Key Takeaways
1. Outsourcing means having another firm perform certain tasks and processes for your company.
2. Insourcing means taking back these outsourced tasks and performing them in-house.
3. Outsourcing is usually motivated by cost savings and access to expertise while insourcing is driven by control over processes and long-term development of capacity.
Should a business function be performed in-house, or subcontracted to a third party? In this article we look at the outsourcing vs insourcing decision and what thing companies need to take into account when making this decision.
What is Outsourcing?
Outsourcing is the practice of contracting a third-party organization to perform some business functions on a company’s behalf. Outsourcing takes advantage of the expertise, human capital, equipment, or specialization of an outside organization. Rather than performing a task or a process in-house, a company usually chooses to outsource it to gain cost savings.
Outsourcing is very common in manufacturing, finance, healthcare, and insurance, though businesses in any industry can outsource functions. Some of the most common functions that companies choose to outsource are accounting, payroll, recruitment, IT support, legal services, specialized manufacturing, logistics, customer service, marketing, and human resources. Sometimes it is not a specific function but a group of functions that is outsourced such as business process outsourcing or knowledge process outsourcing.
Many of these functions are seen as highly specialized and viewed as challenging to develop in-house. By outsourcing them, companies can often have these functions performed more cost-effectively and professionally.
What is Insourcing?
Insourcing is the practice of leveraging current staff and equipment to perform more functions within a company. This can involve creating new teams and initiatives to take on projects that Insourcing technically refers to making a change toward performing functions in-house that were previously outsourced.
In practice, however, new businesses can use this term to decide how to arrange their functions and whether to perform them within or outside of their own staff teams. Insourcing also leans on the concept of reshoring, bringing offshore outsourced functions back to countries that have focused on outsourcing these functions in the past.
Businesses in all industries can choose to insource business functions. However, the functions they usually focus on core functions that they need to keep control of. These can include IT, marketing, or a previously outsourced manufacturing process.
Key Differences Between Outsourcing and Insourcing
There are several key differences to consider when choosing to insource or outsource a function or process, including:
Cost implications
The decision to outsource is normally based on cost savings. Companies that specialize in certain functions can normally perform them for cheaper. By contrast, insourcing can involve investments in specialized equipment or skills that can represent higher costs.
Control
Insourced functions are under the complete control of the company performing them. It can make changes and improvements to processes quickly and easily, making insourcing more flexible. When the same functions are outsourced, the contracting company has little control over how these tasks are performed.
Quality
Quality can be monitored and assured much more closely using insourcing. Outsourced products and services must be assessed from afar and could be produced at lower or unacceptable quality for a long time before the company that outsourced them becomes aware.
Duration
Outsourcing is more often used to perform short-term functions. It’s often not cost-effective to set up the personnel and infrastructure to perform tasks in-house for only a short time.
Pros and Cons of Outsourcing vs Insourcing
Outsourcing and insourcing both have their advantages and disadvantages. Each might be better suited to individual companies based on their age, stage of development, and resources. The benefits and drawbacks of each approach include:
Pros of Outsourcing
Cost
Outsourcing is often more cost-effective because a company can leverage professional services that are already in place.
Expertise
Outsourcing allows a company to find the experts or specialists that they need immediately rather than going through the tough process of recruiting and onboarding them.
Scalability
When a company needs to scale quickly, it can use outsourcing to keep up with increased demand for its products or services.
Cons of Outsourcing
Dependence
When a company outsources functions to other firms, it can become highly dependent on these firms. If they make changes or raise prices, the company has little choice but to accept these changes, often to its detriment.
Quality control
When outsourcing functions to another firm, a company gives up direct control over those functions. The outsourcing firm produces products and services according to its own procedures and standards, which may be inferior.
Confidentiality
Outsourcing always involves some degree of information sharing which can introduce increased risks to confidentiality and data security.
Morale
Outsourcing work may reduce morale in a company. Employees may feel that their work could also be outsourced at any time, making them feel expendable and insecure.
Pros of Insourcing
Communication
Insourcing keeps communication internal, making it easier and more efficient, especially when compared to offshore outsourcing.
Development
Performing a function in-house can help build the skills and capacity of a company’s employees making them more valuable.
Control
Keeping things in-house means a company has complete control over all of its functions and also its data security.
Cons of Insourcing
Investment
It may take a sizeable initial investment to set up a team and infrastructure to perform a task in-house.
Isolation
Without access to outside equipment or expertise, a company has to make do with what it has, which may be insufficient for a certain task.
Outsourcing vs Insourcing: Which to Choose?
Outsourcing and insourcing both have their pros and cons. Choosing one or the other depends on the needs of a company, its future goals, and its capacity to perform certain functions. Ultimately, each company is different, and the choice to insource or outsource must take into account the unique advantages each approach may provide.
For further information on how to outsource functions internationally, particularly HR and payroll processes, get in touch with our outsourcing experts.
Frequently asked questions
A company will normally have to perform a cost-benefit analysis to decide whether to in- or outsource a particular task. This analysis will take into account initial and ongoing costs, risks, and long-term goals to decide which approach to choose.
With insourcing, all risks and obligations are assumed by a single company. With outsourcing, however, risks and obligations are shared. Companies need to create solid contracts with outsourcing firms to protect their interests and ensure tasks are performed to their specifications.
