IT Insource vs Outsource | How to Choose
A decision that many businesses find themselves questioning in the modern age of globalization.
First, the Terms
Before we get into why this decision is so important, let’s make sure that you understand what “insource” and “outsource” actually mean.
“Insource” or “insourcing” refers to the process of having an employee of your company complete a task or business process.
“Outsource” or “outsourcing” refers to the process of having someone external to your company, that is not an employee, complete a task or business process. This could be an outsourcing agency or a consultant.
Say, for example, that you have tons of accounts payable work at your organization. You could hire an employee of your organization to handle your accounts payable, or you could outsource it to a company that specializes in doing accounts payable. This is a great, and very common, example of choosing between insourcing vs outsourcing.
There are many ways to reach this decision. Your business could be doing so phenomenal you could be considering outsourcing to help with volume. Or your business could be going through financial downturn, and you are looking at outsourcing as a tool for containing costs.
Either way, the decision to insource vs outsource is a very serious one that shouldn’t be taken lightly.
There is a lot at stake with this decision. Your choice could be the reason that your business grows at an exponential rate, or saves your company from going under. It could also be the reason that your business actually goes under.
Now that you understand the importance of the decision to insource vs outsource, let’s go over the pros and cons of each choice.
Insource vs Outsource: The Advantages of Insourcing
There are tons of really great reasons to choose insourcing in the insource vs outsource debate.
The first being that usually when you insource a a function you have more control of said process.
Take our previous example: if you were to hire a new employee to do you accounts payable, you would have much more say in how they were trained. Meaning that you could set guidelines for how they completed your accounts payable that you may not have been able to when working with an accounts payable outsourcing firm.
An employee will generally feel more pride and ownership in their work as well. This means that they will go the extra mile to make sure that your company’s accounts payable are top notch. They will be more innovative, and likely have less mistakes than an employee of an accounts payable outsourcing firm that feels no loyalty to your business.
This concept is fairly well known, and applicable to tons of different situations. You will always feel more ownership and pride in something that you own, versus something that someone else owns.
Having an internal employees do your accounts payable will also allow you to customize the process, and respond to changes more quickly than if you were to outsource.
Since the outsourcing company has tons of different clients that they have to service, they will have to have a standardized process that applies to all clients. This means that any customization, or things that you do in a specific way differently from them, will more than likely be out the door.
And let’s say that your business gets a new client that needs their accounts payable done a specific way. Your internal employee will be much more able to accommodate that request quickly than that of an accounts payable firm, where you will have to call the client success manager and then get a price quote for the new change in process.
Insource vs Outsource: The Disadvantages of Insourcing
While insourcing has a ton of advantages, it also comes with its fair share of disadvantages.
First, the cost of insourcing can be much more expensive over the long run than outsourcing. Recruiting, hiring, and then training a new employee is expensive. And as your needs grow, continuing to do this could be costly and time consuming.
With an outsourcing firm, you don’t have to pay all of those costs associated with hiring and training someone. You simply contract the outsourcing firm, and increase your monthly spend with them, the more work that you have. So if you have 60 hours of accounts payable work every week, you know that the outsourcing firm is capable of handling that capacity.
If you are looking to insource, you will have to come to the decision of hiring one person to do the job and asking them to work 20 hours of over time each week, or hiring 2 full time employees that don’t have enough work for a full 40 hour week.
(There are obviously tons of different scenarios with this example, such as hiring a part time worker, but we kept it very simple for example’s sake.)
And the bigger your company gets, the more this will become a problem. Let’s say that you need a whole team of accounts payable employees to handle your company’s workload.
Do you then need to hire a manager to lead that team? Will you need to provide ongoing training to make sure their skills are up to date with industry standards?
The scalability of an insourced team is just not as easy or customizable as contracting with an outsourcing company in some situations.
Insource vs Outsource: Advantages and Disadvantages of Outsourcing
You will find that in the insource vs outsource debate, that positives of insourcing are usually the inverse, or the negatives of outsourcing. And vice-versa.
While insourcing lets you have more control, allows your employees to feel more ownership, and allows you to have more customization and flexibility for quick changes, outsourcing firms most likely don’t have those abilities.
The employees of the outsourcing firm won’t have the same pride in the work that they do for your company, because it isn’t your company that they feel loyal too. If you find a really great outsourcing firm that is very focused on customer satisfaction, this might not be the case. But a lot of the time it is.
The outsourcing firm has tons of clients, not just you. So they don’t have the same capacity to respond quickly to change or customize a process just the way your business likes it. Every outsourcing firm is different, but generally this is a problem with outsourcing certain business processes.
Insourcing has its downfalls. The cost, training required, and scalability can easily get out of control if your company is growing pretty quickly. That is were outsourcing wins in the insource vs outsource debate.
Outsourcing is a great option for containing costs over the long run. They are capable of scaling much more easily than insourcing because of the amount of resources that they have on hand. Having 20 more hours of work each week won’t phase your outsourcing company, but it would put a huge strain on your internal employees.
Outsourcing companies are also responsible for their own training. So when you need to get something done, you don’t have to worry about a ramp up time to onboard a new person to a task.
Also, since the outsourcing company specializes in said business process or task, they usually have expert level knowledge. Hiring someone(s) with this level of knowledge at your organization might be too expensive for your bottom line, so it makes sense to rely on an outsourcing company that has that type of expertise.
Insource vs Outsource: The Final Say
When your company is stuck on the insource vs outsource debate, it is important to assess all of the options available to you and pick the best one for your business objectives. While insourcing allows for more control and customizability, outsourcing can be more scalable and cost effective.
Example: Law Firms
While outsourcing jobs and work are often a major discussion regarding the U.S. economy, there is also still a great deal of insourcing that occurs and is increasing as well.
Examples of businesses which increasingly practices insourcing are law firms. In 2018, results of a survey in a Legal Benchmarking Report indicated that law firms are currently conducting at least 75 percent of their work in-house, an increase from just 17 percent the year before. Further, 20 percent of those surveyed said they conduct all such work internally, and another 20 percent bring in at least half of litigation and e-discovery work in-house. Thirty-one percent insourced less than half.
Outsourcing enlists the help of outside organizations not affiliated with the company to complete specific tasks.
Insourcing, on the other hand, is a business practice performed within an organization's operational infrastructure.
Insourcing generally places new operations and processes on-site within the organization; outsourcing involves an outside organization often away from the primary organization's operations.