"In-sourcing" Outsourcing

While I'm not sure if I agree with all of the logic in this Supply Management article, I nonetheless found the argument creative. In the piece, Rich Simmonds, a consultant, is quoted as suggesting that procurement organizations "match the outsourcers by adopting their best practice to become an internal outsourcer." According to Simmonds, the advantage of this approach is that "removes some of the perceived disadvantages of outsourcing, such as lack of flexibility and reliance on a third party". The article goes onto argue that to get the most from this structure, the internal outsourcer should be a "separate legal entity with incentive to drive profits ... they should report to the board, have service and operating level agreements and build long-term relationships with customers."

After reading the short piece, I must commend Simmonds for such creativity, but in the practical world, I think his concepts would not work as envisioned. I doubt, for example, that most procurement organizations could obtain the level of year-over-year savings on indirect spend that the top outsourcers can achieve, especially given third-party category expertise and leverage. But for direct materials, I think his argument could hold true, especially for companies like Alcoa with significant category scale in aluminum and the internal expertise of both procurement and trading operations. For example, if Alcoa were able to create an internal "outsourced group" with accountability for castings spend, they could in theory provide better results than any outsourcer and could spin-out these capabilities to the external market. For procurement leaders looking to capitalize on their organization's IP, the other option is to invest in internally developed technology and then spin-out these capabilities to the external marketplace. In fact, this is the exact story behind Akoya which spun out of Caterpillar's procurement operation.

- Jason Busch