Insourcing vs Outsourcing: Choosing Between In-house And Outsource Services Using External Workforce
Choosing between an external workforce and in-house services is a dilemma for many business owners or HR managers. Deciding to assign a task (or a project) to an employee or outsource it to a contractor, you can consider many aspects like:
- seasonality and duration
- level of expertise of my actual staff
- cost and financial benefits
- level of urgency
- risk and sensitive information leak
- core activities of the business
Insourcing uses a company’s existing workforce to accomplish a new project. On the other hand, a business may need to outsource by hiring third-party contractors if staff members lack the skills necessary to complete tasks. For example, a US-based company can hire an advertising agency in India to benefit from their expertise and lower expenses.
Business outsourcing services are vital for many small businesses and startups that do not have the required in-house workforce. Business outsourcing services are also beneficial for big brands since it helps them grow faster while lowering expenses. For example, a business coach can be contracted to improve staff training and development.
Insourcing may not be suitable for seasonal activities, but it is convenient for business core activities that require hiring a full-time or part-time employee.
Outsourcing is also when a firm creates a temporary department using an external workforce to face a challenge or respond to abnormally high demands. A group of contractors works in the firm office for a limited time on a specific project.
To address unusual challenges, some companies prefer to assign employees to tasks outside their regular duty temporarily. In this case, offshore insourcing and local outsourcing are also common ways to complete a project without hiring extra employees.
People often use the phrase “global outsourcing” because companies are looking for independent partners worldwide.
Outsourcing and insourcing are more common when businesses need to complete seasonal work. This type of work does not require hiring a full-time employee. A company with multiple offices can find an employee in a different department or location to do the job. Or they can outsource it to an independent contractor.
Insourcing and outsourcing strategies
To hire a new employee or redistribute the workload you may need to sign or modify employees’ contracts. And for contract workers, it would be better to establish a proper outsourcing agreement.
An outsourcing agreement refers to a deal signed between a service provider and a company in which the contractor guarantees to deliver a specific service. A contract is essential to ensure that both parties get satisfaction and includes many elements like delivery due date, a complete description of the services, payment method and cost, etc.
Here are some sourcing strategies based on the location of the service providers.
Onshore outsourcing [local outsourcing, domestic outsourcing]
Onshore outsourcing, also called local outsourcing, is when the company and the outsourcing service provider are located in the same country. For example, a US-based company can outsource its I.T. and cybersecurity maintenance to Corsica Technologies, which provides expert Security Services and I.T. for Business.
Onshore insourcing and strategic workforce planning
Onshore insourcing is when a business picks an employee to perform non-usual or unexpected tasks. In this case, the employee usually works in the company or a subsidiary located in the same area or country. A good strategic workforce planning helps to find versatile workers that can take on challenging tasks.
Offshore insourcing vs captive outsourcing/offshoring [international insourcing]
Offshore insourcing is contracting a fully-owned subsidiary based in another country to do a task commonly done in-house. Captive offshoring relies on the same principle when a multinational corporation creates a wholly-owned subsidiary to relocate part of its activities to a foreign country.
International insourcing is transferring an overseas employee to another company branch. It helps lower the time spent on the hiring process while having the work done by a qualified worker that knows our the brand operates.
Nearshore sourcing is searching for an extra workforce in a nearby location or country to fulfill a need that can not be done in-house. For example, a nearshore software development company like BairesDev can help you find a nearshore development center close to your location.
Nearshore outsourcing allows companies to delegate responsibilities and tasks to businesses located in neighboring countries. Softtek, a well-known digital business solutions provider based in Mexico, has been implemented nearshore outsourcing since 1997 to help its U.S. clients.
Nearshore insourcing implies utilizing nearby workforce resources of the same multinational enterprise to work on a project or task. For example, it could be transferring workers from Mexico to the United States in another branch of the same corporation.
Hybrid outsourcing model
The hybrid outsourcing model allows combining in-house and outsourced workforce. It gives more flexibility and aims to offer the best solutions favorable for company growth while maintaining a modest budget. Hybrid sourcing is effective in creating a team of qualified workers.
Offshore outsourcing is when a business hires a third-party service provider from another country to complete a project or perform a task instead of in-house workers. The Philipines, India, China, and Malaysia are known to provide qualified workers at reasonable prices, making them great places for offshore outsourcing.
Insourcing vs outsourcing pros and cons [advantages and disadvantages]
|Cost and expenses||Increase monthly expenses if hiring a new person. Can be lowered if it is possible to assign an existing employee to the new task for a limited time.||One-time fee to pay and no extra cost of hiring an employee. Hiring an expert in another country like the Philippines can lower the cost.|
|How long does it take||It takes on average 1-2 months to hire a new employee.||The job can be assigned to a contractor in just a few days.|
|When to outsource and when to insource||An existing employee has the required skills and the time to complete extra projects.|
Expanded the company reaches with regular new offers. In-house workers are better suited for core activities and tasks that require having previous knowledge of the brand.
| Need an expert and no one is qualified among the employees or have the required skills and the time to complete extra projects. |
Outsourcing is helpful when a business engages in activities that are not part of its core activities.
|Sensitive information and intellectual property||All the intellectual property belongs to the employer unless stated otherwise in a contract. Sensitive information can not be discussed outside the company without explicit authorization.||A non-disclosure agreement or confidentiality agreement is essential to ensure that any sensitive information stays secret. The contractor or third-party agency can only reveal information if required by court order.|
|Insourcing and outsourcing in supply chain management||In-house workers are often better suited for core activities and tasks that require to have previous knowledge of the brand. Insourcing enforces the idea of branded final products. It can positively affect customers’ trust and increase sales.||Outsourcing can help to manage the flow of services and goods effectively. It helps to reduce the overall cost and prevent highly qualified workers from doing low-value tasks.|
Outsourcing is most effective when an organization’s primary goals are limited in terms of time and skills available. Small businesses usually outsource tasks like social media management, payroll, and building an online presence.
Insourcing is most effective when an organization’s primary goals are continuous in terms of time and multifaceted in terms of scope. These goals are inclusive and expansive and include increasing revenues or profits.
10 advantages of outsourcing
Here are 10 benefits and advantages of outsourcing:
- can help you have your business running 24/7
- lower your costs (labor costs and office internal infrastructure)
- improve efficiency and save time
- risk liability sharing
- workers can focus on their primary tasks and business core competencies
- help to respond to unusual demands
- increase flexibility
- accelerate business growth
- ensure staff training and development
- benefit from contractors expertise and skills
10 advantages of insourcing
Here are 10 benefits and advantages of insourcing:
- get better quality control
- protect sensitive information
- better for branded products and services
- benefit from multi-skilled workers
- favor in-house projects
- can reduce lead time in some cases
- help business reputation management
- it is easier to tailor services to customers’ needs
- facilitates staff hiring and training (knowledge sharing)
- stay ahead of competitors
The advantage of insourcing to a client is that the procedures and operations of the firm can be tailored specifically to the firm. It is probably the biggest attraction to doing things in-house. If there’s a custom approach or there’s a specific need to satisfy due to the nature of the business. An insourced system gives you the control to apply the needed expertise to meet those particular needs.
Outsourcing allows firms to focus on the core competencies that drive their business. They don’t have to worry about the operational needs or the different IT costs that are associated with it.
5 disadvantages of outsourcing
Here are 5 cons and disadvantages of outsourcing:
- require extra efforts to ensure communication and team management
- extended turnaround time
- unexpected costs and fees
- lack of control over BPM
- increase the risk of information leakage
5 disadvantages of insourcing
Here are 5 cons and disadvantages of insourcing:
- labor shortage and lack of skilled employees to do seasonal tasks
- high labor costs and employees benefits
- may require to build extra rooms in the office
- can be challenging to produce at competitive prices
- inefficient if there is no flexibility and adaptability in the workplace
The disadvantages of outsourcing are that you’re dependent on a single vendor that provides the service for you. And as you try to scale your business, you are not sure whether or not the service provider can provide the necessary assistance to help you drive the business more efficiently.
Types of outsourcing
Here are eight different types of outsourcing to choose from depending on your business needs:
Business Process Outsourcing
Business Process Outsourcing, also called BPO, can include the most common and repetitive tasks a business needs to function effectively. Companies usually use offshore call centers to lower costs and provide a 24h customer support or another outsourcing services company based in a developing country.
IT outsourcing utilizes third-party service providers to perform tasks requiring expertise in information technology. Many startups and small businesses don’t have an IT department, and it can be cost-effective to outsource IT services.
Outsource manufacturing [Manufacturing Outsourcing]
Outsourcing manufacturing is a business agreement with a third-party company/contractor to create products and goods. The goals are usually to lower costs and improve productivity. For example, Sony has planned to outsource the production of its LCD TVs in Taiwan and partner with the manufacturer Foxconn.
Multisourcing involves working with multiple partners to conduct a project or sell products. For example, a drop shipper can work with different suppliers to sell the same item, or a state may hire many contractors/freelancers (a GIS expert and an independent architect) to build a new road.
Operational outsourcing allows companies to extend their office without hiring extra employees. Operational outsourcing is beneficial for businesses using heavy machinery to provide services or produce goods. It is also widely utilized in supply chains and advisory services.
Process-specific outsourcing is delegating a particular mission to an external contractor to keep assigning employees to the company’s main activity. For example, restaurants can use DoorDash Drive to fulfill their deliveries while they focus on producing the best meals possible.
Body shopping [Professional Outsourcing]
Professional outsourcing or body shopping involves hiring specialists or highly qualified contractors to do various tasks. It could be paying for legal services or any punctual work that requires an expert. Consultancy firms commonly use body shopping to outsource IT-related tasks.
Project (and project management) outsourcing
Project outsourcing allows companies to focus on core activities while hiring an external PM to conduct a project. Contrary to an in-house project manager, an external PM can be a specialist regarding a specific project. He is generally responsible for coordinating the external workforce and internal resources.
Insourcing and outsourcing examples
Most companies outsource office cleaning and duties that do not use workers’ skills to generate income. While many big brands have a dedicated IT department, other small businesses hire contractors to do the work.
You can outsource any seasonal activity, a cyclic task that requires a high level of expertise, or a function that does not require hiring someone all year. Here are 10 outsourcing examples:
- business audit
- marketing and promotional campaigns
- rebranding announcement
- website development and design
- online presence management
- non-technical customer services
- social media management and marketing
- sales funnel optimization
- payroll and accounting
- business registration
All three main business activities investing, operating, and financing can be done by employees. Here are 10 examples of insourcing:
- pricing management
- pre-opening training
- workforce management and distribution
- customer support
- supply chain management
- legal counsel (in-house counsel)
- sales executive
- in-house bank treasury
- product management
Even though many companies outsource warehouse cleaning, most low-level skills activities and operating day-to-day tasks can be done in-house
Why companies outsource
There are four main reasons why companies outsource:
Maintaining low business running costs can directly affect rentability and profit. Thanks to outsourcing, it is possible to:
- get a smaller and cheaper office
- lessen employee training costs
- save on the overall labor cost
- lower operating fees
- get access to qualified offshore contractors at reduced prices
Employees can focus on the company core competencies and values
It’s great to have some multi-talented workers who can pretend to assume managerial functions. However, highly qualified employees are often specialized in doing a specific task regarding the company’s core competencies. For example, it can be outsourcing payroll or office cleaning services.
Boost sales and grow faster
Most small businesses do not usually have an in-house marketing expert. Since marketing is so essential, it would be better to leverage the external workforce of a marketing agency. Outsourcing professional services like marketing and advertising facilitate business growth.
Work quality, efficiency, and productivity
Outsourcing helps assign each employee to tasks matching their background and level of qualification. No time wasted or guessing how to perform unusual tasks. Most importantly, it is possible to outsource staff training and development to enhance productivity.
Compensate the lack of internal resources
It is not realistic to try doing everything in-house. Even the big brands often outsource tasks like equipment repair, IT maintenance, and warehouse cleaning. Having a full-time employee in charge of machinery repair is not worth it if it remains an occasional duty.
Assigning tasks to team members and finding outsourcing companies are proven ways to get a job done. In the end, deciding between outsourcing and insource depends and many elements. All sourcing strategies have pros and cons, but the goal is to find workers who can help you build a profitable business.