Once an internal service provider improves its performance to competitive levels, it may consider selling some of its products and services outside the firm. This is called “insourcing.” Insourcing can benefit both shareholders and internal clients in a number of ways.
The internal service provider may have opportunities to bring in new sources of revenue, and to amortize its fixed costs across a broader base.
Furthermore, insourcing may improve client satisfaction by allowing an internal service provider to grow in ways that are synergistic with internal clients’ needs. Growth helps build a critical mass of specialists in an area that otherwise might not warrant permanent headcount. This higher degree of specialization reduces costs, improves quality, speeds time to market and accelerates the pace of innovation for all clients.
A few guidelines on “insourcing” can ensure that it enhances, rather than dilutes, service to internal clients.
Rather than selling directly outside, an ideal strategy for an internal service provider is to sell its products and services to externally focused product managers within the company; these business units may then add value and sell their products outside the company. This ensures consistency and coordination with line management’s customer-oriented strategies. It also keeps the focus of the staff on their primary mission — serving internal clients.
An internal service provider may be allowed to sell directly to external clients if all of the following conditions are met:
- The first priority for an internal service provider is to satisfy its internal clients. Unless the firm is pursuing a strategy that takes it into the outsourcing business, it is more important that staff help internal clients succeed than make money on their own. Before insourcing is considered, staff must be sure that internal clients are completely satisfied with their work.
- The internal service provider must have a distinctive competence in a particular area that ensures success in a well-defined niche, in spite of intense competition from other vendors.
- The internal service provider must never sell to the firm’s competitors any products or services that are of strategic value to internal clients, since doing so might give away one of the company’s competitive advantages. (This judgment may require executive-level approvals.)
- The internal service provider must price its products and services so as to never lose money on external sales. This requires a meticulous and transparent costing method and application.
Of course, it’s not easy to set up a new business, even one based on a successful internal service provider.
There are a number of new skills and methods that are required. For example, the organization will have to beef up its sales, marketing and customer-services functions. It must learn to form legally binding contracts and to collect accounts receivable.
Furthermore, the internal service provider will have to establish trade credit policies (which give customers a grace period, such as 30 days, in which to pay their bills), and acquire working capital to finance trade credit.
One way to create an instant source of external revenues is to acquire one of its external vendors.
If the vendor sells a product that is of strategic value to the organization’s internal clients, then the acquisition can pay off even if the vendor fails in the external market.
If the vendor sells generic products and services, then, to be worth acquiring, it must succeed in both internal and external markets without violating the above conditions. In marginal cases, succeeding in the external market may require violating the above conditions of external sales, undermining the value of the acquisition internally. If it fails at external sales, acquisition is an extremely expensive way to acquire skills for internal use.
While cases of successful insourcing are relatively rare, when they work, they provide excellent experience for staff, and valuable synergies for clients.
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