Outsource vs. Insource: What’s Right for Your Business

As competition intensifies with more companies entering the market, organizations are constantly seeking innovative strategies to boost revenue while cutting long-term costs. One effective approach to reducing expenses is outsourcing certain business processes. The decision between outsourcing and insourcing often depends on specific company needs.

According to Investopedia, while reducing costs or increasing revenue can enhance a company's net profit, it doesn't necessarily improve the net profit margin. Outsourcing can be a powerful way to lower expenses and increase profitability, especially for smaller businesses lacking the resources or expertise to manage certain functions in-house. However, outsourcing isn’t suitable for every business.

To determine if outsourcing is the right choice for your company, it's essential to weigh the pros and cons of outsourcing versus insourcing. Here's a breakdown of each method and guidance on when to use them.

What Is Outsourcing, and How Does Hiring a Company Work?

Outsourcing is the practice of transferring or delegating certain business activities to a different company. Outsourcing can be anything from your company’s IT department to marketing functions. This includes outsourcing your app development, QA automation operations, or opting to hire a company to manage your social media handles.

Types of Outsourcing Services

We can first categorize the types of outsourcing based on the nature of the work that needs to be done:

• Contractual: Contractual outsourcing refers to hiring another company to perform a certain function. This ranges from web design to payroll services and other operations.
• Physical Outsourcing: Physical outsourcing is when you transfer the operation of a certain business function to another company. This includes elements like office space, supply chain management, HR, and IT departments.

Next up are the other two main types of outsourcing based on location:

• Nearshoring: Nearshoring is the process of transferring the operation of a business function to a company located in the same country as your business. Let’s say you’re in San Francisco and your company hires a web design firm located in Seattle. That would be an example of nearshoring.
• Offshoring: Offshoring, on the other hand, is when you transfer the operation of a business function to a company located in another country. An example of offshoring is hiring a web design company in India to handle some of your website's design.

The Pros of Outsourcing Your Business Needs

There are many advantages to outsourcing some of your business functions. Here are a few:

• Cost savings: The biggest advantage of deciding to hire a company to handle part of your workload is cost savings. If your business outsources some of its functions, you will not have to pay to hire extra employees to handle those functions. This change can save your company a lot of money. In fact, 59% of business leaders outsource services with the aim to cut costs.
• Increased efficiency: If your company outsources some of its functions, it can become more efficient. Better results are due to your company only being responsible for the functions it is capable of handling. Outsourcing the rest frees up your company’s resources so it can focus on what it does best. You can hire the best freelancers for web development, app development, and more roles from Pangea.ai.
• Flexibility: Outsourcing can give your company a lot of flexibility. This is especially true if you outsource certain business functions that are seasonal or project-based. Once you start hiring based on specific needs and projects, you give your company the ability to ramp up or scale down hour team as needed without having to hire and fire full-time employees.
• Saving time: Outsourcing some business functions can also save time. For example, if a company handles payroll for your business, they can do it quickly and accurately so you can move on to other things.

The Cons of Outsourcing Services

While there are a lot of convincing advantages of outsourcing that will make you outsource right away, you might want to go through a few of the cons as well.

Here are a few to be aware of:

• Lack of control: One of the main cons of outsourcing is that you lose some control. For example, if you outsource your payroll department, you won’t be able to adjust your company’s payroll as you see fit. Or, if you outsource your IT department, you won’t be able to make changes to your network as quickly as you would like.
• Risk: Another con of outsourcing is that it can increase your exposure to different risks. Let’s say you outsource your payroll department and one of the employees makes a mistake that costs your company thousands of dollars. You’ll have no way to hold them accountable because it isn’t your company. Outsourcing can also get you to face new risks if your company uses unethical practices. For instance, if you hire a company to handle your customer service calls but they’re rude to your customers, your company’s reputation will suffer.

What Is Insourcing, and Does Your Business Need It?

One of the best cost-cutting business practices is to stop hiring external contractors and look for substitute talent in-house. Insourcing is when businesses leave aside outsourcing or contracting to an external provider, instead opting for managing it in-house.

Let’s look into how and when you should prefer insourcing:

The Pros of Insourcing

• Have control over the process: One of the biggest pros of insourcing is that you get to maintain control over all your business functions. Most commonly, you can hire people to work in your office and make sure they use proper procedures. This allows you to implement and maintain a custom company culture throughout your business.
• Get things done quickly: With insourcing, team members can get things done a lot faster. Moving at a faster face is much-needed for smaller businesses that can hire people only when they need them. If your company were to experience a spike in sales during a certain time of the year, you could hire extra people to help you handle the increased workload. Having resources available whenever needed allows your company to quickly scale up and down as needed without having to lay off people when there’s no more work left.

The Cons of Insourcing

Just like outsourcing, there are a few cons to insourcing business functions worth noting:

• High long-term costs: One con of insourcing is that it can add to your company’s costs. If you decided to hire a marketing firm to handle some of your marketing campaigns, you’d have to pay them a set regular fee. Alternatively, if you’re looking to build an app (and you already have a team working on similar things) you can save a lot of your budget by building the app yourself.
• Lack of expertise:Another con of insourcing is that you often won’t find the same level of expertise as you would with an outside company. For example, if you hire an in-house marketing expert, they probably won’t know as much about marketing as an outside firm would.

Should you Outsource or Insource Business Tasks?

There‘s no right answer when it comes to outsourcing vs. insourcing certain functions. It all depends on your company’s particular needs and goals. So, before you decide which is right for you and your business, consider these factors:

• Cost: First and foremost, you need to make sure that whatever decision you make doesn’t end up costing you more money. If outsourcing a certain function will cost less than insourcing it, then you should outsource. If you wish to develop an app, compare the costs of outsourcing vs. insourcing. Read more about how much it costs to hire an app developer and compare it to your budget.
• Expertise: You also need to decide whether you have the expertise to handle the function yourself or not. If you don’t, then it may be best to outsource the function.
• Capability: Another aspect to consider is whether or not you have the capability to handle a certain function. If you don’t, then it may be best to outsource that function to prevent missed deadlines or rushed deliverables.
• Need: Finally, you need to consider whether or not you actually need that function. If you outsource or insource a function and you don’t need it, it can lead to a large gap in your budget.

If you decide to outsource your app development and hire web development agencies, freelancers, and vendors, you can head over to platforms like  Pangea.ai that let you handle this seamlessly.

FAQs

Q1. Which is better: outsourcing or insourcing?

Outsourcing is better than insourcing if you want expert talent to leave a mark on your projects. Outsourcing is the right choice when you lack the in-house talent or time and can still work around the budget.

Insourcing benefits your business when you wish to not spend any further amount on getting things done. You can look for talent in-house and delegate these tasks for the same cost.

Q2. What’s the difference between outsource vs. insource?

Outsourcing refers to hiring external contractors or agencies to perform certain tasks. Insourcing, on the other hand, implies work being delegated to in-house talent.

Businesses outsource work when there is a lack of in-house talent or restrictions on budget. Work is insourced for cost-cutting when external outsourcing costs more than insourcing.

Q3. What are the three disadvantages of outsourcing?

First, if you hire a company to handle your workload, you might lose control of the way they work and start focusing only on the results and not their process.

There are also risks to deliverables as these contractors or external stakeholders are not bound to any payroll until they sign a contract.

Finally, understanding the background of your business might get hard for contractors as they’re focused only on their part of the work.