Insourcing and Outsourcing: What You Need to Know

Many businesses use a combination of insourcing and outsourcing to complete their business operations cycle. Especially during periods of growth, deciding whether to insource or outsource parts of your company can be instrumental in your success. Regardless of whether you’re thinking about developing the internal infrastructure to handle activities you’re currently outsourcing or hiring an outside business to take over part of your operations, prepare for the transition by learning about the benefits and drawbacks of insourcing and outsourcing as they apply to your business.

 

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What is the difference between insourcing and outsourcing?

Insourcing and outsourcing apply to either a single position or an entire department. Most companies involve some level of outsourcing, such as using an accounting firm once a year to handle their taxes, but can also have outsourcing as a critical element of their business functions. The main difference between insourcing and outsourcing is who controls production activities. 

When insourcing, your business delegates tasks to its own employees and uses internal resources and workflows to accomplish goals. Outsourcing involves hiring another person or company to use their resources and systems to provide you with a portion of your company’s workflow, which you would then coordinate with the rest of your company’s activities.

 

Example of insourcing vs. outsourcing

Almost any business activity can be either insourced or outsourced. Most businesses outsource activities that aren’t part of their core company purpose, such as human resources, shipping and logistics, IT support, marketing and parts manufacturing. However, some companies find it beneficial to handle these responsibilities themselves. 

For example, a small business might start advertising by outsourcing marketing responsibilities to an agency. That agency would make social media posts, run email campaigns and post search engine ads on behalf of the company. The small business would be one of the agency’s many clients and may have to be flexible on when and how they advertise based on the agency’s capacity. 

As the small business grows, they could hire a marketing manager, a graphic designer, a copywriter and a social media intern to advertise their business. These employees would exclusively focus on their employer’s projects and enable quick turnaround times once they are fully onboarded to the company.

Related: Establishing an In-House Marketing Agency for Your Business

 

Pros and cons of insourcing

Insourcing business activities can have many benefits in the right circumstances, but may also come with challenges:

 

Benefits of insourcing

Insourcing gives businesses the ability to directly manage their workflows, providing the following benefits:

  • Utilizing current resources: Insourcing lets you get the most out of the resources and talent that you already have on your team.
  • Maintaining quality control: Performing quality checks is easier when you are in full control of your business operations.
  • Refining processes: When you manage your own business processes, you can make improvements and implement innovations over time based on your experience.
  • Facilitating simplified communication: Because insourcing involves working only with direct employees, it is easier for your team to communicate with one another and give prompt responses to requests.
  • Controlling reputation: Insourcing allows you to have more control over your brand and reputation. By employing people in your community and providing consistent oversight, you can cultivate employee and customer loyalty.

 

Drawbacks of insourcing

At times, insourcing detracts from a company’s success with these barriers:

  • Initial investment: To insource effectively, you have to spend money and time hiring and training employees, setting up workflows and purchasing equipment.
  • No economy of scale: Because you are only performing tasks for your organization, you may not have access to the same bulk discounts that outsourcing providers do.
  • Less efficient use of company time: Assigning basic tasks to existing employees can be a less productive use of their time and expertise, especially if they have a high salary for other responsibilities.

 

Pros and cons of outsourcing

Outsourcing also has pros and cons that you should consider before hiring an outside firm:

 

Positive aspects of outsourcing

By reaching out to a business that focuses on performing a particular role, you can take advantage of their existing assets including:

  • Access to specialization: Outsourcing providers often have specialized knowledge and machinery that allows them to serve specific roles for other organizations.
  • Short-term savings: Outsourcing doesn’t involve a large initial investment, instead paying smaller amounts in increments.
  • Focus on core responsibilities: You can spend more energy working on your main business functions when delegating smaller tasks to other businesses.
  • Immediate assistance: If you need to launch a new initiative right away, outsourcing can give you a quick way to go to market.

 

Challenges with outsourcing

Like insourcing, outsourcing also has drawbacks that can impede your business success if not properly addressed:

  • Slower long-term delivery: Even though outsourcing can help you get started quickly, you may have to wait on the service provider’s schedule for ongoing activities.
  • Lack of continuity: If the outsourcing business fails or changes leadership, you could experience a rough transition trying to find a new provider.
  • Language and time zone barriers: When outsourcing, the people who perform functions for your company may live anywhere in the world, bringing communication and scheduling issues.

 

How to determine whether to insource or outsource business activities

Where you decide to source your labor can have a significant impact on the direction of your business and your ability to handle company workflows both short-term and long-term. Use these steps to guide you through the process of deciding whether to outsource or keep business operations in-house:

 

1. Assess your resources

Do a thorough review of your current company infrastructure, finances and human capital. If you already have employees on your team who are adept in the area that you want to implement, it may be worthwhile to restructure your current business to insource that activity. If no one at your company has relevant expertise, outsourcing may be essential for you to accomplish your goals.

 

2. Consider your ideal timeline

Because insourcing requires a preliminary investment of time, money and training, it works better for long-term business timelines. Paying an outside source that already has the infrastructure in place to accomplish your goals can allow you to meet short-term goals without overextending your staff or neglecting other responsibilities. If you have a more relaxed timeline, you have more freedom to hire and develop a strong team in-house.

 

3. Review outsourcing options

Research the providers that could help you with outsourcing your business activities and make sure that they align with your goals. Gather quotes from service providers to see if the financials and turnaround times make sense for your company. Looking at different outsourcing options can also provide you with a backup plan if your internal systems fail or you experience unexpected demand in the future.

 

4. Think about scalability

Consider how both insourcing and outsourcing could respond to changes as your company grows. Try running practice scenarios to consider what you would do if you had a sudden increase or decrease in demand, both for insourcing and outsourcing. You may want to be able to control the scaling process by choosing to insource or rely on an outside company to manage your growth depending on your business trajectory and overall company mission.

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