Reasons to outsource:
- The business is growing rapidly and leveraging an existing third party infrastructure is quicker/less risky than building/scaling one’s own. In this case it is worth paying a premium for the infrastructure, which is more than offset by the value to stakeholders of growing the business rapidly with less IT risk. The key aspect here is, speed to market.
- A third party has knowledge, skills, or some other limited resource that the business wants to leverage, and paying a premium to a third party makes more sense than acquiring the resource using internal staff. The key aspect here is non-core specialization.
- A third party is able to subdivide a pool of resources between multiple clients and thereby deliver a service more cheaply than individual clients could do so on their own. This is economy of scale, and provided some of these economies are shared with clients it will never make sense for the business to insource.
- Even if the above aspects do not apply management may lack clear visibility or confidence in internal processes, and may choose to outsource an IT service using a negotiated contract to a separate organization for financial discipline and control.
Reasons to insource:
- Outsourcing requires more formal agreements between organizations and ongoing efforts to ensure goals are mutually aligned. Hence, if there is no compelling reason to outsource then insourcing requires less management overhead.
- An IT process may be intimately related to an innovative business process or product that is a source of competitive advantage. In this case stakeholders may want this knowledge kept in house, and in any case it may be of limited value to a third party to acquire this knowledge on the business’s behalf: this is core specialization.
- Third parties may be unwilling or unable to indemnify the business against certain risks, for example theft of sensitive customer data. More generally insourcing may be considered the most practical response to certain legal concerns.
Insourcing/outsourcing should not be confused with asset ownership, and in particular intellectual property rights and licences. It may make sense to outsource certain processes, while seeking to own related assets.