disadvantages of Insourcing

Insourcing approach has advantages and disadvantages (Pearlson & Saunders, 2001).  The advantages of the insourcing approach include the high degree of control that organizations have over inputs, the increase in the visibility over the process, and the economies of scale and scope.  The disadvantages of insourcing approach include the requirement for high volumes, high investment, dedicated equipment with limited use, and problems with supply chain integration (Pearlson & Saunders, 2001).

Outsourcing Approach and Decision Factors

            Outsourcing is the opposite of insourcing.  The outsourcing option is the process of buying goods or services that can be performed in-house or internally (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  In the 1970s, some IT managers took the outsourcing approach as an essential technique to control the cost (Pearlson & Saunders, 2001).  IT outsourcing involves the outside vendor providing IT services traditionally provided by the internal information system department.  The motives for outsourcing have been broadened since then.  The guiding principle of outsourcing approach has been the transfer of a process and function which is typically not a core competence of an enterprise to an entity that has expertise in that area, allowing the enterprise to effectively utilize its resources in its core areas of business (Kumari & Kumar, 2013).  The objectives of the outsourcing include saving on the cost of operation by acquiring services from a team more productive than the internal resources, and the improvement of quality and value of operation by acquiring services from an entity with best practices in management that business activity. Since these objectives require significant investments in time and resources, over the last two years, many well-structured outsourcing deals have failed to meet expectations (Kumari & Kumar, 2013). Outsourcing approach is increasingly perceived as a strategy that can be used by businesses to leverage the skills and competencies of a definable preeminence.  

In a recent report by (Deloitte, 2018), a survey result showed that outsourcing is enabling competitive advantages.  The same report indicates that organizations are embracing disruptive solutions such as cloud computing and robotic process automation (RPA) 93% are considering adopting cloud solution, and 72% are considering or adopting RPA solution, and 70% believe their service providers have a reasonable or advanced ability to implement disruptive solutions. The disruptive solutions are transforming the traditional outsourcing approach, as the cloud creates capabilities but cost counts.  Figure 2 shows 93% of organizations are considering adopting the cloud, and 64% shows the objective to catalyze IT innovation when adopting the cloud.

Figure 2.  Cloud Adoption One of the Disruptive Solutions Transforming Traditional Outsourcing (Deloitte, 2018).

The same report also showed that organizations are addressing cyber risks when making decisions to outsource.  Figure 3 shows how organizations are addressing cyber risks when making decisions to outsource.

Figure 3.  Cyber Risk Consideration When Outsourcing (Deloitte, 2018).

Outsourcing Decision Factors and Challenges

            Some factors support outsourcing approaches.  When expert vendors are available with specialized know-how generating better output with less cost, outsourcing approach can be a better choice (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  When the cost of developing the required competencies is less with outsourcing than with insourcing, outsourcing is the preferred option (Kumari & Kumar, 2013).  When a business does not have the capabilities or competencies to develop items or products, the outsourcing approach is the better choice.  When a small volume is required, it will not be wise to choose to outsource for cost-effectiveness.  When organizations have limited numbers of employees, the outsourcing option is preferred.  When the volume of a product is unknown and not certain, an organization can go with outsourcing. Organizations can use outsourcing for better strategic focus, better management of IS staff, cash infusion, data center consolidation, and smooth transition to new technologies (Pearlson & Saunders, 2001).

Outsourcing approach has various challenges.  Maintaining an adequate level of control is one of the challenges that organizations have to face.  Maintaining the ability to respond to technological innovation is another challenge for outsourcing approach.  The avoid of a loss of strategic advantage, and overreliance on outsourcing provider are challenges for outsourcing adoption.  The mitigation of the risks associated with outsourcing is another challenge.  Ensuring the cost savings while protecting the quality, and work effectively with suppliers are additional challenges when adopting the outsourcing approach (Pearlson & Saunders, 2001).

Advantages and Disadvantages of Outsourcing

            Outsourcing approach has advantages and disadvantages (Kumari & Kumar, 2013).  Outsourcing approach has greater flexibility, lower investment risk, improved cash flow, and lower potential labor cost.  Additional benefits of the outsourcing approach include the reduced costs, better service and access to new technology and enabling employees to focus their effort on higher-value work that improving output (Baldwin et al., 2001).  The disadvantages of the outsourcing approach include the greater possibility of choosing wrong suppliers and distributors, loss of control over processes, the potential for losing core supportive activities, long lead-times, and hollowing out (Kumari & Kumar, 2013).

Outsourcing Types and Decision Factors

            The sourcing decision cycle framework suggested by (Pearlson & Saunders, 2001) include shows that outsourcing decision includes various types such as off-shore, near-shore, or captive centers (Figure 1).  This section discusses these types of outsourcing approach.

Outsourcing Offshore Approach

The offshore outsourcing approach occurs when the management information system (IS) uses services of contractors or develop a data center in a distant location (Pearlson & Saunders, 2001). The functions sent offshore range from the traditional IT transactions to high-end, knowledge-based business processes.  Outsourcing offshore can save from 40% to 70% in labor.  However, these labor savings come with other costs associated with additional technology, telecommunications, travel process changes, and management overhead which are required to relocate and supervise operations overseas.  Organizations adopt the offshore outsourcing approach for other reasons than the cost reduction.  One of these reasons is that the employees of these companies are highly educated (Kumari & Kumar, 2013; Pearlson & Saunders, 2001).  The offshore outsourcing providers are often profit centers, which have established Six Sigma, ISO 9001, or another certification program (Pearlson & Saunders, 2001). 

Outsourcing Near-Shoring Approach

The outsourcing near-shoring approach is a type of sourcing service work to a foreign, lower-wage country which is relatively near or closes in distance or time zone or both (Pearlson & Saunders, 2001).  It was introduced as an alternative to far-shoring.  Organizations can benefit from outsourcing near-shoring geographically, culturally, linguistically, economically and politically.  Some argue that by being close or nearby, the organization will face fewer challenges regarding communications, control, supervision, coordination or bonding socially (Pearlson & Saunders, 2001).

Captive Centers

The concept of captive center is an alternative to outsourcing offshore and near-short approaches.  The captive center is an overseas subsidiary which is set up to serve the parent company (Pearlson & Saunders, 2001).  Organizations develop captive centers as an alternative to offshoring approach.  In the 1990s, many companies developed captive centers to do software maintenance and customer services.  The captive center approach has four important strategies; hybrid captive shared captive, divest captive, and terminated captive.  

Off-Shoring, Near-Shoring, and Captive Centers Decision Factors

Although offshoring approach has the lowest cost, Enterprises should carefully examine the offshoring option due to the challenges that come along with offshoring such as cultural difference, language barriers, communication gap, time zone differences, and regulations and policies (Corredor, 2018; Pearlson & Saunders, 2001). 

Near-shoring is an alternative option which also offers significant cost efficiencies. Near-shoring has more advantages over the offshoring as it has time and geographic proximity. The timezone and physical proximity of near-shoring approach provide a significant advantage over more distant locations (Corredor, 2018; Pearlson & Saunders, 2001).  The culture similarity is another benefit of the outsourcing near-shoring approach.  The labor pool and cost attractiveness are additional benefits of the near-shoring for decision consideration.

Summary and Conclusion

This project discussed major sourcing topics such as insourcing, outsourcing, offshoring, near-shoring, and captive center.  Executives and leaders are confronted with a critical decision to either insource or outsource and between make or buy. Various factors affect their decisions to go for insourcing such as design secrecy, unreliable vendors, maintaining core competencies.  Other supporting factors that can aid Enterprises in their decisions to go for outsourcing instead of insourcing such as cost reduction for small projects, limited numbers of employees, the requirement for highly educated with specific skills professionals.  When organizations decide to go for outsourcing another critical decision to be made is to go for offshoring or near-shoring or captive centers.  Offshoring has various challenges such as cultural differences, language barriers, and distance, while near-shoring can be an appropriate option which does not have these challenges that off-shoring has.  Organizations decide to go for captive centers as an alternative for offshoring by developing an overseas subsidiary.  In summary, executives are confronted with various sourcing options, and they must weigh the benefits and the drawbacks of each option based on the strategic goal and objectives of the business and the requirements to achieve these objectives.

References

Baldwin, L. P., Irani, Z., & Love, P. E. (2001). Outsourcing information systems: drawing lessons from a banking case study. European Journal of Information Systems, 10(1), 15-24.

Corredor, F. (2018). 4 Reasons Why You Should Consider Nearshoring Vs. Offshoring.

Deloitte. (2018). 2018 Global Outsourcing Survey. Retrieved from https://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html. 

Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications of the ACM, 43(2), 99-107.

Kumari, K., & Kumar, Y. V. (2013). Outsourcing vs. Insourcing: Best for Your Organization? International Journal of Management, 4(3), 08-13.

Lejeck, D. W. (2016). How to decide between insourcing and outsourcing.

Pearlson, K., & Saunders, C. (2001). Managing and Using Information Systems: A Strategic Approach. 2001: USA: John Wiley & Sons.