Insourcing Vs Outsourcing
President Obama’s tax sops for companies and industrial sectors that improve insourcing was big news recently. Obama thinks this step might bring the jobs back home, and he wants to score political points out of this Insourcing Vs Outsourcing debate. Earlier this year, Obama had a meeting with few business managers and industrialists to explore the chances of insourcing work that was earlier bangalored to India and China. But good businesses always look at the right mix of outsourcing and insourcing to get the best business advantage of both rather than being on the right side of politics.
What is Insourcing?
As the word implies, it is the exact opposite of outsourcing. Insourcing is a phenomenon where in an organization ceases its existing external business contracts and starts to carry out internal operations. Insourcing would require re-assigning a work to your own employee or a department within your organization instead of contracting the work outside to another company.
Insourcing decision is based on competency of external work force against your employees, criticality of the work, control required over the task and costs. In wholesale production, insourcing helps in reducing transportation costs, labor costs and cost of taxes. Supporters of insourcing argue that it helps in better control of critical projects, and in some cases it saves money more than outsourcing. It accelerates local job creation and prevents the hidden costs associated with outsourcing.
Insourcing in IT and services sector may be a new concept mainly due to the impetus given by the Obama administration, but insourcing in wholesale manufacturing has existed for quite long. Large organizations either build a new business center to bring back the outsourced jobs or they hire-out the labor and its services from the external organization so that there is better internal control after some point of time.
And insourcing is required for all kinds of companies that have either failed in outsourcing or had un-satisfactory results in the past. In some cases, insourcing also refers to creating a U.S based subsidiary by the outsourced organization to return part of the tasks such as Research and development or Design back into the original company. India based outsourcing giants Tata Consultancy Services (http://www.tcs.com/) and Infosys (http://www.infosys.com/) both have started such reverse outsourcing steps or insourcing from U.S point of view.
Insourcing may be needed in critical sectors, or if the parent company is unsatisfied with the outsourcing results or if the Obama administration steps up the pressure and punishes company which rampantly outsource. The unemployment rates are pretty high reminding the great depression days, and the protectionist steps by the President like visa fees hike and tax breaks for insourcing companies makes insourcing more attractive than outsourcing now.
The Insourcing Vs Outsourcing debate might be new, but outsourcing grew in the past mainly because it was cheaper to do it in countries where the labor and production costs were cheaper. It’s not the case any more, as labor costs have spiraled upwards in most countries like India, China and Indonesia. New Reports from Deloitte & Touche (http://www.deloitte.com/) a leading consulting and professional service firm and our Bureau of Labor Statistics (http://www.bls.gov/) point out to the rising costs and poor quality control in the un-organized outsourcing companies that might hinder outsourcing decisions and spur insourcing activities at a faster rate than expected before.
In a particular example, U.S based midsized service company CGI (http://www.cgi.com/) which earlier used to aggressively outsource its projects to various branches abroad, has recently started opening development centers at smaller towns in Texas, Virginia and Alabama to reduce costs and balance its global work force. CGI believes the untapped talent in our own country can be more cost effective than using the work force at China or India.
Insourcing Vs Outsourcing – The Difference
While outsourcing was expected to be a cost-saving method, insourcing is more about control, security and quality. Since the days jobs were moved to cheaper locations, the debate on whether it is wise to partner with outside service providers or just stick with your labor. For the past 10-20 years, outsourcing seemed to be the best solution to reduce operational, manufacturing and service costs.
Most manufacturing segments like Garments, Automotive parts, Electronics and Toys was moved to Taiwan, Hong Kong, Korea, China and India. Initially there was lots of support for outsourcing since it not only reduced costs, but also took away manufacturing related pollution to those respective countries. Today, the effect of industrial pollution caused by purely export based firms in the Chinese cities like Shanghai very clearly prove that pollution was outsourced as well.
In service industry, all non-core business activities could be outsourced very quickly and cheap English speaking labor from Indonesia, Thailand, India and China looked like a lucrative solution. It was not just the economy, but also the huge availability of semi-skilled labor that made Business Process Outsourcing (BPO) a huge success. So, in spite of all the pressure from the Obama administration, the process of jobs being bangalored will continue for some more time, though not as rapid as in the past.
The choice of Insourcing Vs Outsourcing should be based on the business process itself. The company should look at generic issues on a case-to-case basis and make decisions on whether to outsource or not. If no significant cost reduction is achieved, then insourcing might be the best choice. Insourcing not only brings better control and quality to the tasks, in some cases it even reduces costs due to the raising costs in developing countries.
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