How can you know that you're getting good value (compared to outsourcing) from internal service providers?

Challenge

Many of the products and services produced by internal service providers (such as IT, HR, engineering, marketing, etc.) can be outsourced.

On the surface, one would think that paying other shareholders a profit to do what you're already doing wouldn't save money (unless there are real cost efficiencies that cross corporate boundaries). But an inefficient internal service provider can be more expensive.

In such cases, a fair comparison should reveal opportunities for either internal cost savings or outsourcing. Benchmarking compares internal costs with external vendor (outsourcing) costs.

But most benchmarking or outsourcing studies don't answer the question, "Can I buy this particular product/service for less outside?" Instead, they compare high-level summaries of costs (sometimes called "towers") with past outsourcing deals for other companies.

This doesn't tell you much. Are your service levels really comparable, or are you getting more, or a higher quality, of services that those other companies. Are you really less efficient, or have you found ways to make better use of internal services to leverage the business? Are there attributes of your business (such as location or market niche) that drive higher costs, whether internal or outsourced?

Also, at this high level, the only options you're provided are in-house versus outsourcing entire functions (or major portions of them). But it may be that your internal service provider is very cost effective at many of its products/services, and only a few are good candidates for sourcing.

Benchmarking studies which compare your spending to others in your industry have all the same problems. In addition, you can't buy from your competitors; so the comparison provides no realistic opportunity to reduce costs.

And neither of these high-level cost comparisons give you data in sufficient detail to know where cost-savings opportunities can be found.

Solution

The only accurate way to know if your internal service providers are producing fair value is a like-to-like comparison of products/service costs with external sources.

To do this, internal service providers need to publish a catalog of their products and services with rates based on fully burdened costs. All items in the catalog need to be things their customers actually buy. And rates have to be based on a cost model which associates all indirect costs with just the right products and services.

Then, comparisons with external rates for specific products and services tells you whether you can save money through selective sourcing. A repository of external rates can grow and evolve over time.

Comprehensive solution....

Other Resources

How to calculate comparable rates....

Column: Outsourcing....

Anecdote: The Outsourcing Shell Game
how to fairly compare internal IT staff to outsourcing, apples to apples

Anecdote: You Cost Too Much
internal IT can appear too expensive if you're comparing apples to oranges

Book on outsourcing versus extended staffing....

Speech on outsourcing versus extended staffing....

Speech abstract: You Cost Too Much!
how to ensure fair comparisons to benchmarks and outsourcing