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Insourcing: What Do You Need To Know?

In a guest blog for MRO-Network.com, Mike Pierides and Caron Gosling of UK law firm Pillsbury Winthrop Shaw Pittman discuss the topic of insourcing and what MROs need to consider when carrying this out.

The aviation sector is beginning to experience a greater prevalence of insourcing, that is, the bringing back in-house of functions and business processes that have previously been outsourced.

United Airlines, for example, last year announced that it would be completing insourcing work at nine large US airports by early summer.

After decades of outsourcing and therefore more services to insource, there is an anticipated increase in insourcing. However, there are identifiable drivers which make it clear that the rise of insourcing is more than just a statistical inevitability 

Why insource? The key drivers 

Regaining control over critical functions. A key driver is often the intention of enabling organizations to regain or improve their control over business critical functions and processes. Whereas a particular function may have initially been perceived as low level and part of operations, empirically it has been proven to have far reaching impact on the MRO business. One such example would be a function such as IT architecture, which affects IT policy, strategy and security.   

Increasing flexibility. Insourcing often provides flexibility to identify and implement change to the way in which services are delivered, or to support change within the MRO business itself as it undergoes internal corporate restructuring or change through M&A activity. While outsourcing agreements do accommodate change, they typically prescribe a structured change process which requires coordination with the outsourced provider, and there can be a cost impact for the customer. Whereas change which is primarily an internal business function activity is perceived to allow a greater degree of control, potentially limiting the cost and time impact.    

Simplified purchasing route for new technologies. Changing technologies and the way these technologies are made available from an operational and commercial perspective have also been a significant contributor to aviation insourcing trends.  Simplified purchasing routes, with the increasing prevalence of “as a service” and cloud offerings, has allowed businesses to re-take activities which previously would have relied upon legacy technology and infrastructure and, therefore, outsourcing suppliers.  

Cost reduction. Cost reduction is another driver. For a start, insourcing removes the supplier margin. Insourcing does not automatically mean onshoring, but labor arbitrage, often a driver of outsourcing, is losing its appeal with increasing costs in outsourcing centers, along with the rise of automation and robotics which is reducing the labor component of certain activities.  Currency fluctuations have also detrimentally affected some decisions to outsource, with organizations bringing functions back in-house and onshore as a result.

Insourcing challenges

An insourcing will potentially require some or all of (i) recruitment and training of personnel, or transfer of personnel (ii) amendments to processes (iii) data transfers, systems reconfiguration, user access modification (iv) IT licenses reviewed and assured (v) updated governance (vi) new reporting, and so on.  

Implementing the new operating model carries the greatest operational risk of an insourcing decision. Clearly understanding and documenting the scope of the new, insourced activity, and how that activity will align internally and with ongoing third party providers is essential. 

Insourcing typically, though not always, will require a partial, insource of an outsourced activity. The extraction of a part of a particular function has attendant challenges.  From a contractual perspective, even if the customer is granted complete flexibility by the outsourcing agreement to terminate portions of the service, the practical implementation of a partial termination is a barrier to insourcing.

Outsourcing agreements are evolving to reflect a greater trend towards insourcing. Businesses are increasingly focused on the potential future structure and operating model design, and are writing in to agreements specific, potential changes and future, potential operating models. A greater flexibility is also being achieved by agreements being split, or modularised to reflect individual components of service, for example within an IT infrastructure arrangement having separate T&Cs stretching from legacy, dedicated IT components, through to public cloud, via infrastructure as a service or platform as a service. 

Personnel issues 

Where outsourced functions involve significant employee support, the impact of TUPE upon the insourcing is a major consideration: key questions to ask are to what extent is it the preference of either commercial party that employees transfer back in-house (bearing in mind the need for knowledge and skills transfer) and to what extent is this supported not only by the application of TUPE but also the relevant provisions of the outgoing contract? An insourcing is just as likely as an outsourcing to be a transfer for the purposes of TUPE, but this is very much a fact-based assessment, determinable on a case by case basis. One key issue is whether the employees of the outgoing supplier are dedicated and ‘assigned’ to the activities being insourced: this will involve an assessment of not only how they work (in terms of organization and team structure) but also their individual arrangements, including but not exclusively, the proportion of working time spent of those activities. Only such dedicated and assigned employees will transfer under TUPE. Where the commercial parties want employees to transfer back in-house (supported by the application of TUPE), a further risk is that the employees could ‘opt-out’ of or object to the automatic transfer of their employment. In practical terms, this is effectively a resignation by the employee without the need to give notice, and potentially without having to comply with any post-termination restrictions. This could clearly have a detrimental impact on not only the future provision of the relevant activities, but also potentially the business of the outgoing supplier.

And where employees do transfer under TUPE, the regulations protect their T&C’s of employment, giving the business little scope to make changes to these at the point of transfer or for an undetermined period afterwards. This is a significant restriction on and potential cost for the business, but one which may be subject to change in the future following the vote in favor of Brexit.

Businesses that buy outsourcing services are evolving, and as their needs change so do their requirements to either outsource or insource functions.  An increasingly mature outsourcing market is in a position to assess what has, or has not worked, and is responding accordingly with a move to in-house those things that have not.  The key for organizations will be to have the contractual flexibility to make such changes, and a clear operational understanding of the related delivery models and risk. 

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