Growth in business brings more work for entities in terms of new operational tasks and projects that require more focused effort and exceptional skills for their fulfilment. Such tasks and projects can be handled and completed using one of the the two approaches – insourcing and outsourcing. Both are models of assigning business tasks to individuals, groups, departments or organizations and help in the companies’ strategy to improve overall efficiency and productivity of their operations.
Insourcing is the approach of completing an entity’s tasks within its immediate operational infrastructure. Under this approach, the company has complete authority and enjoys full control over the entire procedure of task accomplishment. Outsourcing, on the other hand, is the process of hiring individual professionals or organizations outside the company’s affiliation to complete the tasks. The company undertakes this model as part of its strategy to either cut operational costs or save time to focus on its core operations for optimal performance.
Definitions and meanings
Insourcing is the business practice of assigning new tasks, procedures and projects to the workforce in-house instead of hiring an individual, organization or agency outside of company’s own facilities or infrastructure. An individual, group, department or branch within the company handles the task using its existing and already developed resources. IT companies are perfect examples of such model of task handling and work completion. These companies, for example, can easily manage the technical support for a newly launched software application because they often have a team of in-house technical experts already providing support to customers for their other IT products. Another real life example is the law firms. According to a Legal Benchmarking Survey Report, USA law firms insourced only 17% of its operations in 2017 but increased to a 75% in 2018 – a huge conversion from outsourcing to insourcing model.
Under insourcing model, the task remains in the hands of company’s own employees and workers who understand their company and importance of its projects batter than any external party. The company has complete authority and control in managing the entire work process; hence, it can regulate the outcome and quality of the task to achieve the desired goal. Another main advantage is that the entire managerial process becomes simple and straightforward when the company relies on its own resources for the accomplishment of its task.
Many a time, insourcing proves expensive because it involves new processes and operations for setting up a separate division within the company.
Outsourcing (sometimes referred to as business process outsourcing or subcontracting) is the approach of hiring an outside individual professional or organization which specializes in the service to accomplish a specific task or procedure on behalf of the company. The company which outsources its task or buys service of an outsider is termed as the client company and the supplier who offers his service is termed as service provider or outsourcing provider.
Under this approach, the company relies on external help to avail a service, manufacture a product, manufacture a component or subcomponent of a product or completing a project etc. The cost minimization, efficient accomplishment of outsourced tasks and a better management of core business functions are among the prominent purposes of outsourcing tasks and projects.
Generally, the tasks outsourced are companies’ non-core activities which enhance its ability to focus on their core operations. It helps companies streamline their processes and increase productivity while maintaining or minimizing both manufacturing and operating costs. If the client is unsatisfied with the work quality or due to any other reason, he can cancel the contract and change the outsourcing provider because the model is generally not static. Also, he can later adopt insourcing as its second choice to fulfil its work needs.
Outsourcing model has been effectively adopted by companies in many industries. Media, retail, electronics, telecommunications, travel and automobile are common examples of industries where companies heavily rely on outsourcing one or multiple functions. Outsourcing may be a better choice for a wide variety of business activities and processes like marketing, product designing, production process, recruitment of employees, research and development, human resource management (HRM) and even customer support.
Almost every outsourcing activity involves a certain degree of risk because the entity outsourcing the work hands over the work responsibility and control to some external party. The primary concerns of companies that choose to outsource their work are poor management, poor quality control, work conditions, delayed delivery and confidentiality of sensitive information. If the outsourced task is not carried out skillfully or on time, it may negatively impact the company’s own operation or goodwill in the eyes of customers and other stakeholders.
A company can seek the services of an outsourcing provider both domestically or overseas depending on its outsourcing needs and the availability of reliable outsourcing providers. Overseas outsourcing models have witnessed a great increase in the last decades. Hiring foreign labor at lower rates often results in considerable savings and improved bottom line. As real life example, we can consider the operations of a smartphone manufacturing company that outsources the completion of a single chip to a foreign company with relevant machinery and skillful labor to manufacture this single piece.
Building a productive outsourcing system can take a lot of time as the companies have to overcome cultural and language difficulties while interacting with a foreign seller. Further, the companies may have to face problems in signing contracts, processing payments and transporting tangible components in case the mutual relations of two countries are conflictive.
Difference between insourcing and outsourcing
The five main points of difference between insourcing and outsourcing are given below:
Insourcing refers to allocating a new task in-house or internal sourcing of business while outsourcing subcontracts tasks to an external organization which is not affiliated with the firm outsourcing its work but has all the expertise required for efficient fulfilment of the task.
2. Location of operation
Insourced operations are performed in company’s own site, building or locality whereas outsourced activities are performed at site, building or locality owned by the external service provider.
3. Types of activities involved
While many non-core activities can be handled and completed within the organization, insourcing is mostly opted for core or critical business activities. Outsourcing is common for non-core business activities.
4. Extent of control over operations
Insourcing enables the company to exercise full control and management at every stage of the process from start to its completion. In case of outsourcing, the client company has no control and management of the operations because it hands over the task to some external service provider.
5. Purpose of the process
In case the existing employees and workers are able to handle the new task successfully and without any hassle, insourcing often proves advantageous in cutting down the recruitment costs. It facilitates an easier management system and provides complete control over the procedure till the completion of the task. Outsourcing helps make more out of core functions, maximizes productivity and in many cases results in minimized cost.
6. Risk involved with confidentiality
In an insourcing system, confidential information remains with the firm and the risk involved is minimal. For the outsourcing model, confidential information is at risk with the external organization.
Insourcing versus outsourcing
A tabular comparison of insourcing and outsourcing is outlined below:
|Allocating a new task to employees in-house.||Subcontracting tasks to a distinct organization which is not affiliated with the firm.|
|Location of operation|
|Carried out within company’s operational infrastructure.||Carried out at the outsourcing provider’s locations.|
|Types of activities involved|
|Mostly core activities.||Mostly, non-core activities.|
|Extent of control over operation|
|The firm enjoys full control of the entire function.||The firm hands over control to external organization.|
|Purpose of the process|
|Completion through existing employees eliminates recruitment costs and facilitates the company with full control of its operations.||Maximizes profits, productivity and helps companies focus on their more crucial activities.|
|Risk involved with confidentiality|
|Confidential and sensitive information remains secure and within the company.||Such information may be at risk because it is at the disposal of a foreign organization.|
Conclusion – insourcing vs outsourcing
Insourcing and outsourcing both are feasible methods of acquiring required expertise and labor for completing business operations without recruiting new permanent staff. Both options are essential parts of successful business models and the decision on which process to adopt highly depends on the nature of activity or task in question. The company adopts the one that most suits its strategy. A task that is insourced by one firm may be outsourced by another similar firm in the same industry. Companies that deal with confidential information like law firms rely on insourcing. Moreover, core functions of any firm are also preferably insourced. In contrast, outsourcing is mostly preferred for activities that are not confidential in nature. Moreover, it is done to save time, reduce expenses and help employees focus on core functions.
Besides above factors, the size and resources of the entity also matter. The large and well established organizations may have their in-house sections, branches or divisions with highly efficient staff to perform certain activities which are generally outsourced by small or medium sized companies with limited resources.