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Table of Contents
Introduction
There comes a point in the growth of every business when the decision needs to be made, whether to continue handling certain tasks (like customer support, IT, logistics, etc.) in-house or if it makes more sense to outsource those tasks to specialists. The insourcing vs outsourcing question can have a major influence on the success of your business, so it’s an important consideration to take seriously.
In this guide, we’re providing a side-by-side comparison of insourcing vs outsourcing, contrasting the pros and cons of each, discussing which tasks are smart to outsource, and even shining a light on the less-discussed co-sourcing and hybrid models. Let’s get started!
Key takeaways
- Insourcing is smart for the unique tasks that your brand is known for. Tasks, functions, or processes that are core to your brand’s reputation and value proposition are the perfect candidates for insourcing.
- Outsourcing’s true cost depends on the provider. Choose your BPO provider carefully. Though outsourcing is usually less expensive in the long run, some providers may include hidden expenses that can bloat the overall cost.
- The best solution is completely dependent on your unique needs. While neither insourcing nor outsourcing is a superior model in all cases, one might be the ideal situation for your case. Pay attention to your brand’s unique needs, plans, and current capabilities, and compare them to the strengths and limitations of both models.
What is the difference between insourcing and outsourcing?
Insourcing is essentially the typical way of doing business, the practice of performing essential business functions with your organization’s in-house employees and resources. Outsourcing is the decision to contract an external provider to perform certain functions, leveraging the provider’s expertise, scalability, and focus.
What is insourcing?
Insourcing describes the deliberate decision of a business to either continue handling certain tasks in-house with its own employees and resources or to bring previously outsourced tasks back in-house. Insourcing requires businesses to hire and retain dedicated staff to the task in question, invest in the technology and infrastructure required for the task, and (if previously outsourced) orchestrate the transition to bring the function back in-house.
Back-sourcing
Back-sourcing is the process of reclaiming an outsourced business function and bringing it in-house. Back-sourcing can present a challenge, since it requires a business to take on several new costs at once, which can easily outweigh the savings that the business received when the process was outsourced.
Some examples of back-sourcing costs include:
- Knowledge reconstruction: Replacing and rebuilding the institutional knowledge around the tasks that may have been lost when the process was originally outsourced.
- Penalties for exiting contracts: Some outsourcing contracts can involve early exit penalty fees, which add another expense when back-sourcing.
- Staff recruitment and onboarding: Labor can be a major cost to take on when a company is used to an outsourcing arrangement. Back-sourcing requires businesses to take on the recruiting, hiring, onboarding, and training of the necessary new staff who take over the previously outsourced tasks.
- Tech migration: Moving the various important and secure data, systems, workflows, and tools from the vendor back into the insourcing company’s infrastructure.
Reshoring
When international market conditions fluctuate, it can cause a variety of difficult-to-navigate problems, from supply chain disruptions and rising labor costs in offshore markets to government incentives and geopolitical risks. When these problems arise, it can often drive businesses to reshoring, which is the strategic decision to return offshore outsourced processes back to their home country.
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What is outsourcing?
Outsourcing is the practice of contracting a defined scope of tasks and business processes to an external third-party company. This is usually done under a service-level agreement (SLA) to establish clear standards and performance metrics. Outsourcing can either be for small tasks here and there, or an entire business function or team, like customer experience.
While, in the abstract, outsourcing is often more cost-effective, care should be taken when looking into potential outsourcing partners, as some may have hidden costs or fees, including but not limited to:
- Compliance audits
- Legal fees
- Potential exit costs and back-sourcing costs
- Quality assurance
- Security audits
- SLA penalties
- Vendor management FTE cost
Critical differences between insourcing vs. outsourcing
Cost structure and capital expenditure
Insourcing will usually come with a higher expense of capital upfront, everything from staffing to facilities overhead and technology. That being said, the investment in insourcing can usually be turned into an internal asset that is controllable and scalable.
Outsourcing, on the other hand, trades the upfront capital cost for a lower but ongoing operating expense. That can be a huge saving for companies that need it, but it’s still important to research any potential partnership and be certain of their pricing, including potential hidden costs, like those above.
Though neither model is inherently cheaper or superior for all businesses or in all circumstances, the critical factors to pay attention to are volume, the duration of the contract, and the total cost of performing the same function internally.
Quality control and performance monitoring
When insourcing, you have complete control over the services you provide, and therefore a direct line of sight to their quality at all times. When an insourced process hits a snag, a manager can step in to realign things with very little issue and no worry of an SLA renegotiation.
The quality control of an outsourced service can be a little trickier depending on the relationship with the vendor, and will depend somewhat on how precise the SLA is and the state of the provider’s particular quality management system. This is not to say in any way that outsourced providers are inherently of lower quality than doing the same tasks in-house. In fact, BPOs often have the capacity to greatly outperform their in-house counterparts. However, it’s vital to carefully select outsourcing vendors and inspect SLAs thoroughly, because there can potentially be more red tape and costs in the way of proper quality assurance with the wrong partner.
Security and data privacy considerations
Privacy and security risks are an important factor to keep in mind when weighing your options to insource or outsource.
Security Dimension | Insourcing | Outsourcing |
Data access control | Governed internally and only accessible to authorized personnel | Depends on the vendor’s Identity and Access Management (IAM) practices and terms of their contract |
Regulatory accountability | Direct accountability, with Chief Information Security Officer (CISO) and Data Protection Officer (DPO) held responsible | Shared accountability between client company and vendor, with data potentially held in separate jurisdictions |
Breach notification | Internal process with controlled timelines | Dependent on vendor, possible delays |
Third-party audit rights | Self-audited, internal, or external audit | Audits must be secured under contract. Some vendors may resist scope |
Additionally, if the process you hope to outsource involves important intellectual property (such as proprietary algorithms, methods, or product development efforts), it’s vital to include a carefully formulated “IP Assignment” clause in your SLA.
When to choose insourcing
Protecting core competencies and proprietary technology
The most important aspect of the insourcing vs outsourcing debate is to remember exactly which tasks and capabilities make your company unique and competitive, and to keep those tasks in-house. Not only does it make sense to double down on what makes you special, but it also keeps those aspects of your business under your control and protects them from data leakage.
It’s also essential to keep tasks in-house when they require high levels of institutional knowledge, have high standards of quality, are too difficult to delineate in an SLA, or have repeatedly failed at being outsourced in the past.
When to choose outsourcing
Leveraging specialized expertise and scalability
Outsourcing is an extremely powerful tool for companies that need access to a service that is not a core competency. If a provider specializes in the service you need and your company’s main value proposition lies elsewhere, that is an excellent use case for outsourcing, especially if the task in question is something that would be difficult for your organization to perform to the same level of quality, speed, or affordability that the provider can achieve.
Some of the most common tasks and functions that BPO providers can provide for their clients include, but aren’t limited to:
- Customer service
- Back-office functions
- Basic IT support
- Payroll
- Billing
- Legal
- Sales
- Translation
- Audits
Considering outsourcing?
If you’re exploring outsourcing, Global Response can help demystify the process and help you determine if it’s the right option for you. Get in touch with our team today for a free consultation and quote!
FAQs
Specifically, what problem are you trying to address?
Rather than starting from whether or not to outsource, it’s more constructive to go to the very basics and consider what the actual problem is. Is your business trying to lower costs? Do you need more efficient processes? Do providers have a service or capability that you need, but can’t offer? Knowing this will guide the rest of your decisions.
Do you have the time or talent to solve the problem yourself?
Do you have anyone in your current internal staff who has the skillset required to solve the problem you need solved, and does that person have the time in their schedule to allow them to do so?
Are you able to give up control in this area?
Is this function an area where you can reasonably trust a third-party to take over? Is sensitive or proprietary data involved? Is this function a unique skill that your business is known for, or an incidental task that distracts from your core competencies?
Are there better things your internal team could be doing?
When they aren’t your core competencies, some business functions can take time away from the important work that sets your team apart. Though often an essential function, it’s not the function you’re known for, so offloading it to a third-party who specializes in that task allows your team to focus on what they specialize in.
What are the plans for this function in the next few years?
Just because your decision makes sense in the short term, that doesn’t mean it will be solid in the medium to long term. For instance, if you plan on scaling your business, it might be easier to do so with an outsourced team, but if you know that you’ll want greater control and privacy over proprietary information in the coming years, insourcing might be more valuable.
What does success look like?
Not only should you have a thorough understanding of the problem itself, but it’s also important to know what true, measurable success looks like. What level of quality is required? What average handle time (AHT) is acceptable? What customer satisfaction score (CSAT) are we looking for? Knowing which KPIs you need to look at and what levels you’re shooting for allows you to compare those goals with the capabilities of insourcing vs outsourcing.
