Insourcing vs. Outsourcing (Definition and Differences)
By Indeed Editorial Team
Published November 22, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When completing projects or meeting milestones, companies usually adopt one of two practices: insourcing or outsourcing. Various factors influence these choices, and a company may consider insourcing or outsourcing depending on the nature of the project, the set deadline, and available budget. Understanding the differences between both approaches can help you make a more sustainable decision for your team or offer informed advice to your clients. In this article, we discuss insourcing vs. outsourcing and highlight tips for choosing between both approaches.
Insourcing vs. outsourcing
You may consider insourcing vs. outsourcing when seeking to understand their differences. Consider the differences between both concepts from the following perspectives:
Insourcing involves assigning project tasks and responsibilities to professionals within a team or organization. An organization can adopt this practice where it has relevant departments or teams to handle the task, milestone, or deliverable demands. Insourcing also applies when an organization hires or onboards new professionals to perform a task. For example, an organization can create a new department to cater to the demands of a temporary project for its duration.
In contrast, outsourcing involves assigning project tasks and responsibilities to professionals outside a team or organization. An organization usually has no relationship with the company or group that handles such tasks. They form a relationship based on the project's requirements, and this relationship usually elapses upon project completion. Organizations typically consider this option for its cost efficiency as they can restrict overhead, labour, and technology expenditure to the relevant services rather than establish a new department. This business practice is also effective when a project involves a specialized demand.
The differences between insourcing and outsourcing costs depend on the nature of the organization and the project. With highly complex tasks that require a more extended hire period, outsourcing can become expensive for an organization. In contrast, insourcing can save deliverable costs when the existing professionals are familiar with specialized roles. Insourcing becomes more expensive where the nature of the role or project deliverables requires significant changes in department structures, the purchase of new equipment, the training of staff, and other previously absent components. In these cases, outsourcing to skilled professionals can reduce labour costs.
Insourcing is a more confidential business practice as professionals complete all relevant project tasks within an organization. Outsourcing comes with a range of confidentiality risks as the company an organization outsources to operates as a distinct body. While organizations can have agreements to maintain confidentiality with external organizations, insourcing offers more confidentiality. The legal agreements between organizations can also lead to the sharing of sensitive information, so understanding existing privacy laws is essential.
Productivity and quality control
Insourcing offers more control to an organization. With this business practice, you can control and oversee the methods professionals adopt when interacting with projects. Such control encourages a greater sense of accountability and productivity as you can ensure the maximization of labour costs. Insourcing also ensures greater flexibility, allowing you to incorporate changes to milestones and deliverables. Conversely, outsourcing offers less control over processes and production standards. Usually, the professionals on outsourced projects are able to meet project requirements without providing constant access to make updates.
Insourcing and outsourcing differ in the range of business processes they address. An organization usually manages its core processes with insourcing, while outsourcing usually takes care of its support functions. Supporting functions are necessary and basic tasks that complement an organization's main processes. Outsourcing such tasks allows the organization to focus on its core tasks and put its resources to better use. Conversely, where such supporting tasks require high specialization or quality control, an organization can achieve better results through insourcing as it offers greater control, supervision, and flexibility.
Insourcing encourages innovation within organizations by providing opportunities to monitor processes closely. With close interactions at every step of core or supporting processes, an organization can devise means to achieve better results and optimize costs. Such efforts may lead to innovation as in-house professionals and team members can better recognize problems and innovate solutions. When an organization outsources its processes, it only receives results as the end product. By outsourcing, a company assigns a project with all its demands and challenges to an external company. This deprives organizations of the chance to explore processes and learn incrementally.
Insourcing achieves more seamless communication as all the relevant professionals and parties to a project exist within an organization. Outsourcing involves working with professionals in a different city, province, or country. While virtual communication media can make collaboration easier, miscommunication is still a possibility. Digital communication methods might also fail due to power outages, weather, natural disasters, and other disruptions. With insourcing, an organization can recognize the presence of miscommunication and promptly rectify it. Insourcing also achieves more effective communication through existing team structures.
Customers may find brands and companies that manufacture locally more attractive. This means insourcing can provide greater brand value for organizations by assigning their processes to relevant departments. A focus on insourcing can lead to the development of more departments or the diversification of interests. Insourcing also creates a stronger brand presence as customers can interact with relevant individuals, unlike where external sources control products and services. An organization can consider insourcing as a business practice to achieve sustainability and corporate responsibility.
Outsourcing is generally a more time-demanding process compared with insourcing. The 4X rule refers to this disparity in timing. With X as the amount of time a project requires, outsourcing a project takes four times the regular timeline. Projects with a strict schedule are more likely to benefit from insourcing. Insourcing allows an organization to complete its projects within set deadlines by assigning management responsibilities to project managers who remain on-site and monitor timelines.
Depending on the size of a business, insourcing may restrict an organization to a local talent pool. Multinationals or large corporations can access a global pool through branches across different countries. Outsourcing provides access to a global talent pool and can sometimes allow organizations access to new markets and expand their portfolios.
Tips for deciding between insourcing and outsourcing
You can consider these tips when choosing between insourcing and outsourcing:
Determine your control requirements
Outsourcing is increasingly viable as companies assign their IT support, software development, and auditing to external organizations. The processes that a company outsource usually require a level of expertise unavailable within the company or address processes outside its core functions. The similarity between these trends is the level of control a company requires with such processes. You can determine what practice to adopt between insourcing and outsourcing by considering the level of control you need. For example, the risks of handling highly specialized projects can necessitate outsourcing. Similarly, you might consider insourcing to meet a strict deadline.
Determine the value you can gain
It's helpful to evaluate the costs of insourcing and outsourcing a project at the preliminary stage to determine the best approach. With such evaluations, you can decide which value matters most to you. You can consider the advantages of each approach and adapt them to the project. For example, you can achieve a more efficient process by outsourcing a project to discourage dependency and role redundancy within the organization. Where a project requires a clear understanding of business values and principles to succeed, you can achieve better results by insourcing.
Conduct regular benchmarking
A business can adopt an insourcing or outsourcing approach, then switch to another approach if it chooses. Benchmarking is an effective way to determine when to switch from outsourcing to insourcing. With an existing outsourcing relationship, you can use benchmarking to determine the cost of services from other outsourcing companies and renegotiate terms. This can also help you project the profitability of outsourcing a project after comparing labour and overhead costs with insourcing.
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