What is the difference between insourcing and outsourcing?
Let’s begin by giving our terms concrete definitions.
When we use internal staff, either new hires or existing employees, we are insourcing. Insourcing means handling the job totally in-house.
Outsourcing comes in many flavors. The most basic type of outsourcing is just hiring an outside firm to perform a process or provide a service. A company that hires an outside consultant also is outsourcing, even if it’s only one person they use. According to Statista, Business process outsourcing (BPO) has generated 26 billion U.S. dollars worldwide in 2019.
For example, let’s imagine a company that makes parts for helicopters. The company’s location is not near any restaurants or shops, so they need to feed their workers in the facility. The company could go ahead and hire kitchen staff, including cooks and cleaners. But the company decides to concentrate on its core business of making helicopter parts. They can outsource the cafeteria work to an outside firm.
In software development we often need to outsource. Let’s take another example, a company that makes HR software for large corporations. The software works fine, but the user interface needs work. Our software company could outsource the user interface design to an outside firm. This would prove cost-effective. It would also guarantee the software company gets fresh expert eyes on their software. They would also get their new look faster than if they tried a user interface overhaul with insourced staff.
Let’s take a closer look at the advantages and disadvantages of insourcing and outsourcing.
The advantages of insourcing
When a company chooses to insource a process or service, they retain more control. Take our helicopter firm above. If they choose to insource the cafeteria, they control the menu, meal times, and equipment. The company will also have greater quality control.
A company employee will feel more ownership and accountability to the company than a representative of an outside firm.
The disadvantages of insourcing
Insourcing costs more in most cases. Companies that insource must create new systems and processes. Companies that insource also bear the costs of training and hiring. Insourcing also is not terribly scalable or flexible.
The advantages of outsourcing
Outsourcing usually costs less. Outsourcing firms are able to scale quickly. Outsource companies have staff already trained and ready to begin work on a project. More importantly, outsourcing firms are experts in their field. Outsourcing firms will execute their work at a high standard.
Outsourcing also offers flexibility in workload and hours. If your firm hires an in-house engineer that person can only work a certain number of hours a week. You might have too much or not enough work for them. With outsourcing, the outsourcing firm can easily provide the services you need in a flexible way, giving you more or less help as required.
The disadvantages of outsourcing
Outsource firm employees will not have the same loyalty as insource employees. Outsourcing firms typically have many clients. They might not respond to your needs as quickly as insourced employees. Outsource firms cannot always customize processes exactly to your specifications. Outsourcing firms will have their own way of doing business.
Our helicopter firm who outsources their catering will likely not have a lot of say about portion size or menu options in their cafeteria. They will have to accept limited choices and the outsourcing firm’s method of service.
If the outsourcing is offshoring, the difference in time zones and work hours could also prove disadvantageous.
To sum up
Pros of insourcing
- quality control
- greater control of processes
- more accountable, loyalty
Cons of insourcing
- more expensive
- less scalable
- more training and human resource costs
Pros of outsourcing
- Usually Cheaper
- Outsource employees are usually experts
- Outsourcing firms scale fast
- Outsourcing firms train their employees, no need to onboard
Cons of outsourcing
- Less-custom solutions
- Slower workflow/response time
- Communication delays if offshoring
So, which do you choose, insourcing or outsourcing?
A simple first step in making the choice between insourcing and outsourcing: define your core business. If your company makes helicopter parts, it makes sense to outsource food service. It makes much less sense to outsource propeller design or engine manufacturing.
Core business activity rarely, if ever, should be outsourced. This includes research and development, design, and production. These activities, handled by insourced teams, are the heart and soul of the business. A company that outsources these might end up losing focus. They might lose sight of their founding principles.
Depending on the industry, outsourcing food service, janitorial services, and facility management make sense. You might even outsource customer service or receptionist services. However, if customer service excellence is a strong part of company identity and customer loyalty, those roles should remain insourced.
Outsourcing financial work, accounts, payroll, and the like is usually smart. Outsourcing works best when the task or service is uncomplicated and not fundamental to the business. Outsourcing professional services traditionally worked well because maintaining experts in house costs more. Plus, outsourcing gives the company many experts to work with, not just a few. This is why lawyers, accountants, and architects have traditionally been outsourced roles.
In the digital era, technical experts join these other professionals in providing outsourced services. It makes sense to outsource highly technical parts of your business to allow you to focus on your core work and generate innovative business ideas. Outsource firms will have staff already trained, so they will arrive ready to work. You don’t have to onboard a new person and ramp them up to their tasks. You don’t have to try and hire technical experts whose field you know little to nothing about.
Our helicopter firm, for example, could also outsource the development of their applications. They could hire outside experts to build systems. The applications could help them organize ordering and manufacturing processes. They could develop applications for customers to order helicopter parts. They could also create applications to help with customer service inquiries. This would free the company to concentrate on doing what they do best, build helicopters.
Blocshop offers custom software development services to help firms do just this. Blocshop works with Agile processes to deliver results on time. Our expert engineers, designers, and developers will help you see your full potential. We help our customers reduce costs by up to 30%. Blocshop optimizes resources and helps you keep your headcount numbers low.