Is insourcing the new outsourcing?
Insourcing is on the rise as councils bring contracted-out services back in-house. Mike Pierides and Caron Gosling of international law firm Pillsbury Winthrop Shaw Pittman take a look at the potential benefits - and challenges.
THE SOURCING cycle continues to spin with local government returning in-house services it had previously outsourced. This trend, insourcing, has seen local authorities cancelling or not renewing contracts for processes ranging from IT and property management to back-office functions.
Insourcing is driven by a variety of factors. While originally outsourcing was perceived as a money-saving initiative, costs derived from complications suggest insourcing may be the real cost-cutter for local government. Nevertheless, the potential advantages of regaining control over critical functions and cost reduction must be balanced against insourcing's challenges.
Drivers for insourcing
- Regaining or improving control over critical functions: Functions seen as low level have proven to significantly impact organisations.
- Increasing flexibility: Change is inevitable throughout an outsourcing agreement. However, its implementation is a time-consuming, rigid process, requiring in-depth supplier engagement. Insourcing eases these considerations, while providing greater control in determining the nature of the change.
- Simplified purchasing route for available technologies: The increasing prevalence of "as a service" and cloud offerings lessens local government's reliance on the legacy technology and infrastructure supplied or serviced by private outsourcers.
- Cost reduction: Insourcing evades the supplier margin charged by outsourcers. Meanwhile, increasing costs of outsourcing centres decreases the appeal of labour arbitrage and the emergence of automation detracts the labour component of certain activities.
Insourcing requires consideration of challenges such as:
- Recruitment and training, or transfer of personnel.
- Amendments to processes.
- Data transfers, systems reconfiguration, user access modification.
- Review and assurance of IT licences.
- Updated governance.
- New reporting.
Operationally, the key risk facing local government is selecting an operating model that will not create deficiencies in operations to replace the previously outsourced functions. Councils must clearly define the scope of the insourced function, establish its role and determine how it will fit with existing services. The risk is that the transition from outsourced to insourced may itself detrimentally impact service and costs.
Moreover, extracting part of a function can be problematic. If the insourcing occurs during the lifetime of an outsourcing agreement, there may be a lack of clarity regarding what can be terminated or transferred within contractual provisions for partial termination. Where complete flexibility is contractually provided, practical implementation remains a challenge in terms of cost allocation and impact on remaining services.
The potential transfer of employees to the local authority under TUPE is likely to be a key consideration. An insourcing is just as likely to be a transfer for the purposes of TUPE as an outsourcing. Issues to consider include:
- The impact of the existing outsourcing contract: what protections and obligations apply on the exit of this contract?
- Which employees are likely to transfer back to the local authority: Does this fit the needs of the business? Is there a risk that key employees could opt-out of the transfer and remain in the private sector? Is the provision of the services over-resourced by the current provider, leading to potentially expensive termination costs?
- The protection of terms and conditions of employment under TUPE. How will the local authority deal with a possible two-tier workforce? How will the local authority compete with private sector employers so as to recruit and incentivise key and/or experienced employees and retain them within the public sector? What about pension benefits?
- Employee representation: to what extent will the local authority's recognition arrangements with unions apply to the newly insourced functions? The unions may want to use this opportunity to expand membership.
- Public vs private sector cultural issues: Will the local authority need to help employees adjust to being public sector employees, particularly where they have no previous public sector employment?
The sourcing landscape continues to fluctuate and the current insourcing trend adds another wheel to the cycle. Indeed, despite an increase in insourcing, outsourcing is still on the rise globally. The constant evolvement of service needs and corresponding drivers set out above explain this shifting dynamic. Contractual flexibility will help organisations maintain pace with these changes and organisations must demonstrate a clear operational understanding relating to delivery models and risk.
Mike Pierides is a partner and Caron Gosling is counsel at Pillsbury Winthrop Shaw Pittman.