Outsourcing vs Insourcing
Everything You Wanted to Know About Outsourcing vs Insourcing
In today’s fast-paced economy, businesses use several ways to manage their processes. Insourcing and Outsourcing are some of those processes that have helped firms reduce the cost of production and remain competitive. Companies use both of these techniques to acquire talent. But what is the difference between Outsourcing and insourcing?
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In this comprehensive guide on Outsourcing vs. insourcing, you will learn the differences between Outsourcing and insourcing and know which is best for your IT needs. Before making a detailed comparison, let’s understand what they are and their benefits.
What is Outsourcing
Outsourcing is hiring a workforce from a third party or an outside organization to perform non-critical business tasks formally carried out in-house. The third-party or external company specializes in that particular task or service.
The main reason businesses outsource is to save on the cost of production, resulting in increased profit. Most companies focus on hiring offshore developers, logistics, supply chain management, and manufacturing. These activities also include marketing strategies like digital marketing, content marketing, social media marketing, and inbound marketing.
According to statistics from a YouGov poll (1), over 70% of B2B decision-makers say that their companies have outsourced some of their business operations. IT outsourcing remains the highest at 34%, and customer service is a minor task to be outsourced.
There are three types of outsourcing that businesses use. These are:
- Offshoring – involves outsourcing to an individual or company far from your home country and mostly a country with a different time zone.
- Onshoring – is outsourcing to an external organization or an individual in your country.
- Nearshoring – outsourcing to an exterior company or an individual in countries near yours.
What are the Benefits of Outsourcing
Many businesses use Outsourcing to save on the cost of hiring talents whose expertise is occasionally required. Outsourcing also helps reduce the cost of production by saving more money on expenses.
With Outsourcing, companies can add or remove resources or personnel to fit their requirement at a given time. It also helps businesses to improve productivity and efficiency by focusing on core business operations leaving other business aspects to experts in that field.
Downsides of Outsourcing
One of the disadvantages of Outsourcing is that the business hands over quality control to another company or individual. The management will depend on the external organization hired to carry out a project.
Besides quality control issues, Outsourcing may lead to communication barriers, especially when you have outsourced remote workers. There will be no uniform understanding of a subject matter. In addition, offshoring may cause challenges due to cultural differences and time.
While Outsourcing helps you access a pool of talents, you may need help to get a service provider who thoroughly understands the ins and outs of your business. Finding an outsourcing company specializing in your specific niche gets even more challenging.
If not carefully selected and vetted, outsourcing companies may pose security concerns. Before entrusting sensitive data to a third-party service provider, ensure that the provider will take optimal security measures.
What is Insourcing
Insourcing is a business practice using your company’s employees to carry out a specific task instead of hiring an external outsourcing company. Businesses choose to train and develop existing personnel to carry out particular tasks that may be outsourced.
Benefits of Insourcing
With insourcing, businesses can have absolute control over the quality of service and people providing the services since everything is done in-house. You will also be up-to-date with the process and be part of the decision-making process.
Insourcing eliminates communication barriers as your team works from the exact location. Face-to-face communication becomes possible, and employees can communicate any issues in real time.
Insourcing reduces the risk of data breaches by an external organization. A leak in sensitive data or intellectual property can compromise your brand, investment, research, and staff.
Insourcing can promote your brand image as people feel you are creating jobs for the locals. It becomes even more beneficial if the task requires a person who understands the local community and culture.
Downsides of insourcing
Insourcing can lead to increased costs of hiring and labor. You will spend more money hiring new employees, paying salaries and other benefits. Also, you will incur extra charges for training existing employees on a new task you need them to carry out.
Insourcing can also be time-consuming. Even though you already have candidates to handle the job, you will still need to train them. Also, training new staff for them to understand your business scope and functions can be overwhelming and time-consuming.
Workload management becomes a challenge with insourcing. Most companies need help establishing workload flexibility as the employees take on extra responsibilities. This leads to unforeseen delays and failure to meet project deadlines.
Differences Between Outsourcing and Insourcing
Do you know whether to outsource or insource? Here are the critical differences between Outsourcing and insourcing that can help you make the right decision.
Outsourcing and insourcing have different meanings. Outsourcing refers to subcontracting some business processes or tasks to an external organization with the expertise to effectively and efficiently carry out the tasks. On the other hand, insourcing is allocating new responsibilities or duties to in-house employees.
Outsourcing and insourcing differ in where the activities are performed. In Outsourcing, actions are performed at the building or site owned by the outsourcing company, while insourcing operations happen in-house.
Insourcing is the most preferred for critical business activities, while Outsourcing is for non-core business activities. However, you can choose to handle non-critical activities within the business.
Extent of Control
Insourcing gives the business management complete control of the process from start to end since everything is done in-house. In Outsourcing, there is little or no control over how the external company operates.
Reason for the Process
If you already have employees who can handle some new tasks and responsibilities successfully, insourcing will be more advantageous in reducing the cost of hiring. Working in-house helps the management to have more control of the processes. Outsourcing helps the company focus more on the core business operations and minimize the cost of productivity.
Risk of Confidentiality
There is no risk of confidentiality involved when you choose to insource, but in Outsourcing, there is some risk that might happen.
Should you Outsource or Insource your IT Needs?
According to Statista Research Department (2), IT outsourcing services have increased significantly, and the market revenue is estimated to be approximately 413.7 billion US dollars. When considering whether to outsource or insource your IT needs, you should decide after reviewing both benefits and the reasons for outsourcing software processes. The choice differs from business to business. Some may consider Outsourcing because of its cost-saving. They get high-level expertise and flexibility, allowing the company to focus on the core process.
On the other hand, some businesses prefer insourcing because they will have direct control of processes, and it encourages innovation. Some companies like the hybrid approach, with some services done in-house and others through an external organization. Defining the type of services you need to be managed can make it easy to choose whether to outsource or insource. Learning more about the pros and cons of IT outsourcing will absolutely assist in figuring out if it’s right for you!
Why do many IT firms choose Outsourcing
Many IT firms prefer to outsource IT services to save on costs. However, data breaches remain the primary concern when outsourcing. To eliminate these concerns, you can insource highly specialized services, involve confidential data, and expose core intellectual property.
Another reason companies outsource IT operations is to get a pool of offshore or onshore talent. Many US companies prefer nearshoring of software developers, especially when there is a shortage of IT talents. Outsourcing enables them to hire knowledgeable and skilled remote developers. It also gives the company some flexibility because they can quickly release the IT specialists once their work is completed.
According to Forbes magazine (3), “the major benefits of outsourcing software development include getting time and cost efficiencies, launching products on time, and focusing on core business processes.”
Frequently Asked Questions Outsourcing vs Insourcing
Both outsourcing and insourcing have their benefits and downsides. But, to help you make the right choice, here are some of the questions you should ask:
What is your ultimate goal?
What you want to achieve should guide you on which method to choose. While Outsourcing relieves labor and overhead costs, insourcing encourages innovation and helps build resources in-house.
Outsourcing is your best fit if your priority is cutting costs and getting assistance with a heavy workload. However, choose to insource if your focus is to expand your business capabilities.
Are your business needs time-bound?
Outsourcing some processes is your best bet if you work on tight project deadlines. Outsourcing companies can handle your project needs at short notice. On the other hand, if you have ample time to do the tasks, insourcing will pay off big.
You may also choose a hybrid method that combines Outsourcing and insourcing if your business model demands so.
Do you have a startup or an established business?
If your business is new, you can outsource some processes to save on expenses. On the other hand, if you have an established business, you have the luxury of choosing whether to outsource or insource or even have them both.
Both insourcing and Outsourcing have potential benefits for the business. While Outsourcing can help reduce costs, give you flexibility and finish time-bound projects, insourcing gives you greater control of your business operations. Companies have different reasons for choosing to outsource their work.
However, both of these methods have their drawbacks. Outsourcing challenges communication, and you have no control over work quality. Insourcing may require massive investment, and it is a bit time-consuming. You can make the right decision by knowing your business goals, project requirements, and size.
- Statista Research Department
- Forbes magazine