Outsourcing vs Insourcing: What’s the difference?

Insourcing

The process of hiring an in-house employee to fulfill a role in your company is called insourcing. These employees will be on the company payroll and will enjoy the perks and benefits that are typically offered.

Firms typically hire in-house employees for core business functions - i.e., ones that are related to providing direct value to the customer.

For example, in a bicycle manufacturing company, the roles directly involved in production - like the site engineers, mechanics, etc. would all be ‘core’ roles.

Outsourcing

Outsourcing is when you hire an external individual (like a freelancer) or agency (a contracting firm) to complete a specific job or even recurring jobs.

Typically, but not by rule, companies outsource jobs that are non-core. For example a SaaS company outsourcing the maintenance of its office building, or a manufacturing company outsourcing the development of its website. In both these cases, the company is said to outsource their non-core functions.

Similarly, across industries, businesses tend to outsource their end-to-end software development to development agencies, or 'dev shops'. Here, the dev shops take up the product development in its entirety, and the onus is on them to deliver the finished article.

If companies prefer to wield more close control over the product, they prefer to hire freelance developers to augment their internal tech team. By hiring freelancers to supplement their existing team rather than replace it, quality standards can be easily controlled.

Bottom line, companies choosing to outsource or insource certain skills comes down to whether:

• There is a pressing need for the skills to be in-house, or
• An external entity can do a better job in one or more parameters: skill, time, money, and/or effort.

Problems with in-house hiring

Hiring in-house is often preferred by most companies when given a choice due to its several benefits. However, it does come with a few difficulties, like:

1. Long recruitment process

It takes a lot of time and resources to find, interview, and hire permanent employees. In the tech industry alone, fulfilling an engineering position takes an average of 55 days. Moreover, commitments such as notice periods further delay the time taken for a new recruit to join the firm.

In addition to time, the effort spent by the company’s recruitment team to carry out the hiring process should also be taken into consideration. Further, the lost opportunity cost can be substantial if the company ends up making a bad hire.

2. Dipping employee-employer loyalty

The average tenure (i.e., how long a person works at a particular company) of the workforce is currently 4.4 years. However, this has been dipping with more millennials entering the workforce. According to talent managers, a large fraction of resumes right now are filled with job stints of just a year or two.

Of course, companies spend many months training their employees. Therefore, losing them in less than a couple of years is a huge waste of resources spent on their recruitment and training.

3. Reduced flexibility

The ability of a business to remain agile and adapt its workforce to the market’s needs can be a huge competitive advantage.

For example, certain situations might call for scaling the company’s workforce fast, sometimes to solve a highly-specific problem. In such scenarios, going through the lengthy and resource-intensive process of hiring in-house employees can be hugely limiting for a company.

Outsourcing vs Insourcing: Which is the right one for you?

Of course, both – outsourcing and insourcing – come with their own benefits and drawbacks. Each is better suited to solve a particular use-case.

Let’s discuss a few factors that can help you decide which one would be the best for you.

1. Stage of company

Early-stage companies and startups can find it very hard to compete with larger companies for great talent. At the same time, quick product development cycles and rapid iteration is also a critical aspect of their growth, which means they can’t afford to lose time in long hiring processes.

As hiring full-time permanent employees are a costly and time-consuming activity, startups can save time and money by working with freelancers. Of course, it would be a good idea to find a core employee with or around whom the freelancers can work.

2. Core business function

As previously mentioned, businesses tend to outsource jobs that are not related to their core business function. However, there are certain exceptions to this, especially for startups.

For example, if you’re an early-stage tech startup without a technical co-founder, it can sometimes be more beneficial to outsource the development of the MVP. This frees up bandwidth for the non-technical founders to work on other important tasks like sales and marketing.

However, once you are ready to scale, it is important to hire a core team member (maybe a CTO or someone with similar capabilities) who will end up owning the product. Needless to say, such a person can be assisted by external and/or internal help, ensuring that your USP in tech lies within the company.

3. Speed of delivery

As discussed, hiring permanent employees involves extended interviews to evaluate candidates, negotiations, and possible delays due to a notice period, employee induction, etc.

So if there is a need to hire people fast to keep up with tight product deadlines, outsourcing is the best option as it is much less time-consuming. However, if the objective to hire is with a long-term vision in mind, insourcing would be a better fit.

Also, in cases where there is a long-term need for someone, the stringency of fit becomes higher. This makes it tougher to find the right person. Clearly, companies can’t stop or postpone work as a consequence.

Until you find a suitable replacement, hiring a freelancer to augment the team on a short-term basis could be smart. This allows you to meet internal deadlines, while still not hurrying the process of hiring a quality permanent hire.

4. Duration

Hiring permanent employees for one-off or short-term projects is quite tricky, possibly even unethical, as they would be rendered redundant once the project is completed. Hence, for such short-term projects, it is better to hire freelancers and outsource the work as the cost savings are significant.

For long-term projects that require a regular and consistent workflow, it is best to focus on building an in-house team. However, if you are open to working remotely in perpetuity (which is fast becoming the norm), you can save money by employing freelancers on long-term contracts. You can also negotiate a discounted price with them in return for a long-term commitment.

Moreover, software developers with a lot of experience and skills in competitive fields are courted by many suiters with lucrative offers. It is hence cheaper to hire them on a need-basis rather than permanently.

5. IP-related risks

Intellectual property (IP) – related risks is an ostensible issue that sometimes hinders companies from deciding to hire freelancers. The notion that a company’s IP is safe only when its employees are under constant supervision and are physically present in the office simply isn't true.

The future of work is remote and distributed, with employees working independently in various parts of the world. This will test and eventually break the often-held association of safety with a close presence nearby.

However, in any case, companies can execute legally-binding contracts that can be enforced in case the need arises. So, from the perspective of having a legal recourse, freelancing is as safe for IP as insourcing.

Another concern that companies have is about freelancers meeting the company’s quality standards. This is a legitimate concern due to the noise in the freelance market, but vetted tech talent platforms like Flexiple and Toptal have made it very easy to hire quality talent without risk.

When is Outsourcing the clear option?

So to summarise, outsourcing your work to a freelancer is the best option when any of the below points are satisfied:

• Build a flexible workforce and want to take advantage of worldwide talent
• Hire people fast in order to meet product goals
• Work required is on short-term projects
• You want to reduce bloated overheads and keep costs low
• Hire experts in a niche technology when needed
• Increase your internal team’s bandwidth

Using a mix of Outsourcing and Insourcing

Remote working has become the norm across the world and the coronavirus pandemic has accelerated its adoption. The differences between working with an in-house team vs freelancers are getting blurred for companies.

Working with freelancers in the past required stringent protocols (like perfect documentation) and extra effort in communication to make it work. With the growth in technology and the adoption of remote tools, the entire process has become easier.

Overall, companies can no longer take a hard stance on going only one way or the other. Rather, they need to align with the goal of the particular case in question.

There are many websites that make the process of hiring freelancers on-demand friction-less and risk-free. Read more about our picks here.