Insourcing cost modelling template

Real-world example: bringing a customer returns operation in-house

Brightline Manufacturing Ltd, a fictional manufacturer employing approximately 180 people, outsourced its customer returns and reverse logistics operation to an external provider. The provider collected returned products, inspected them, updated the company's systems and arranged either resale, refurbishment, recycling or disposal.

The company was paying approximately £265,000 per year for the outsourced service. At first glance, the contract appeared to be good value. However, the senior management team had become increasingly frustrated by inconsistent service levels, delays in processing returns and a lack of visibility over the customer experience.

The company initially estimated that bringing the service in-house would cost approximately £180,000 per year in salaries. This suggested a potential annual saving of £85,000. However, the HR and Finance teams challenged this calculation because it did not include employer National Insurance, pension contributions, holiday cover, recruitment, training, management time, equipment or the potential employment law implications of the proposed change.

A more detailed model was therefore prepared.

The proposed structure required four Returns Operatives, one Returns Team Leader and 0.5 FTE of management support. Once employer on-costs, recruitment, training, uniforms, equipment, IT systems, insurance and management time had been included, the estimated annual operating cost increased to £228,000.

The company also identified one-off implementation costs of approximately £72,000, including racking, scanning equipment, system configuration, recruitment, training and the cost of running the outsourced and insourced operations in parallel for one month.

The initial headline saving of £85,000 was therefore reduced to an expected annual saving of approximately £37,000 from Year 2 onwards. The first-year saving was only approximately £(35,000) once the transition costs were included.

The project team then considered whether TUPE might apply. The existing outsourced provider had employees dedicated primarily to Brightline's returns operation, and the nature of the activities being carried out was not changing significantly. This created a potential TUPE risk that had to be assessed before the financial business case could be finalised.

The model was therefore updated to include a potential TUPE scenario. The business also identified possible accrued holiday liabilities, existing contractual benefits and the need to obtain further information about the transferring employees before finalising the cost comparison.

Three financial scenarios were prepared. In the best-case scenario, the operation achieved the expected staffing levels and productivity within three months. The expected-case scenario assumed a six-month bedding-in period and some additional overtime. The worst-case scenario assumed higher sickness absence, recruitment delays and the need for additional temporary labour during the first year.

The expected scenario showed that the operation would save approximately £37,000 per year from Year 2 onwards, with a payback period of approximately 23 months. The worst-case scenario showed no meaningful financial saving during the first three years.

Despite this, the management team decided that insourcing remained the preferred option because the non-financial benefits were significant. After six months, the company reported a 31% reduction in the average time taken to process customer returns, a 22% reduction in customer complaints relating to delayed returns and improved visibility of stock entering the business.

The internal team also identified several process improvements that had not been possible under the outsourced model. Returns staff were able to work directly with the Customer Experience, Production and Logistics teams, resulting in faster decisions about replacement products, repairs and resale opportunities.

The project did not deliver the originally forecast £85,000 annual saving. However, the more realistic model demonstrated that the project was financially viable, provided that implementation was carefully managed. By modelling the full cost rather than relying on a simple comparison between the outsourcing fee and salaries, Brightline avoided an overly optimistic business case and was able to plan properly for the financial and operational realities of insourcing.

The exercise also demonstrated the value of involving HR early. Employment costs, TUPE, recruitment, training, absence, employee relations and consultation requirements all had a direct impact on the financial viability of the project. The final decision was therefore based on a complete business case rather than a simple assumption that bringing the work in-house would automatically be cheaper.