Insourcing or outsourcing: it comes down to people, processes and technology

An often asked question by business leaders is why should I pay someone to do the work when I can just do it myself?  Given my position of providing support services to a wide variety of industries from insurance carriers and hospitals to utilities and governments my answer may come as a surprise.

There is absolutely no need whatsoever to outsource if, and only if, an organization has the resources and infrastructure to do it better internally.   Having spent more than twenty years in the confines of multiple Fortune 500 companies, I can attest to the limitations that exist which have given rise to the myriad of vendors plying a variety of trades. 

The most common obstacle to doing something internally is manpower.  Businesses have become increasingly wary of expanding their workforce for a variety of reasons.   Until there is some semblance of confidence in the economic direction of the country, this is unlikely to change.   Beyond that are levels of bureaucracy that can sometimes impede interal production.  As a result, it is sometimes easier to look outwards for assistance. 

From in sourcing processes to using low cost vendors, expenses often are the overriding factor in making decisions.   While perceived upfront costs should always be a consideration, business leaders should never minimize the potential costs associated with lack of expertise, inefficiencies or dumbed down processes used to drive down price points. 

Consider the case of a large financial institution that opted to utilize a low bid vendor for subrogation collections.   Certainly the upfront costs were slightly cheaper than other bidders.  But to achieve those price points, the service provider relied on a lower skill set of employees which turned out to be a costly error after unfair trade practice allegations began to surface.   In the end, the costs of the ensuing litigation more than erased the upfront perceived savings. 

During my tenure overseeing claims vendor management for a large insurer, daily solicitations were the norm.   Invariably, they always said the same thing.   They were unique, innovative and better than the competition.   I was certainly not alone, as this ubiquitous presentation is what procurement staff in any industry is confronted with.    The challenge is to separate those who can from those who say they can and the reality is that if a service provider has not walked in the shoes of their potential business partner they will be ineffective. 

There is a reason that some products cost more than others.   Reliability, quality, safety all drive our decision making process when looking at commodities such as cars.    The same should hold true when deciding how to run a process.   Can I do it better myself or do I need help?  Will my help know what they are doing or will they get me sued?  Can I save money beyond the upfront perceived savings?   Can I reduce my internal staffing costs? What is my realistic net back to the bottom line? 

Numbers can be very fuzzy and those presenting the numbers should be held to account.   Those asking the questions need to understand what their internal results have been and then measure them against what is being presented.   If something is too good to be true, it probably is just that.  If much of the proposed savings come in the form of “soft” savings, be leery.   Effective and credible business partnes will give proposed client’s solid numbers with a quantifiable return on investment.  

The reality is that the most successful organizations identify the most effective processes.  Certainly an organization isn’t going to build a fleet of cars for their staff because it wouldn’t be cost effective; unless you happen to be GM, Ford or Honda.    So the million dollar question remains at what point to economies of scale make sense for internalization of process?  The answer is that it varies, but what doesn’t vary is the need for a quality at all costs approach.  

Expertise costs money.   But with expertise comes results.   Simply put, if given a choice between paying $100 dollars for something that could probably get you $110 back or paying $150 dollars for someone who could guarantee getting you $500 back what would you do?  The same holds true with business processes relationships.  

Rather than looking at the upfront cost savings, focus on the long term benefits.  While a percentage point here or there may be enticing, is it really worth it if millions of dollars are left on the table?  As the Chinese proverb says, “if you are planning for a year, sow rice; if you are planning for a decade, plant trees; if you are planning for a lifetime, educate people.”

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Chris Tidball spent more than twenty years in a number of claims related functions in the insurance industry.  He is a business consultant, contributing writer to Claims Magazine and the author of Kicked to the Curb and Re-Adjusted: 20 Essential Rules To Take Your Claims Organization from Ordinary To Extraordinary.  He works with the insurance, healthcare, utility and government sectors to improve their bottom line.  To learn more, please visit www.christidball.com.