When new capability moves the outsourcing line: revisiting what you buy as your data and skills grow

Many outsourcing decisions are made for a reason that later disappears. A business pays a consultant to analyse its production data because nobody inside can pull the data together. It buys a monitoring service because the supplier owns the specialist tools. It relies on an outside firm for monthly reporting because its systems cannot produce the reports. At the time, each decision is sensible: the business lacks a capability and buys it.

Then things change. A new system makes the data accessible. Someone inside learns to analyse it. Dashboards turn a monthly report into something anyone can check daily. The team can now estimate costs, spot problems and automate work that once needed outside help. The original reason for buying the service has weakened or gone, but the contract, the habit and the monthly invoice continue.

This article explains why better data, tools and skills can move the line between what a business does itself and what it buys, what the research suggests about how that happens, how to tell when doing work yourself makes sense and when buying or working jointly with a supplier is still better, and a practical way to review outsourced services against the capability you have today rather than the capability you had when you signed.

Make or buy is not a one-time decision

The make-or-buy decision, whether to do work in-house or buy it from outside, is often treated as a choice made once, when a need first appears. In practice, it is a judgement about capability, cost, knowledge, control and strategic importance, and every one of those can change.

Technology is one of the strongest forces changing them. When information that used to sit with a supplier becomes available inside the business, when coordination becomes cheaper and when people inside build expertise through repeated use, work that once clearly belonged outside may now be better done inside. The reverse also happens: new platforms can make specialist outside services easier to use and integrate, making buying more attractive than before.

The point is not that a business should bring more work in-house or push more out. It is that the line should be redrawn deliberately as capability changes, rather than left where it was put years ago. The make or buy: choosing between in-house manufacturing and outsourcing article covers the underlying decision in more detail.

What one study found

An action-research study published in 2017 by Pagoropoulos, Maier and McAloone followed a company in the maritime industry as it built up its digital capabilities, and looked at how this affected its use of product-service systems: arrangements where products and services are combined into one offer, such as equipment supplied with monitoring, maintenance and performance support. These arrangements often depend on close collaboration between the customer and outside providers.

The researchers started from an expectation that stronger digital capability in the customer would open up more opportunities to buy and jointly develop such services. The results only partly supported that expectation. Better data integration and business-intelligence capability did help the company develop services internally and work strategically with partners. But it also reduced some opportunities for buying services from outside, because internal people could now standardise processes, find improvement opportunities and make better use of resources the company already had.

Outside providers remained important, particularly for strategic collaboration and innovation, but the network delivering services changed: internal people took a larger role in everyday delivery. The study also observed a tension between standardisation and more disruptive innovation, discussed later in this article. It examined one company in one industry, so its findings are a prompt for reflection rather than a general rule, but the pattern it describes is easy to recognise in many businesses.

Four things better capability changes

Better data, tools and skills shift the make-or-buy balance through four mechanisms:

• Information asymmetry: when a supplier holds the data and the tools to interpret it, the business depends on the supplier to tell it how things are performing. When the business can see the data itself, that dependence falls, and so does the supplier’s advantage in any negotiation.
• Coordination cost: shared data and standard workflows reduce the effort needed to do work internally or to coordinate several partners.
• Knowledge accumulation: every cycle of analysis done internally builds understanding of the business’s own processes, customers and equipment. Over time, that understanding can become valuable in its own right.
• Supplier differentiation: capabilities that were once rare become less distinctive when customers acquire similar tools. A supplier whose main value was access to data or software may find that value shrinking.

These are changes to how the business operates, not just technology benefits. They change what the business should own.

When better capability favours doing it yourself

Doing the work internally becomes more attractive when the activity is:

• frequent, so the business has enough volume to justify the fixed cost of the capability;
• data-rich and close to core operations, so internal people have context an outsider lacks;
• important for continuous learning, so each repetition improves the business’s understanding;
• quick to act on, so having the answer inside, today, is worth more than a report next month.

For example, a manufacturer may have paid a specialist to analyse production performance each month. Once machine data, production records and quality information are connected internally, engineers can see losses as they happen and act the same day. The specialist may still add value for advanced modelling or comparisons with other businesses, but routine interpretation moves closer to the shop floor.

Better internal capability also improves cost transparency. When a business can estimate what a service would cost to deliver internally, it can see more clearly when an outside service no longer justifies its margin.

Doing work internally carries its own costs, though. People must be recruited, trained and retained. Tools must be maintained and governed. Internal teams can become inward-looking. The volume may be too small to keep skills sharp. Being able to do something does not automatically mean it should be done inside.

When it still favours buying or working jointly

Buying from outside remains attractive where:

• innovation moves quickly, and a specialist keeps up better than a small internal team could;
• expertise is scarce, and the business would struggle to recruit or retain it;
• scale matters, because the supplier spreads its costs and knowledge across many customers;
• the activity does not build learning the business needs.

Co-development, where the business and a supplier develop a service together, is especially useful where the business holds the operating context and the data while the partner brings specialist technology or knowledge from other industries. Here, better internal capability improves the partnership, because the business becomes a capable collaborator rather than a passive buyer.

The result is often more nuanced than a simple choice between in-house and outsourced. Routine delivery may move inside while specialist and frontier work stays with partners. The from making to orchestrating article looks at the opposite movement, when routine work goes out and the business focuses on coordinating it.

Doing it yourself is not the same as independence

Bringing work in-house can create new dependencies. A business that stops paying an analytics consultant may now depend on a cloud software provider, a data platform, a particular reporting tool or one employee who knows how it all fits together. Those dependencies may be cheaper or better, but they are still dependencies.

When moving work inside, list what the business will now rely on: software subscriptions, data storage, integration between systems, specific skills and specific people. Consider what would happen if any of these became unavailable, and include cybersecurity and data protection in the assessment, because data that used to sit with a supplier now needs protecting inside the business. The Australian Cyber Security Centre publishes practical guidance for small businesses.

Five tests for each outsourced service

When better capability may have moved the line, test each significant outsourced service against five questions:

The answer does not need to be in or out. Each service can be placed in one of four groups:

• Own: capability that builds important knowledge or distinguishes the business.
• Partner: capability where working jointly with a supplier creates more value than either could alone.
• Buy: services that do not distinguish the business and where the supplier’s scale and specialisation give better value.
• Automate or retire: activities whose original purpose has disappeared now that better tools and data exist.

The last group is easy to miss. Some services survive only because nobody has asked whether they are still needed. A monthly report that duplicates a live dashboard is not worth buying or bringing in-house. It is worth stopping.

Review contracts against today’s capability

The practical step is a periodic review of outsourced services against the business’s current capability, not the capability it had when each contract was signed. For each significant service, ask:

• Why did we start buying this?
• Is that reason still true?
• What do we now have, in data, tools or skills, that we did not have then?
• Is the supplier still providing something we cannot easily provide ourselves?
• What would it cost, in full, to do this ourselves, including people, tools and management?
• What would we lose: specialist knowledge, comparisons with other businesses, access to new ideas?

Look especially for services whose value depends mainly on access to data, reporting or routine analysis that is now available internally. These are the most likely to have moved.

Also check what the contract says about data. If the supplier holds records, history or analysis that the business would need to take the work in-house or move to another provider, make sure the business owns that information and can get it in a usable form.

Plan capability ownership in technology projects

Many technology projects describe the systems they will deliver but not the decisions and skills the business intends to own afterwards. As a result, a business can install new tools and still depend on outside providers for basic interpretation, because nobody planned for internal people to take over.

When planning a significant technology change, write down which tasks currently bought from outside should move inside once the project is finished, who will do them, what training they need and when the outside service will be reduced or stopped. If none, that is a legitimate answer, but it should be a decision rather than an accident. The data readiness is a business habit, not an IT project article covers the data side of this.

Build internal capability deliberately where it compounds, meaning where each repetition makes the business better at something that matters. Avoid rebuilding routine services internally just because new tools make it possible.

Balance standardisation and experimentation

The maritime study observed that better digital capability strongly supported standardisation: common processes, common data and common reports. More disruptive ideas were harder to absorb when they disturbed the standard way of doing things.

Both matter. Standardisation makes work efficient and comparable. Experimentation finds better ways of working. If every new idea must fit the standard process from day one, the business may suppress useful experiments. If every team builds its own tools and reports, the business loses consistency and control. A practical approach is to set aside a small, clearly bounded space for trying new methods, often with a partner, and to move what works into the standard process deliberately once it has proved itself.

A worked example

This is an illustration. A plastics injection moulding business with 45 staff buys three outside services:

• Production performance reporting: a consultant prepares a monthly report on machine performance and scrap from data extracts the business sends, at $4,500 a month.
• Energy monitoring: a provider monitors electricity use, compares it with similar sites and advises on tariffs, at $1,200 a month.
• Scrap tallying: an administrative staff member spends about half a day a week compiling scrap figures from paper sheets for the consultant.

Over the past year, the business has connected its machines to a data collection system and set up a live dashboard as part of a wider systems upgrade. The production engineer has learned to use it and can now see machine performance and scrap rates daily.

The owner reviews each service against the five tests:

• Production reporting: the routine monthly report now duplicates the dashboard. The consultant’s distinctive value is in deeper analysis and comparisons with other moulders. Decision: own the routine reporting, with the production engineer spending about two days a month on it, and partner with the consultant for an annual review and one improvement project a year.
• Energy monitoring: the provider’s value comes from comparing many sites and following tariff changes, which the business could not replicate. Decision: buy, and keep.
• Scrap tallying: the machines now record scrap directly. Decision: retire the manual tally.

The owner estimates the cost change for the reporting decision:

The saving is modest. The larger benefit is that losses are now spotted within a day rather than weeks later, the production engineer’s understanding of the process grows every month, and the consultant’s time is spent on work that actually needs a specialist. The administrative staff member’s half day a week is redirected to other work. The owner also checks the consultant’s contract to make sure all past reports and analysis belong to the business, and confirms that the new data system is backed up and access-controlled.

How this applies to a small Australian business

Small businesses often buy services to fill capability gaps, and those gaps can close faster than contracts are reviewed. Practical steps:

• List outsourced services and the original reason for buying each one.
• Review them at least annually against current data, tools and skills.
• Apply the five tests: learning, scale, differentiation, control and risk, innovation access.
• Place each service in own, partner, buy or automate and retire.
• Calculate the full cost of doing work internally, including people, tools and management time.
• List new dependencies when bringing work inside, including software, data and key people.
• Check data ownership in supplier contracts.
• Plan capability ownership as part of technology projects.
• Keep a space for experiments while standardising what works.

Signals worth watching

• Outside services reproducing analysis already available inside the business.
• New tools installed but outside providers still needed for basic interpretation.
• Supplier spend steady while internal capability has grown.
• Reports nobody reads because a dashboard now shows the same thing.
• One person holding all the knowledge of a newly internal capability.
• Suppliers contributing less new thinking even as fees stay the same.
• Experiments stalling because they do not fit the standard process.

Common mistakes

• Treating make-or-buy as permanent.
• Bringing work in-house because you can, rather than because it builds something valuable.
• Ignoring the full cost of internal capability.
• Assuming in-house means independent.
• Installing technology without planning who will own the work afterwards.
• Letting supplier contracts hold data the business needs.
• Standardising so early that useful experiments cannot survive.

Frequently asked questions

How often should we review outsourced services? At least once a year, and whenever a significant technology change or a change in key staff alters what the business can do.

What if the supplier relationship is good and we do not want to damage it? Talk to the supplier openly. Many suppliers prefer to shift towards more specialised, higher-value work rather than lose the relationship entirely. Explaining what the business can now do itself, and where it still values the supplier, often leads to a better arrangement for both.

How do we avoid depending on one person for a new internal capability? Document the process, train a second person and keep the tools and data accessible to more than one account. Treat the capability as belonging to the business, not to the individual.

What if we are not sure we can sustain the work internally? Move it in stages. Keep a reduced arrangement with the supplier for a period while internal people take over, and agree in advance what would show that the change has worked.

Does this apply to services we sell, not just ones we buy? Yes. If you supply services that depend on access to data or tools your customers may soon have themselves, consider where your distinctive value will be as their capability grows, and develop it before the routine work disappears.

Questions to ask

• Which outsourced services exist mainly because we lacked data, tools or skills when the contract began?
• Which capabilities build learning that should grow inside the business?
• Where do suppliers still have genuinely distinctive knowledge or scale?
• Are we bringing work in because it is valuable, or simply because we now can?
• What new dependencies would bringing work in create?
• Which services should move from simple buying to working jointly with the supplier?
• Which activities should simply stop?

Bringing it together

Better data, tools and skills change more than how fast work gets done. They change where the line between doing and buying should sit. Review outsourced services against today’s capability, apply the five tests, place each one in own, partner, buy or retire, count the full cost and the new dependencies, check data ownership and plan who will own work after each technology change. The aim is not to maximise insourcing or outsourcing. It is to keep redrawing the line so the business owns what builds its strength and works with partners where they create more value than ownership would.

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Source: KEVOS notes, drawing on an action-research study in the maritime industry by A. Pagoropoulos, A. Maier and T. C. McAloone (2017) on digital capabilities and product-service systems. Examples and figures in this article are illustrations.