Advantages of In-Sourcing

Why have any employees at all? Why have a building? Why not just sit [at] home, wearing ... jammies and bunny slippers, sipping a nice cup of tea, and outsource everything? Michael Munger, Bosses Don't Wear Bunny Slippers: If Markets Are So Great, Why Are There Firms?

Personal relationships. When there’s a supply shortage, a need for a special favor, or a friendly kick-in-the-butt, trusted partners are there. You help me because you know I help you. The firm leverages the personal relationships of its employees with vendors (and each other) to help get over the thousand small obstacles and setbacks that plague any commercialization+ effort. There’s no need for a contract amendment, formal agreement or legal involvement.

Franchisees, though they are external legal entities, are considered extended family. They wear the family crest. Franchisee employees and firm employees work together in many dozens of ways (i.e., ties that bind+). The franchisee, through its franchise operations+, extends it’s protections to cover its R&D brethren in the firm. Employees are considered for job opportunities across the firm-franchisee boundary. Implicit trust+ is often the norm.

Not so with external vendors. All our transactions, all our relationships, are contractual. We rely on calculated trust+. I trust you but I keep my hand on my wallet. Small favors do happen, but they are tainted by the calculated nature of the relationship. Cost overruns and delays, the norm in a creative endeavor, require negotiation and contract amendments. Vendor staff may not have anything else to do, and vendors are loath to keep employees on the clock if they’re not billing a client.

Internal resources, in a World Class R&D organization, have better things to do. Always. Our mantra is we’re never held hostage+ to any one or few opportunities. So Industrial Design+, Commercial Operations+ and a host of other internal departments in the firm have a surfeit of opportunities from which to choose. Cost overruns and delays are important to management in these departments: they take away from being able to do other exciting work. The firm therefore has an advocate within commercialization pursuits who attests that delays are intrinsic to the pursuit, and not caused by mismanagement or gamesmanship. Not so with external vendors paid time and materials.

Internal resources, in a World Class R&D organization, are more attuned to the needs, concerns and pressures of other internal resources. For example, professionals in Industrial Design will have many years experience working with their counterparts in Commercial Operations. They know the workload of their colleagues. They know which colleagues need a push, and those for whom you just stay out of the way. Individuals within a franchise develop relationships with firm internal resources through their mandate to regularly launch sub blockbuster+ products. Indeed this is one of the many ways in which they develop ties that bind.

Internal resources, in a World Class R&D organization, are more attuned to the potential and risks for any particular prototype+. Internal resources are typically involved in both the graduation+ and the firm’s purchase of the prototype. They get first-hand insights into which prototypes are effortlessly bound for glory, and which ones may take a bit more work. Depending on their animus, internal resources (e.g., Industrial Design) may opt for the challenge: to better hone their skills and reputation for future work. But they always have a leg up on outside vendors who may, or may not, have been invited to these commercialization milestones.

CAUTIONS

The franchisee makes the final selection on resources. They balance the intimate understanding of the firm’s internal resources, with the need to maintain a robust competition across all vendors. Internal resources do not have a monopoly on all the good resources and ideas. Also, internal resources give the firm a stronger hand in any future negotiations with the franchisee, mitigated by the need for the internal resources to keep on good terms with the franchise organization. Vendors will tend to side with their immediate benefactor: the franchisee. Internal resources are not guaranteed the work. On the other hand, internal resources are deliberately sized so they cannot handle all the work. They get to choose the work they want. Both parties to the transaction must be convinced they want to work together.