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Research Topic
From outsourcing to insourcing.
Or what can stimulate the companies to turn back
home.
Master thesis
Angel Marchokov, /s2557339/
a.marchokov@student.rug,nl
University of Groningen – Faculty of Economics and Business Msc International Business and Management
Mr. Dr. B.J.W. Pennink Mr. Dr. K. van Veen
***
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Abstract:
The globalization has led to significant changes in the way firms do business. New forms, methods and practices were adopted and implemented, due to it. National companies made a shift toward international domains, exploring new markets and reaching more diversified customer groups and their needs. And while companies go global, in order to access a larger pool of buyers and resources, reduce development costs and increase their market share, one of the most appropriate modes to do so in the last couple of decades was through outsourcing. Meanwhile, in the last few years we become witnesses of a new raising phenomenon, called ‘insourcing’ or described also as a reversed-outsourcing. Therefore the objective of this qualitative research is to explore multinational Dutch companies with initially outsourced activities to non-affiliated entities, which subsequently have been insourced back home. The paper investigates under the insourcing decisions taken by few Dutch multinationals and the reasons behind the factors which have stimulated these companies to insource their activities back home.
Three case studies with in-depth interviews were conducted, transcribed and consequently interpreted. All three are in different sectors and industries. However, two of the case studies relate to the service sector, while the third to the manufacturing. The case studies indicated that few factors appeared as common and considered as a strategic decision for the insoursing. The most notable ones are the cost saving, the taking back responsibility and the new technology implementation Nevertheless, differences between different companies become apparent, with regard to both, factors and motives for insourcing.
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Acknowledgement
I would like to express my special appreciation and gratitude to my thesis advisor Professor Dr. Bartjan Pennink for his exemplary guidance, assistance and valuable advice to me throughout the process of this research. In addition, I would also like to thank my second thesis coordinator and co-assessor Professor Dr. Kees van Veen.
I also take this opportunity to express my deep regards to both Professor Dr. Kirstin Scholten and Professor Drs. Henk Faber for their collaboration for providing me with invaluable and useful coordinates of companies and their managerial staff for interviewing. Without these contacts, the data collection of this research would not be the same. In complement to that I would also like to thank all practitioners for agreeing to be interviewed, for their willingness and desire for cooperation.
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Content
1. Introduction ………5
2. Background ………....8
2.1. RQs and conceptual model ………..23
3. Research methods ……….24
3.1. Strategy ………24
3.2. Recruitment and interviews ……….25
3.3. Data collection ……….26
3.4. Data analysis ………...28
4. Case studies ………..29
4.1. Case study 1 – Company ‘A’ ………..29
4.2. Case study 2 – Company ‘B’ ………...36
4.3. Case study 3 – Company ‘C’ ………...43
5. Discussion and implications ………46
6. Conclusion ………51
7. Limitations and Suggestions for Further Research ………52
8. Appendices ………54
8.1. Appendix 1 – Interviewing questions ………54
8.2. Appendix 2 – Interview Company A ………56
8.3. Appendix 3 – Interview Company B ……….71
8.4. Appendix 4 – Interview Company C ………83
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1. Introduction
In the last couple of decades the globalization has led to significant changes in the way firms do business on the international markets. Nowadays, modern markets are required for manufacturing and servicing architectures which enable the MNEs to respond very quickly to the variations in quality and quantity of the produced goods and services so as to satisfy the customers’ needs, preferences and desires. In order to achieve this goal and to stay competitive, the companies should consider a new, more efficient strategy by implementing a constituent mode of sourcing or more precisely, a global sourcing, as well as cross-site collaboration with other non-affiliated companies (Karolak, 1998; Elbert, 2007). One of these alternative methods of sourcing, which gained its popularity in the early 1980s in the United States and is being seen for the last three decades as a great expanding phenomenon, was the outsourcing (Sikula et al., 2010).
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al., 2006; Ebert, 2007). Due to these negative facets of the outsourcing in addition to the occurred financial crisis of 2007, a global economic downturn was triggered (Drauz, 2013). As consequence, many companies have started questioning both their recent outsourced decisions and sourcing strategy. By shifting processes and activities which have been initially outsourced for a long period of time to foreign suppliers, back home, enabling the companies to react independently, and with higher efficiency and speed to economic fluctuations and downturns, a new phenomenon is raising on the horizon, called ‘insourcing’. And while there is a wealth of academic literature examining the outsourcing as one of the possible sourcing options, generally addressing the decision of whether or not to outsource (Smite et al., 2010; Tanriverdi et al., 2007), other specific sourcing decisions, such as the insourcing phenomenon of the last few years, appeared relatively unexplored and neglected. A systematic in-depth literature review from near past (Prikladnicki et al., 2010), states that the insourcing as a new mode of sourcing and firm strategy, in particular, is not well researched (Smite et al., 2012). In compliance to this there is a scarcity in the academic literature, comparing the different sourcing options, and especially the outsourcing versus the insourcing.
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labor expense in the Far East. These and other factors have resulted in the last few years, “in a new wave of insourcing and decline in the popularity and practice of outsourcing” (Sikula et at., 2010). Therefore, this study aims to identify the tendency from outsourcing towards insourcing.
The current research explores the underlying motives behind the insourcing and the decision-making process. The objectivity is to probe and to analyze the factors which stimulate the multinationals to insource back in-house their previously outsourced activities. Thus, the paper examines the insourcing decision and the reasons motivating it in three case studies, all from different industries with headquarters based in the Netherlands. A qualitative research method has been used, investigating over three Dutch companies, and providing the reader with insight into the practice of manufacturing and service strategy departments.
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2. Background
The outsourcing is usually represented as a strategic decision of the company, which it takes in order to achieve better performance and competitiveness on the national and international markets. This type of decision is even characterized the same as the classical one “buy-or-make” decision on products, services, processes, and facilities that companies are making from many decades (Russell and Taylor, 2003, p. 126). And while the theoretical foundations for the outsourcing can be traced back to the transition cost economic (TCE) theory, introduced by Coase (1937), the motivation for outsourcing can be seen in two perspectives. The outsourcing can be differentiated in terms of domestic outsourcing and international outsourcing (Schniederjans & Zuckweiler, 2004). The former one means that both companies, the outsourcing firm and the company to which the operations have been outsourced, are situated in the same country of origin. However, the later term is relevant when the contractor company and the performing firm share two different countries. These two terms can also be met in literature as only outsourcing and as offshore outsourcing. The same categorization applies also for the insourcing.
Due to the abovementioned variety of definitions and the different understandings of the authors behind them existing in the literature, and taking into account the fact that for writing a good qualitative research, one of the most important things is to be initially considered is the audience (Hennink, Hutter & Bailey, 2011), as this determines the structure, the content and the depth of the explanations, profound definitions for the diversity of terms are provided in the current section. Considering the fact that the audience of this paper may vary widely, from academic staff, researchers and professional groups with in-depth knowledge and experience in the particular field, to non-aware ones, such as undergraduate students and people out of the business and management study, a couple of explanations are presented for the better comfort and convenience of the reader further in the paper.
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1. The Outsourcing is the movement of internal to the company business processes, functions, operations and activities to an external organizational unit. In this manner the outsourcing refers to the process when a company or an organization gives part of its work to another non-affiliated firm and thus makes it responsible for most of the issues relating to this outsourced product or service. For instance a project which has been performed initially in-house but later on is sent out of the company’s borders, to be performed by another company. The outsourcing is the contracting out for the company business processes and functions to a third-party in the same country of origin, because it offers a higher value than staffing it internally (Burton, T., 2013). By doing so, a company can focus more on its core competencies in-house and other business concerns, getting a better performance in general, while outsourcing activities from a secondary importance and with low valued-added to other organizations that have specialized tightly in the particular outsourcing operation or activity. Mitigating the shortage of available skilled labor to perform these operations, the lack of resources, required expertise in particular areas or just due to cost-saving drivers, many companies nowadays outsource various professional areas of their companies, such as e-mail services, payroll and call center, simple assembly work, packaging etc. This allows the companies to be more efficient, to save time and resources, and to focus on other drivers for growth as R&D, innovation, new technologies, product lines, and tailor-made products and services to their customers.
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synonyms of each other and backsourcing is usually used as a substitute for the more widely accepted and common one – insourcing. Because of this, the term which is used, and accepted with higher accuracy and validity in this research is insourcing.
3. Offshoring is another business term relating to the relocation of companies’ segments, processes and operations from one country to another country. It can be seen in terms of production offshoring, as well as services offshoring. The incentives behind the offshoring can be many, but the most fundamental ones are: cost reduction, cheaper labor, lower taxies, natural resources of the offshore country, a means for entry mode, better geographic location, cheap land, cheap loans, fixed currency, huge economies of scale based on higher population in the particular country etc. In this manner, the offshoring looks pretty much the same as the outsourcing, but with the main difference that the former one involves moving functions and operations from one country to another one, without the explicitly of moving these from one company to another one. While the outsourcing expresses exactly the opposite, a production or service shift from one entity to another one, both based in one country.
4. Offshore outsourcing is third kind of definition, differentiating from the pure outsourcing and offshoring. It is a combination of both of them. This means that an external company or organization is hired to perform some business functions, situated in a country other than the country of the contractor firm is. For instance, if a company based in the United States sends out some of its activities and operations abroad to a Chinese firm located in China, to perform these functions for it, this would be an example for offshore outsourcing. But meanwhile if the American company sends these functions out only of its borders, but not from the country’s borders, then the operation is characterized as just outsourcing. But due to the complexity and the length of this term, the literature usually neglects its full presentation and calls it as just outsourcing as well.
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illustration, an example can be a Dutch-based company, headquartered in the Netherlands with initially offshored outsourcing activities to Malaysia, which subsequently decides to insource these back in-house, in the Netherlands. Then this relates not just as an insourcing, but as a re-shore insourcing, due to the fact that these brought back functions come first from a non-affiliated company, and secondly, this company is located in a different country. This can also be met in the literature as an “inshore insourcing”, “offshore insourcing” or as a “backshore insourcing”, both bringing the same meaning and idea. Considering the most accepted and common terminology, the first definition is used in the paper. By comparison, Han et al. (2014) defines the same re-shore insourcing, as a sourcing activity inside, within the boundary of the firm (sourcing from its own affiliates) through foreign direct investment (FDI). Or in other words, a company which sources its domestic production, by bringing activities from its own subsidiary, located abroad and opened through FDI in that particular country. However, this explanation contradicts our definition for re-insourcing and consequently it is not used further in the text.
Although, there are more sourcing decisions for a company, existing in that area, such as: global sourcing, multisourcing, co-sourcing, personnel sourcing, and in addition onshoring, nearshoring, farshoring etc., they are not in our field of interest and consequently only the foregoing five are used further in the paper.
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Table 2.1. Outsourcing advantages and disadvantages
Factor
Advantages
Disadvantages
Managerial
Focus on core activities
(Antonucci et al., 1998; Beaumont and Costa, 2002; Lankford and Parsa, 1999; Pagnoncelli, 1993; Yang and Huang, 2000)Focus on key strategic
objectives
(Apte et al., 1997; Gupta and Gupta, 1992)Shared risk (Antonucci et al.,
1998; Beaumont and Costa, 2002)Loss of control over critical
functions
(Antonucci et al., 1998; Lankford and Parsa, 1999)Loss of control over suppliers
(Allen et al., 2001; Apte et al., 1997; Gupta and Gupta, 1992; Lankford and Parsa, 1999)
Performance measurement
(Allen et al., 2001; Apte et al., 1997)
Risk of violations over the
property rights
(Apte et al., 1997; Beaumont and Costa, 2002)Anticipated benefits exceed
the actual benefits
(Beaumont and Costa, 2002; Lankford and Parsa, 1999)Financial
Lower overhead cost (Allen et
al., 2001;Antonucci et al., 1998; Apte et al., 1997; Beaumont and Costa, 2002; Yang and Huang, 2000)Reduce technology
investment
(Allen et al., 2001; Apte et al., 1997; Beaumont and Costa, 2002;)Transfer fixed cost into
variable cost
(Allnoch, 1997; Antonucci et al., 1998; Beaumont and Costa, 2002; Yang and Huang, 2000)Failure to realize cost savings
(Antonucci et al., 1998; Beaumont and Costa, 2002)
Cost of reverting to
insourcing
(Apte et al., 1997; Beaumont and Costa, 2002)Operational
Increased access to
resources
(Antonucci et al., 1998; Apte et al., 1997; Gupta and Gupta, 1992; Yang and Huang, 2000)Higher quality
(Antonucci et al., 1998; Gupta and Gupta, 1992; Pagnoncelli, 1993; Yang and Huang, 2000)Decrease product design
cycle
(Apte et al., 1997;Dependence on suppliers
(Antonucci et al., 1998; Beaumont and Costa, 2002)
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Pagnoncelli, 1993)
Access to leading-edge
technology
(Apte et al., 1997; Gupta and Gupta, 1992)Increased flexibility
(Antonucci et al., 1998; Gupta
and Gupta, 1992; Pagnoncelli, 1993)
Tap suppliers’ existing
capacity
(Antonucci et al.,1998)Human Resource
Access to specialized
knowledge of the suppliers
(Allen et al., 2001; Yang and Huang, 2000)
Flexibility to adjust staffing
levels
(Allnoch, 1997;Antonucci et al., 1998; Apte et al., 1997; Gupta and Gupta,1992)
Lower moral and loyalty of
permanent employees
(Antonucci et al., 1998; Beaumont
and Costa, 2002; Gupta and Gupta, 1992; Lankford and Parsa, 1999)
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started a rapid change in the last few years. The financial crisis from 2007 in addition other global factors which occurred on the international market, left a strong impact over the offshore outsourcing decisions and questioned its advantages and validity, in terms of cost savings, efficiency and benefits. Rise in the oil price, since 2000 made the cargo ship transportation overseas a much more expensive option. The costs for cheap labor in China increased as well. The wages are now five times higher than what they used to be ten years ago, growing at an annual rate with up to 20 percent (Burton, T., 2010). A production shift from labor intensive goods to higher material content and technology items, required a new method of manufacturing than just chasing labor savings and cheap transportation. This led to the need for improvement of outsourcing decisions and re-thinking of the companies of their current strategic sourcing functions with a different one, more efficient and up-to-date. With the turn of millennium and as we entered the 21st century this began to change. All these factors resulted in a new wave, a wave of insourcing and meanwhile a decline in the popularity and practice of the outsourcing (Sikula et al., 2010). The insourcing as a new business model appeared to be the successor and replacement of the previous outsourcing and a trend in the field of international business for the next upcoming years.
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If the main motives for the outsourcing decisions are well-known and identified in details in the literature (see Table 2.1.), the motives for the (re-shore) insourcing have been far less researched and unexplored (Drauz, 2013). Even thought existing researches do point out the motives against outsourcing, such as the loss of know-how (Adenauer, Hoffman & Kayser, 2008; Hoecht & Trott, 2006; Lonsdale & Cox, 1998), or the unexpected costs and overestimated savings of the outsourcing (Bergin, Feenstra & Hanson, 2011; Jennings, 2002; Kremic, Tukel & Rom, 2006), no existing research clearly and entirely states and represents the insourcing decision motives and the driving factors of the companies behind them. However, there are two papers, which partly explore the re-insourcing motives in two specific industries. The first one explores the underlying re-insourcing motives and the decision-making process in the automobile industry (Drautz, R., 2013). While the second one, researches the offshore insourcing decisions in the software development (Smite et al., 2012). Yet, aside of this there is not any existing comprehensive and fully describing the insourcing decisions literature and the factors stimulating it. One of the possible reasons for this can be related to the novelty of this process. However, the main goal of this research is to explore and probe deeper in the insourcing decisions and the issues supplementing it.
Often firms make their outsourcing-insourcing decisions without being fully aware of all related issues and implications or focusing their attention only on short-term drivers and benefits, such as the cost price reduction dimension. However, a late or inappropriately taken decision may harm and affect the firm with long-standing negative consequences. Loss of control over core functions, unreliable suppliers, failed cost savings, lower quality, monitoring issues, lose of know-how and property rights violation, are just some of possible consequences which can occur, if a bad decision would be taken. All these factors in combination with the rise in transportation costs, as a consequence of oil price developments and the need to be produced closer to the customers for better flexibility and meeting the needs, resulted in the adoption of insourcing initiatives in several developed countries, including the US and Western Europe (Burnson, 2013).
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demands” (Youssef, 1994), or a quick time response, referring to the “speed to market” of the products (Azuma, 2001). The re-shore insourcing of manufacturing functions and operations, especially in the high performance quick response industries, provides the firm with several advantages, like a capacity buffer, in order to respond to unexpected peaks and downturns in the demand, independence from the supplier’s lead time, higher quality control and monitoring, higher value-added from the products, improve in the customers’ satisfaction and the request’s responsiveness, and better performing system in general (Caputo and Palumbo, 2005). All these factors contribute to the company and enable it to achieve a quick-reaction to the fast changing environment, gain again full control of its external functions and operations, and increase its competitiveness on the market. Meanwhile, other issues deriving from the perspective of insourcing shift may be: concerns about the reliability of the suppliers, their capability to meet the needed quantity and the quality of the production; excessive dependence of the supplier for the final product; and, possibilities of realizing economies of scale of scope, in accordance for positive future forecasts to demand patterns and customers’ orientation. However, any other opportunity which can raise and serves for the company as an advantage of the insourcing decision can be: the achievement of better control, transparency and visibility, reduced costs, improved internal skills, competencies and technology, and reduced lead times (Caputo and Palumbo, 2005).
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illustrates some of the most common outsourcing-insourcing advantages, by weighting them on the both sides of the scale.
Figure 2.1. Determinant Factors: Insourcing vs Outsourcing (Modified from Sikula, 2010)
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contrast the activities of the supply chain are outsourced. The insourcing also enables for a significant reduction of the product transportation delivery costs and problems (Sikula et al., 2010). It became more important in the last years, the site of production and consumption of goods and services to be on lower distance than what it used to be. Products and all kinds of items produced thousands of miles away from the final customers, conveyed and transported across seas and oceans to reach their final point and country of purchase. The transfer of these items increased its value, due to the rise of the oil price, making such kind of transportation extremely expensive. The innovation and the R&D as factors and requirements for sustained business advantage became one of the most important and crucial factors, driving the companies toward new products, markets and customers, as well as growth and higher revenues. By innovating and developing R&D in-house, the companies can achieve better and faster results than comparing the same through outsourcing. Another essential issue and reason for insourcing is the customer satisfaction. Nowadays, the customers’ concerns and preferences are directed more to quality and country of origin of goods and services, rather than the price. On the other hand, a big increase in unhappy customers appeared as a result of the permanently outsourcing activities and operations to third countries, such as India and China, turning the wheel toward insource and home-based operationalization. And last but not least, the aspect - “speed to market”. Price and quality issues are not any more the only ones factors affecting the buyer’s decision. How quickly a company responds to the demand and how quickly it produces and delivers the product or service on the market, is now more important than just price and/or quality. By eliminating delivery delays, the insourcing enhances the “speed to market” consumption criterion. Considering these and other factors, the weights from the recent past began to turn the scales in favor of the insourcing versus the prior dominating outsourcing model.
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outsourcing has cooled slightly, taking into account and recognizing the risk of internal knowledge and control, service quality and delivery, and the failure to find an appropriate market of outsourcing executors to perform their work (Warner and Hefetz, 2007). The emerged reasons behind the public services insourcing come to be inadequate service quality, failed cost savings, monitoring issues, contract specialization problems, and political support and improvements to local governmental efficiency. In fact, the most common drivers for insourcing derive from inadequate cost savings and monitoring problems. “The lack of monitoring of outsourced contracts leads to the need to insource in later periods.” (Warner and Hefetz, 2007). But other dimensions can support the idea for insourcing as well. High transaction costs, fiscal concerns, level of competition, poor management, a higher level of asset-specificity services, citizen dissatisfaction and public opposition can also complement to implementation of insourcing in the service sector, in regard to the public sphere. In addition it should be mentioned that the insourcing requires a level of capacity to bring the work back in-house (Warner and Hefetz, 2007). Meanwhile, if there is underutilized capacity during the outsourcing and its costs constitute for a high-amount of the total fixed costs, than the insourcing or re-insourcing can lead to a decrease in the costs per unit, by fully eliminating the existed costs of the outsourcing supplier (Drauz, 2010).
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2012). This has been mainly driven by two factors. Firstly, the rising Chinese labor costs and wages which have doubled for a period of five years, in the period between 2003 and 2008 (according to the BLS - Bureau of Labor Statistics). On an annual base the Chinese wages are going up about 18 percent, while the US wages are going up with only 2 percent (Moser, 2013). And secondly, the fuel prices on a global level, affecting negatively the shipping and cargo transportation. In addition, discoveries in the national gas have boosted the manufacturing, by decreasing dramatically the industrial prices and costs for production (Kim, 2013). Implementation of new technology advances also made the American production cheaper with growth in the productivity and decrease in the content of labor as a part of the total costs for production. Therefore, considering all these aspects, until 2015 the manufacturing costs in China are expected to be high enough, to become more expensive to manufacture many goods and products there than in the US (Moser, 2013).
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2.1. Conceptual model
Although a wealth of academic literature exists on studying the sourcing options and implications, it relies primarily on the outsourcing process (Smite et al., 2010; Tanriverdi et al., 2007), while the specific decision for insourcing appears to be relatively unexplored. A recent literature review shows off that the re-shore insourcing, in particular, is not well researched (Prikladnicki et al., 2010) and that just a limited amount of data points exist in that concrete field. Considering the scarcity of the available literature and the novelty of the insourcing, the current research tries to explore and shed light on this process with all factors and issues supplementing it.
In order to develop an in-depth understanding of the insourcing decisions and outcomes of the large multinational companies, a multiple case study approach was adopted. Motivated by the limited systematic research work in this particular area, the goal of the paper is to address the following research questions:
Main research question:
“What factors stimulate the multinational companies with outsourced activities and operations to insource these back in-house?”
In addition to the main research question, a couple of sub-questions are pointed out as well.
Sub-questions:
“Which factors do companies use to give as a reason for the insourcing?”
“Are the reasons for insourcing the same as those which have been primary for the outsourcing?”
“Do the reasons behind the insourcing vary among the different sectors and industries?”
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What factors can stimulate a company to make a move from outsourcing to insourcing?
3. Research methods
3.1. Strategy
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open-ended semi-structured questioning was considered most appropriate and suitable for this research (Bernard, 1994; Patton, 2002; Rubin & Rubin, 1995). A strategy which enabled to elicit the participants’ in-the-moment thought processes, with well-limited researcher bias.
3.2. Recruitment and interviews
In this study, three large Dutch companies, agreed to participate in the research and to be interviewed, providing the researcher in this manner with three case studies. Although there is no ideal sample size for conducting a research, consisted of case studies, the present paper can be related as fitting the most of the academic recommendations for a case study research. An empirical data was collected from qualitative type interviews with different managers and directors in companies, responsible for and involved directly in the insourcing implementing and the concomitant issues regarding it. Two of the three companies have a global impact, operating in more than one country. The headquarters of the all three are situated in the Netherlands, the country where the implementation of their manufacturing and service strategic activities and operations take place. For company ‘A’ and company ‘C’, the city of origin is in the North-East province of Holland - Groningen, while for the third one that is the nearby located Drachten. The three companies range in size of employees, turnover, annual sale revenue, profit etc. Even though, the companies’ sizes provide a base for adequate comparability and opportunity for transparent observation of their outsourced and insourced activities and operations.
The interviews' data were collected between July and August 2014 from three places. The sites were located in two neighbor cities, as it was already abovementioned. All interviews exploratory in nature, were conducted in person, and comprised of only one interviewer and one interviewee. The interviewing process was conducted in English, recorded from a digital recording device, and varied in length from 30 to 75 minutes. During the interviewing, notes were taken on a sheet of paper as well. Later on the audio-taped interviews were transcribed verbatim on electronic format documents, assigned a pseudonym and subsequently sent back to the interviewees for approval.
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to the researcher was consisted of seven multinationals, all Dutch companies, mainly located in the Northern part of the country. Each of these was reached by email with a request for an interview. In addition, a comprehensive guideline and explanation, regarding the thematic of the study problem and the format of interviewing process, was sent in order to prepare the companies for the meeting. The respond rate was 57 percent. Four of seven companies replied with a positive answer for conducting an interview with them. After a secondary check and phone call, one of these four failed the criterion for interviewing, due to the fact of overlapping information of the participants. The contacted person said that he is aware with the outsourcing-insourcing issues in his previous company (in our case that is company ‘B’), from which interview was already taken, but not with the company where he currently works in. Meanwhile, second email reminder was sent to the other three non-replied companies. One of them gave back an answer that the company will be temporary closed for three weeks period and interview could be taken after its activities and operations are reopened again. Unfortunately, this became in contrast with the already settled and specified timeline of the research project. The other two did not reply.
3.3. Data collection
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Each of the companies was interviewed only once, with one interviewee. In company ‘A’, the interview took place with a senior purchaser, responsible for and involved in the insourcing activities of the company back in-house. For company ‘B’, the key informant was a director of industrial projects and member of the management team. For company ‘C’ the interviewee was a manager of procurement. All three interviewed people were part of the upper-echelons of their companies, serving in them from a long period of time, involved in the strategic decisions and aware with the outsourcing-insourcing issue implementation. On a later stage of the research it becomes clear that even though the interviews were not conducted with the CEOs of the three companies, the decision-taking process for the insourcing, was not in their jurisdiction and competencies. However, the so chosen respondents were directly implicated in the strategic operations of their companies, as well as taking enough high positions in the organizations, to be the survey considered exhaustive, accurate and trustworthy.
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3.4. Data analysis
The transcribed verbatim interviews were analyzed, by using data analysis and techniques. These consisted of the following model encompassing several steps:
1. For each interview was created an individual case study description. The detailed cases were written based on the collected data from the interviews. Every case included: key information about the participants, their role and current position in the organization, as well as their involvement and awareness in the insourcing process; an explanation about the main purpose and business of the company; description about the initial outsourcing decision, its goals, issues and result; the major factors stimulated and forced the firm to switch toward insourcing, and the responsible figures (decision-makers) staying behind the decision; duration, costs and implementation of the insourcing; and finally, the consequences (results) from it, as well as the future plans of the entities.
2. The second step was to scan about existing common features across the three cases and then to analyze these, in order to obtain some impression about actualities, similarities and differences. A couple of similar factors emerged among the companies as a common reason for their insourcing decisions and all other issues relating to them. Outsourcing sameness was also found, as a preceding decision-taking process and implementation. On the other hand, some differences appeared as well. A comparison summed up these facets into one whole, by making a clear distinction between which are the things that come to be common and meanwhile what can be the discrepancies. This is shown off in the discussion section, coming straight after the case study illustration.
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4. Case studies
Aiming to achieve a better understanding and idea about the insourcing decisions of the companies, their strategies and stimulated factors toward the back in-house movement, a set of respective examples provided by the companies is explored and summed up.
In the following, three cases are provided, with in-depth description about their insourcing decisions, the underlying motives and factors behind that, and the firm basis for their manufacturing or service strategy. In order to that, the research also seeks the prior purpose of the outsourcing decisions, their results and implications responsible for the later insourcing implementation. The term ‘outsourcing’ is defined as “having work that was formerly done inside the organization, performed by an external organization” (Beaumont and Sohal, 2004). While regarding the insourcing, its definition describes the opposite meaning of the outsourcing (reversed-outsourcing). In other words, bringing formerly outsourced activities, operations or in general firm’s processes to external organization back in-house. In addition, the re-insourcing (re-shore insourcing) includes bringing the same these outsourced functions abroad back home.
4.1. Case study 1 – Company ‘A’
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In order to be studied the main decisions and factors that stimulated the company to insource its activities back in-house, a preceding investigation seeking the outsource motives, decisions and driving factors, as well as the achieved results had to come first.
Company ‘A’ decides to outsource some operations for the first time in 2001. The outsourced activities can be diversified divided in two major groups. The first one relates to the work of digging and fitting of gas pipes into the ground. This activity has been outsourced to a contractor doing the work for the company, but due to its specifications and other related issues, it is not in our interest and it will not be further investigated in the paper. The second group underwent outsourcing regards to the ICT stuff of the company, such as the data center. This is the activity on which the research stops its attention and investigates what factors resulted in the following decision of insourcing shift. Seeking the reasons behind the outsourcing of these functions, in terms of what they have been firstly outsourced, two clear reasons are pointed out as an answer of the question. These are: “(1) saving money and (2) being worry free”. The goal of the former one relates mainly to costs reductions in the payroll of the company through outsourcing these functions to an external contractor to perform them on a lower price than the home-base execution would cost. Thus, the decision behind the outsourcing here comes as a full support of the most popular and cited reason in the literature, regarding the financial aspect of this strategy and more precisely to “lower/stabilize overhead costs” (Allen et al., 2001; Antonucci et al., 1998; Apte et al., 1997; Beaumont and Costa, 2002; Gupta and Gupta, 1992; Lankford and Parsa, 1999; Pagnoncelli, 1993; Yang and Huang, 2000). The second reason, “being worry free” usually addresses the transfer of responsibility and work performance to someone else. The following quotation underlies this even better:
“The idea was they were gonna keep all the data server related, servers running for us. And then it didn’t work out as we wanted to. You want to be worry free, you want to determine what is to be done and you want the other company to determine how they do it. You do not want to worry about how.”
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text is only ‘outsourcing’. What regards the importance of the outsourced activities it comes clear that even though the company is heavily ICT related, with all its functions (office automation, outlook, email, ERP system etc.), no core competencies or key functions from a primary importance have been outsourced. The main activity which is gas transportation, “the main one, everything which is gas related, we have never outsourced”. Only the operations characterized with a secondary importance for the firm, such as the office automation have been sent away. This is in accordance with the literature suggestions that an outsourcing firm has to focus on what it does better than the others, or the so called core competencies (Antonucci et al., 1998; Beaumont and Costa, 2002; Lankford and Parsa, 1999; Pagnoncelli, 1993; Yang and Huang, 2000), while delegating power to another organization to run up its activities from a secondary importance. In addition, the loss of control over the outsourced activities was examined as well. The idea was to see where the need for a shift toward insourcing comes from. Thus, asking this question, a positive reply was received revealing the idea that the loss of control is something desirable for the company and purposely made. By describing only the “what has to be done” issue and leaving the supplier the concern about “how it is going to be done”, the company surely loses a certain level of control with the clear idea of doing so. This leads to the next part where the insourcing decision has been taken. Pointing out directly the question “what factors stimulated your company to insource the activities back home?” to the interviewee, a couple of factors appeared as major drivers and motives for the decision-making of insourcing implementation. These factors are: (1) “less worries”, worries about that if something breaks down it does not come up again, and (2) the second one has been “financial”. The first one can be related more on the social aspect of the problem, while the later is fully based on the financial implications of the insourcing, in terms of costs and price. The following statement supports the idea:
“The supplier was very good at squeezing money more and more out of us and performing less and less. They are really very good at that. Anything you wanted more was costing extra money. Any they did their job so bad that we even reached the point that something they were supposed to do and were paid for that we hired other people externally to do it, just to be sure that gotten to be done.”
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The unsatisfactory and inadequate work performance of the external organization brings to the outsourcing company firstly worries, regarding the poor service quality, and secondly increases the costs that were supposed to serve the already agreed job. Thus, the two factors can be seen and related to the sphere of the supplier’s performance and liability. The reasons behind the insourcing decision do not derive from the perspective of the outsourcing company, but exactly the opposite from the contractor. So, company ‘A’ turns its activities back toward in-house service execution, due to problems arising from the supplier’s scope and realm. In addition to the bad performance of the supplier, a third factor can be pointed out as a reason for the insourcing. Being also part of its jurisdiction, this factor concerns the responsibility issue. If the initial idea of the outsourcing has been exactly this to give the responsibility to someone else, determining only “what to be done”, without taking care of “how it is going to be done”, lately this comes up as a motive for the insourcing. To take back the responsibility, due to the arisen discrepancies of the negotiated and expected service quality and work performance, and the followed results. Consequence of the outsourcing decision-taking process which has turned later into a factor of the insourcing adoption. The following quotation brings the support.
“That was the main reason that we wanted to insource. Just to take back responsibility because the idea of outsourcing was you to give responsibility to somebody else and they just didn’t perform as we wanted to. (…..) And then if your producer doesn’t deliver what they have promised, and yes that was the reason for insourcing back again. Take back responsibility.”
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Table 4.1. Outsourcing vs. Insourcing weights
After the factors for the insourcing decision have been once explored, a further investigation is needed in order to be found the other aspects related to the insourcing implementation and the achieved results from it. First of all, it has to be seen who are the figures, responsible for and took the decision for the insourcing. Usually the widely-accepted social perception is that behind the decision-making of key and strategic choices in a company stays the board of directors, headed by the CEO. However, in the case of company ‘A’ this is not the case. The person who has taken the decision is a manager from the ICT department, directly involved and responsible for the entire ICT infrastructure.
“…. and the guy responsible for all this, that manager cost the insourcing. Because he was responsible and ‘X’ could not deliver, so he took back the reins, he took back control.”
Meanwhile, the duration of the insourcing implementation takes two years for the company to put everything in the desired order. After being outsourced for about 10 years, the ICT activities bring a whole new set of requirements and needed changes in the organization, before the work can start up again. New people are hired temporarily to perform initially the work. At the same time the need of bigger place with more square meters appears where ‘A’ to can settle all these people, as well as to expand its operations. Due to the fact that till that moment the company has not had the need to keep updated systems and up-to-date technology at home, because the supplier has taken care of that, now emerges the need for improvements. Thus, in order to be implemented the insourcing process and to ensure that the company operates its activities at home, it has to do a couple of developments first. In
Company ‘A’
Outsourcing reasons
Insourcing reasons
1. Saving money Saving money
2. Being worry free Take back responsibility 3.
-
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addition to the hired workers and the new place settlement, improvements in the company facilities, such as virtualizing of the current system and replacement of the old storage are done as well. Here is what the interviewee says:
“Some of our servers were really old, so we had to buy new servers and new storage. And virtualization was not only on the servers, but the desktops as well. This virtualizing was a project as well. So I do not count this as an insourcing, because it was entirely new project.”
Hereby, this comes as a support of the literature that the insourcing requires a level of capacity to bring the work back in-house (Warner and Hefetz, 2007). And while these improvements benefit the company, they have their price as well. In spite of the price of the real insourcing, the movement by itself back home is two million Euros. All other additional expenditures related to the infrastructure improvement cost a couple of million extra. However, when the insourcing price is calculated in terms of financial capital, these extras do not take place in it. If a comparison between the costs derived from the outsourcing and these from the insourcing has to be made, it can be estimated that the outsourcing price is higher. An interesting fact is that reasons for the outsourcing has became after that reasons for the insourcing. While the initial idea of the outsourcing has been to save money and resources to the company, as well as to take the responsibility of the performed work, it fails in both terms. So then the decision for the insourcing is easily taken as consequence of the unsuccessful outsourcing. And even though the insourcing costs a lot of money to the company, mainly because it does not relate only to the direct spending of the process switch, but also to all other indirect expenditures for improvements of the infrastructure, the insourcing comes to be relatively cheaper than the outsourcing. If the basis is based only the real price of the insourcing shift, without taking into consideration all other supplementing it costs for establishment and running of the process, then no doubt the insourcing has a much lower price than what the outsourced costs. This can be seen from the next statement:
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would not be that expensive of course. But we wanted the new servers, because they were very old and we had to.”
Finally, turning to the outcomes of the insourcing and the way how the work is performed back home, a few implications can be pointed out. Thus, the main achieved results are: (1) lower costs; (2) less concerns; (3) “more in control”, and (4) better administration. All positive aspects which the initial idea has sought in the outsourcing decision, later became implications of the successful insourcing implementation. However, other important effects are the better monitoring, the existence of KPIs (key performance indicators) and the relevance for the customer which has gone up. So the outsourcing is very intertwined with the insourcing and it often turns out that the pros for the one can be cons for the other. In addition, the level of control and monitoring, as well as the trust are issues which can influence the decision choice and future results have to be wisely taken into account. Hereby is what the participant says:
“People who want a tight control, they want it insourced, because then it is their own nature. People who have more confidence in other people, there is easier to be outsourced, because they trust the other people. If you have a trust issue with other people, you have an issue with outsourcing. So it depends on who is there. I find that this has a big influence.”
In order to sum up the whole insourcing process with all its aspects and obtained results, the next Table 4.2. provides a clear illustration of the most important facets comprising the insourcing implementation.
Table 4.2. Company ‘A’ Insourcing process
Insourcing
factors
Decision
maker
Time for
implementation
Insourcing
implementation
Costs
/Euros/Results
Less worries; Saving money; Taken back responsibility ICT manager; ICT department. 2 years36 | P a g e
4.2. Case study 2 – Company ‘B’
The second examined company in this paper is a manufacturing company. The main business of the company is the production of all kinds of domestic appliances, such as shavers and items for grooming and female depilation. In addition, it manufactures also treatment appliances, coffee makers and vacuum cleaners. The interview was conducted with the director of the industrial projects, who is a member of the management team as well.
Originally Dutch and based in the Netherlands, company ‘B’ sells its items all over the world. Initially the production had been placed in Holland, while later on with the development of China and the available cheap labor force there, it has been outsourced. The company decided to outsource about 20-25 years ago. The multinational separates its technology in two major groups. This separation is based on the fact is it a routine technology or it is a unique technology for the firm. Here is what the participant says:
“If it is a routine technology then we are going to third companies who are producing then on our price conditions, quality conditions these appliances. We are guiding them in these outside factories and we pay them per produce item. (……) The principle is when it is routine technology we have in the world a few competitors, so then there is no necessity to invest in our own factories. ...when it is a unique technology then we cannot get it from the market. (……) Then we are doing it in our own factory or in our own factories.”
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capacities, while the simple commodities with a secondary importance to the firm are being outsourced to China. The followed quotation confirms this strategy as well:
“Every time is a discussion, is it core for our business or is it non-core. And it’s not only driven by cost price, it’s not wised to bring items outside based only on cost price. The idea behind the outsourcing should be that the company doing that has more competence and knowledge than you have by yourself. That should be the main reason. (…..) When it is a simple commodity then there’s no discussion you can outsource it. But higher the complexity is and the technology need, you have to decide are you going to do it by ourselves.”
This in combination with the previous citation shows that the company’s outsourcing activities are based on a routine technology and have secondary importance. Meanwhile the cost price is not the only one considered factor behind the idea of outsourcing and the supplier’s selection. The higher expertise and knowledge possession of the contractor come to be significant in the choice of outsourcing as well, supporting the idea in the literature about “access to sophisticated and specialized knowledge of the supplier” (Allen et al., 2001; Allnoch, 1997; Antonucci et al., 1998; Apte et al., 1997; Beaumont and Costa, 2002; Gupta and Gupta, 1992; Lankford and Parsa, 1999; Pagnoncelli, 1993; Yang and Huang, 2000). However, the outsourced activities of the company are: (1) the power plugs, and (2) the simple shavers. In addition, it is important to mention the fact that the company outsources its activities not only to a third party organization, but to a foreign country as well. So in this manner it is accurate and more appropriate to be spoken about offshore outsourcing, due to the relocation of functions not only from one company to another one, but also from one country to another one.
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Chinese market and leave the company’s presence there as a footprint. While the last, forth reason relates to the human resource implications of the supplier and its intellectual possession, such as scope, capabilities, expertise and specific know-how. In compliance with the reasons for the outsourcing it has to be checked for loss of control over the particular outsourced activities. Then it appears that through outsourcing the company always loses a certain level of control, due to the fact that it never knows what the sub-contractor is doing. So, because of that it has to be checked and monitored. “And the lower the trust is, the higher the control is”. The following statement supports it as:
“You have a lot of items which you have to check and you have to trust your supplier but you have also to control that. (…..) So you always lose a certain level of control. And when you are aware of that then it is ok you can take measures. But if you not aware of that and you outsource you face very high risk. Your knowledge can be copied. Especially in the countries which lack legal systems. They do not have legal foundations. So that’s another risk when you have the highest new technology.”
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delivery to the customers. Here is what the practitioner points about the importance of the trouble time in the insourcing decision process:
“Very important thing is also the trouble time. It is the time from order to delivery. And as more flexible you are, the shorter the trouble time is. So we had few years ago a trouble time of more than 20 days to deliver a shaver and now it’s on average is 5 days from order to shipment. So that’s one of the things when you take the decision to outsource, or keep it in-house and do it by yourself. So flexibility and trouble time are very important for us.”
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Table 4.3. Outsourcing vs. Insourcing weights
settle the production back in-house is nine months. However, this does not count the time for updating and installation of all the equipment, machines and technology implementation in general. The choice for re-insourcing production is a whole process and therefore it requires a long and careful planning before decision-making, considering all pros and cons of that decision. As the interviewee states:
“That’s not a decision which you take over a night. We first look at the customer and then we invest.”
This thought leads to the next issue of the re-insourcing implementation, and in particular the financial implication. So, the price of the process is differentiated and separated in two groups of costs. Costs emerged from the physical production shift back in-house and costs for settlement and start of the manufacturing on the new place. An intriguing fact is that even though the costs for investments in new domestic infrastructure and technology can vary, the movement by itself can be for free, without any additional spending. Thus, in the case of company ‘B’ the expenditures for home-base investments are about ten to twelve million Euros, while at the same time no costs consist the shift. The following citation shows how this comes possible:
Company ‘B’
Outsourcing reasons
Insourcing reasons
1. Price cost Saving money
2. Balancing of the currency volumes New technology implementation 3. Presence on the market Lead time/ Speed to market 4. Knowledgeable and competent
supplier
Increased products quality
5. - Transportation costs
6. - Savings from packaging
41 | P a g e “More or less we re-schedule the volumes between China and ‘X’. And
based on the fact that it was at the moment we started the new range, so you can say the costs are balanced, there is no additional cost for it. We reduced the volume in China a little and increased this in ‘X’.”
In such a manner the company just reduces the quantity of manufacturing in China and increases equally the number of items produced in-house, and hereby it does not pay any for the turn. The only costs derived from the re-insoucing in general, occur from the need of expanding and modernization of the existing domestic capacities, in terms of implementation on new production lines, architectures, machines and technology.
On the next stage an attempt for comparison between the costs for outsourcing and these for insourcing is made. Pointing out the question to the company, which of the two production decisions has cost more, mainly in terms of capital, an interesting finding appears from the answer. Both sourcing options have their positive aspects and both are regarded as successful. Meanwhile, even though that the company re-insources some activities back home, this does not constitute for the whole production range. A part of it stays in China, due to particular reasons, such as the good footprint on the market and the necessity to pay a lot of import duties for the products, if they are not produced there, but imported in the country. Thus, the re-insoucing decision is based on manufacturing in-house of only that production part which is supposed to serve the European market as well as the Far East. So the company does not fully re-insource all of its activities, but just that part for which it would be cheaper and wiser if is done in domestic factories. Here is what the participant says:
“We never said we only produce in Europe, or we only produce in China. So it was very wise to start a factory in China. (…..) We didn’t stop working in our Chinese factory, because we do there much more shavers than here in ‘X’. (….) And it was wise to produce here for Europe and the Far East. It is always a balancing act. It is not only a cost price, but also strategy and competencies.”
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of the flexibility. It grows with the accessibility of the nearer situated plants, allowing for quick production changes in case of need. In addition to the lower “trouble time” and flexibility, the new technology use enables also for higher quality of the products, mainly due to the replacement of manual work with such of robots. And last but not least, the workers’ positive reaction about the fact that the work comes back home. The quote below shows this:
“The idea that they can steer their own future. It was good for the mindset of the people to have such a move in-house. So the eagerness and the drivers have increased based on that.”
In order to sum up all these consequences from the insourcing implementation, the next Table 4.4. puts all of them together, by making a tabular virtualization.
Table 4.4. Company ‘B’ Insourcing process
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4.3. Case study 3 – Company ‘C’
The third company which takes place in this research is also a representative of the service sector. The main purpose of its business is healthcare provision of people in need. Besides taking care of sick people, the company serves also as a university medical center with focus on scientific research and on training and educating healthcare medical staff. The information about the current study was provided to the researcher by a manager of procurement, working in the particular company.
First of all, the exploration starts with the activities which the company has outsourced. By doing so, two operations appeared to be subject of outsourcing. But before that it is important to be mentioned that due to the specific sphere of business the organization works in, a large part of its products and services are bought on the market and performed by different suppliers. However, this is not related as outsourcing and consequently it is not included in the research. The outsourcing is defined as only those activities which initially have been done by the company, and subsequently sent out to third-party organization. Thus, the two outsourced activities are: (1) cleaning, and (2) maintenance. The first relates keeping clean the facilities of the company, such as operation rooms and offices, while the later one to maintaining the medical equipment and infrastructure. Meanwhile, both activities are outsourced fifteen years ago. The country where the outsourcing takes place is the Netherlands, so it can be related as domestic outsourcing, or just outsourcing. The particular country is chosen due to the presence of mandatory regulations, requiring and bounding the company to the European tendering regulations. In addition both activities are services, tightly interlinked to the daily operations of the company, which assumes that only local-based companies can perform the work.
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the organization, while the maintenance because of the technological knowledge which the supplier possesses. Here is the support of this:
“Reason was cost. And especially for outsourcing maintenance was knowledge. Technological knowledge. You can imagine it took quite a lot of training a maintenance staff to keep updated. Because technology advances is very fast and it was difficult to have all our own maintenance staff updated on all this kind of new equipment. Which is also costly, but the focus was on knowledge and on cost. Knowledge or expertise.”
Even though the outsourced activities are crucial for the work of the company, they relate only to its functions with secondary importance. They serve as a support to the primary activities of the hospital which is to provide services, in terms of doing surgery, operations and diagnosis. Checking further is if there is any loss of control over these secondary important activities sent out of the organization, it appears that this largely depends on the contract and supplier. So it comes clear that the company does not lose a certain level of control, due to the base on the appropriate contracts and choosing the right supplier.
After the outsourced activities and the reasons behind them are clarified, the next step is to investigate the insourcing. However, when the interview reached the point of questions regarding the insourcing process, and in particular the factors stimulated the decision, an unexpected answer was received from the interviewee that the company has never done insourcing on any of its activities so far. Although the company was contacted with the main reason that it has made insource before and the subsequent communication confirmed this information, a misunderstanding appeared to be the problem. However, the further interviewing revealed valuable and intriguing facts about the reason(s) for lack of insourcing and even how it can be prevented. Thus, due to the emergence of interesting findings and serving as an example for how a company can handle with outsourcing problems, aside of turning back toward insourcing, the case study was created, making the company part of the research.
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does not lead to the desired results, is just to cancel the contract and to move to another supplier. Thus, both options hardly relate to the contract which a company signs. Here is the statement of the interviewed manager:
“So in case that we are dissatisfied with our current supplier, either we would try to improve these services or we move to another, or we would issue a new European tender. But for all the activities we outsourced there are alternatives available on the market. (…...) but we never made the decision let’s do it ourselves again. (…….) So in outsourcing we are quite stable.”
This clearly shows that the lack of insourcing for company ‘C’ is based on its contracting strategy. It becomes evident that a company can prevent the insourcing, even when the outsourcing is not very successful in two simple ways - by using the contract to try to improve the quality and performance, or just by canceling the contract to move to another supplier. Another reason for the insourcing absence derives from the level of control in the outsourcing process. If the control of the outsourced activities and services is on a high enough level, then no need occurs for insourcing or another alternative option. In contrast, if through outsourcing there is loss of a certain level of control, the chance for subsequent movement toward insourcing is higher. However, in our case company ‘C’ prevents the loss of control in the outsourcing process through good contracting.
A finding is also that when a particular activity or service is outsourced for a long period of time then it can become quite difficult for the company to insource it back home, due to the fact that it can lose the needed capabilities, infrastructure, employees and knowledge for that. Here is what the participant says:
