Insourcing: The Ultimate Guide
27 Jul 2023 By: Michael Kansky
Updated: 09 Aug 2023
Every business faces the conundrum of insourcing vs. outsourcing. This decision often has major cost and quality implications. And there is never a right or wrong answer. Instead, businesses must weigh potential benefits against potential drawbacks and risks. That’s the best way for businesses to decide how to achieve their strategic goals.
Most businesses rely on a combination of business process insourcing and outsourcing to provide all of the services they need. Some businesses even use a hybrid insourcing–outsourcing model to provide a single business function. In this article, we’ll start with basic definitions of business process insourcing vs. outsourcing. Then, we’ll present important factors that should go into your decision. We’ll also show you how to identify and think through each factor. Finally, we’ll present real-life case studies and practical tips.
Insourcing vs. Outsourcing: What’s the Difference?
The main difference between insourcing and outsourcing has to do with who’s performing the work:
- Insourcing uses the business’s internal resources to deliver a service or complete a task.
- Business process outsourcing uses the resources of an external organization to deliver a service or complete a task.
Thus, the decision to insource vs. outsource is a strategic business decision.
What Is Insourcing?
Insourcing is the process by which a business delivers a service and completes a task using internal employees only. Typically, the business assigns work to an individual or a team within its own organization. To insource, a business needs a big enough workforce. The insourced employees also need to have specific skill sets and experiences.
For every service or task that a business decides to insource to an internal supplier, the business must identify people to perform the work. Sometimes, businesses may need to train or retrain their existing employees. Other times, businesses may decide to restructure teams or shift around their workloads. And sometimes, businesses may need to recruit and hire new employees with specialized talents.
Benefits of Insourcing
Businesses choose insourcing for a variety of reasons. Key benefits include the following:
1. Control and Flexibility Over Operations
Not every business feels comfortable delegating important work to a third party. Insourcing helps businesses maintain control and flexibility over how work gets done. The business directly controls the timeline, the work processes and security protocols that will be used, and the composition of the team. Additionally, when the scope of work changes, the business can immediately adjust and pivot; there’s no need to negotiate with a third party.
2. Enhanced Communication and Collaboration
Insourcing isn’t just a way to get work done. It is also a way to foster communication, collaboration, and camaraderie among teams. When employees work together on insourced projects, they learn how to exchange information, solve problems together, and develop creative solutions. These experiences help teams become more effective at working together over the long term.
3. Better Alignment with Company Culture and Values
Every time a business delegates work to its permanent employees, it’s an opportunity to reinforce company culture and values. The team learns through firsthand experience what’s important to the company. Employees also learn the company’s preferred methods and approaches for getting the core aspects of their work done.
Drawbacks of Insourcing
Insourcing has multiple drawbacks. Key drawbacks include the following:
1. Increased Overhead Costs
Insourcing is expensive because of the high cost of recruiting, hiring, onboarding, training, and compensating employees. Employees are a fixed, permanent cost—unlike contractors and vendors. When employees leave, the business bears the financial burden of replacing them.
2. Limited Access to Specialized Expertise
No matter how good a company is at recruiting talent, every company struggles to find and keep all of the expertise it wants. The reality is that specialized expertise comes and goes. Companies are also unlikely to be able to afford all of the in-house expertise they’d like.
3. Potential Capacity Constraints
In-house teams take extensive time and resources to build and maintain. Thus, businesses struggle when they need to add capacity rapidly to supplement existing staff. The business’s ability to scale to meet insourcing demands becomes hampered by constraints on its own in-house capacity.
What Is Outsourcing?
Business process outsourcing is the process by which a business delivers a service and completes a task using an external entity. Typically, the business partners with a third-party company that already has a developed workforce and specialized expertise. Companies typically outsource to save time and money, receive higher-quality products and services, and complete work that their in-house teams lack the core competencies to complete.
Benefits of Outsourcing
Outsourcing offers companies multiple benefits. These benefits include the following:
1. Cost Savings and Increased Efficiency
Outsourcing services eliminates the costs associated with employee turnover, vacation and sick days, onboarding, training, and other costs. Companies pay fixed prices to receive predictable, steady services. That often makes outsourcing cheaper, more reliable, and more efficiently delivered.
2. Access to Specialized Expertise and Technology
Outsourcing services providers give a company instant access to specialized expertise and technology. These resources are typically impractical for the company to obtain by relying on in-house resources alone. Significantly, these specialized resources aren’t at risk of disappearing during in-house turnover.
3. Scalability and Flexibility in Resource Allocation
Outsourcing enables companies to easily scale up or down to meet demand. Companies can gain instant access to resources when needed. And companies can cancel these resources just as easily when they’re not needed. This flexibility with resource allocation is key.
Drawbacks of Outsourcing
Outsourcing can present multiple drawbacks. These drawbacks include the following:
1. Potential Loss of Control and Visibility
When companies outsource, they have minimal direct managerial control over how the work gets done. The outsourced employees use their own administrative structures and processes. Furthermore, when the company wants to change how outsourced work is getting done, the company must go through the outside company’s negotiations and approvals processes.
2. Communication and Cultural Challenges
When companies delegate work to an outsourcing partner, important context and details can get lost in translation. Communication is harder. Team members must take into account time zones and individual employees’ working hours. Misunderstandings are more common. Cultural challenges are also possible, especially if the outside organization’s way of doing things clashes with the company’s own.
3. Risk of Dependency on Third-Party Providers
Outsourcing partners build institutional knowledge when they do work for a company. If the company’s own employees are not building this same institutional knowledge, the company can become dependent on its third-party providers. For many companies, that’s an operational risk they’d prefer to avoid.
Factors to Consider When Making a Decision
There’s no universal right or wrong answer when it comes to insourcing vs. outsourcing. What’s right for one business could be wrong for another. Every job, every task, and every service needs to be evaluated individually. Key factors to consider when making a decision include:
1. Nature of the Task or Service
Some types of work are more common to outsource than others. It depends on the nature of the task or service. In general, companies prefer insourcing when the work is mission-critical and the stakes are high. Keeping core business activities in house can reduce risk and enhance the company’s ability to achieve compliance. Insourcing also maximizes quality control: The company has direct oversight as the core business functions are being done. Companies commonly insource work that involves confidential company data or intellectual property. Highly specialized services also are commonly insourced.
Outsourcing is preferable when the work isn’t core. A business’s executive team may want to reduce costs or get work done faster. The business may want expertise that would be difficult to find in a full-time hire. Or the business may need expertise that they could not afford to hire.
2. Cost Considerations
A company’s most basic cost consideration is whether a job is cheaper to insource vs. outsource. But lower labor costs are not the only consideration that matters. Companies also care about long-term cost implications. And that makes the cost equation more complicated.
Let’s say a company wants to build a strong in-house team. In the short term, the company may know it’s cheaper to outsource this work. But over the long term, outsourcing could be the more expensive option. For example, if an in-house team is building institutional knowledge, the company might see important long-term value in that. Similarly, if the company’s in-house team gets faster and more efficient at doing a job over the long term, outsourcing may only be cheaper in the short term.
3. Resource Availability and Expertise
Many projects and tasks require specialized staff and resources to be available at specific times. Sometimes these specialized resources are more practical or cheaper to obtain through outsourcing. Other times, insourcing is more practical or cheaper. If a company already has a trained team lined up, insourcing may make more sense. If a company needs to recruit, hire, and/or train its staff, outsourcing may be the more logical option.
4. Risk Assessment and Mitigation
Companies are responsible for managing all types of risk: Inadequate customer service is a risk. Shoddy legal work is a risk. Failure to meet deadlines is a risk. That said, some risks are bigger deals than others. When the risk is relatively high, companies may want to insource, as insourcing gives companies more control, governance, and oversight. When the risk is relatively low, outsourcing may be more practical—the company can still hold the outsourcing partner accountable.
5. Long-Term Strategic Goals and Objectives
Some work is critical to advancing a company’s long-term strategic goals and objectives. Other work isn’t mission-critical. When work is intrinsic to the company’s competitive advantage, it may be safer to choose insourcing. When the work is more operational and routine, outsourcing may be the more logical choice.
Case Studies and Examples
The sections above provide generic, theoretical advice about how to weigh insourcing vs. outsourcing. Now, let’s transition to real-life case studies and examples of companies that chose insourcing instead of outsourcing and vice versa.
Successful Insourcing Instances
- Law Firms: The legal industry is a sector that tends to rely disproportionately on insourcing. That’s because legal work is high stakes and involves a lot of sensitive, confidential information. A whopping 44 percent of law firms say they still rely on in-house teams to provide the majority of their litigation services, including intake, document review, and depositions. Moreover, one in five law firms says it is planning to decrease its reliance on third-party services in the next year.
- IT Services: In recent years, companies have dramatically increased the number of IT services that they outsource. But that doesn’t mean companies never bring these services back in house. For example, 34 percent of companies that terminate an outsourcing contract for cause or convenience choose to insource the work afterward, according to Deloitte’s 2012 Global Outsourcing and Insourcing Survey. An even higher portion—48 percent—reported that they’ve terminated an outsourcing agreement for IT or software development services early for cause or convenience. Insourcing is effective when companies want more control.
Successful Outsourcing Instances
- Cybersecurity: Traditionally, businesses have been reluctant to trust a third party with something as important as cybersecurity. But that paradigm is changing. Competition for top-tier cybersecurity talent is intense. The best cybersecurity experts can be used on an outsourced basis. A reported 81 percent of businesses rely on third-party vendors to provide at least part of their cybersecurity capabilities.
- Financial Advisors: The financial advisory industry is turning more and more to outsourced help. These consultants help keep up with evolving client preferences, regulatory demands, and digital transformation. A whopping 99 percent of financial advisors who use these consultants say they’ve seen business improvements as a result of outsourcing.
Hybrid Insourcing-Outsourcing Model
For some companies, a hybrid insourcing-outsourcing model provides the best of both worlds. This business model allows companies to add individuals to their teams via outsourcing. But instead of contracting with a third-party provider, the company contracts directly with the individual.
Benefits and Considerations of a Hybrid Model
Companies use this hybrid model when they want to retain talent that is not available domestically. Companies get to take advantage of a global talent pool, plus lower costs of the outsourcing location. Companies also get to directly manage these individuals and make them part of the company. That means the company doesn’t need to worry about cultural differences.
A hybrid outsourced team member can come with challenges. Businesses need a plan for overcoming potential language barriers and time differences. They also need to invest in onboarding and training this team member. The main difference is everything needs to be done remotely.
Making the Decision: Insourcing or Outsourcing?
At the end of the day, businesses must make a decision about whether to insource or outsource a job. Key considerations that every business should keep in mind when making this decision include the following:
Evaluating the Specific Needs and Goals of the Organization
More than anything else, businesses must align every job and every task to the needs and goals of the organization. What need does the work fill? How important is the work to advancing the company’s goals? The answers to these questions help companies decide if insourcing vs. outsourcing is the more appropriate choice.
Assessing the Advantages and Disadvantages of Each Option
Insourcing vs. outsourcing should be more than just a gut-feel decision. There are always going to be multiple considerations to think through. It’s important for businesses to methodically identify the advantages and disadvantages of each option. The list of considerations should include the following:
- How readily can the work be delegated?
- How much scalability and flexibility does the business need?
- What kind of quality control does the business want?
- What kind of oversight and visibility does the business need?
- What are the cost implications?
- How important is it for the business to build institutional knowledge?
- What degree of security risk is the business willing to take on?
Insourcing vs. Outsourcing – What is Right for Your Business
When it comes to insourcing vs. outsourcing, there’s no right or wrong answer. The decision to insource vs. outsource is a strategic business decision. Insourcing uses the business’s internal resources to get work done, while outsourcing uses external resources. The key to making the best decision is to consider the work in relation to the business’s long-term goals and needs. It’s also important to methodically identify advantages and disadvantages.
Businesses don’t need to make consequential insourcing vs. outsourcing decisions on their own. The experts at Live Help Now can help businesses think through all of the important considerations. We know how to help businesses understand work in relation to their organizational needs. And we know how to guide businesses in evaluating the pros and cons of insourcing vs. outsourcing.
Insourcing strategy FAQ
In conclusion, the decision between insourcing and outsourcing is a strategic one that requires careful consideration of various factors. Businesses must evaluate the nature of the task or service, cost implications, resource availability and expertise, risk assessment and mitigation, and long-term strategic goals and objectives. Insourcing offers control, flexibility, and alignment with company culture, but it can be costly and may have limitations in accessing specialized expertise and capacity. Outsourcing provides cost savings, access to specialized expertise and technology, and scalability, but it may result in a loss of control and visibility and communication challenges. Some industries, such as law firms and IT services, tend to rely more on insourcing, while others, like cybersecurity and financial advisory, lean towards outsourcing. Additionally, a hybrid insourcing-outsourcing model can be considered for businesses looking to retain talent globally. Ultimately, businesses should assess their specific needs and goals and weigh the advantages and disadvantages of each option to determine whether insourcing or outsourcing is the right choice for their organization.
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