In-House vs. Outsourcing – Which One to Choose and When?
Last update: 18 May 2023 at 03:58 pm
Are you looking to move forward with a project but don’t know where to start? Or is your company missing the right in-house team members to do so? It must have crossed your mind more than once to outsource the project to a different company or to outsource it entirely. But which outsourcing options do you have? And which one is the most suited to your project? This article tells you everything you need to know about outsourcing and gives you a front-row seat to the ultimate in-house vs outsourcing battle.
Outsourcing – what is it?
“Outsourcing refers to the use of external sources for specific tasks that require expertise that is not (yet) available internally or is too expensive.”
The term outsourcing is a compound of the terms out (outside) resource (source) and using (use).
Many companies were already using external resources long before the term outsourcing even existed. For companies, there are several reasons why a project or an entire area of a department is outsourced. Often brands outsource projects for which it is not worthwhile to build an in-house team or which are far removed from the core business functions within the company. We will look at the individual reasons for outsourcing later in more detail.
Common projects that companies outsource time and time again are, for example, IT, accounting, design, content creation, but all in all, any area of a company can be outsourced – if it makes sense and contributes to the company’s success.
Let’s take a look at an example of a small fashion brand focused on the design and production of clothing. Even though small businesses (especially) like to do everything themselves, it would not be advisable for this company to build up internal resources e.g. IT department or accounting, for several reasons as there are many cost-effective providers for these issues.
Forms of outsourcing
From sending out small projects to outsourcing entire departments, outsourcing can take many different forms in which a company is more or less involved. Due to the multitude of possibilities, we will limit ourselves here to the essential forms where we see an advantage for your company.
The following forms of outsourcing are ranked according to how much control the company retains over the expertise, starting with the most control:
- Application Service Providing (ASP)
With ASP, external providers make programs available to the company for individual tasks. These are installed on the computers and integrated into existing processes. As a rule, the providers offer the company additional services such as workshops, maintenance, or data backup.
The next level of outsourcing is the outsourcing of a specific and usually time-limited task. A classic example for the creation of a website or web design. External agencies can create an internet presence for a company in a short time, which then only needs to be maintained and possibly optimised.
- Business Process Outsourcing (BPO)
If a company needs increased expertise in a sub-area without directly hiring in-house employees, it can be worthwhile to outsource the accounting or recruiting process, for example. In this case, the third parties take over the sub-area completely but remain in close contact with the parent company.
- Managed services
With managed services, the outsourcing partner takes over a department within the company either as a long-term commitment or for a specific time. For example, in PR (Public Relations), this can be worthwhile if the core company either wants to concentrate on its own processes or needs experts in this area due to a special situation.
- Complete Outsourcing
As the name suggests, complete outsourcing involves outsourcing an entire department of the company (also means less control). This is worthwhile if the department is not directly related to the core activity of the company, but requires a high level of expertise. A classic example is the outsourcing of IT for companies that do not know or do not want to deal with this department. However, as these areas are often important for many processes, the provider to whom complete control is handed over must be carefully selected.
When a company outsources departments, it can often be worthwhile to contract them out to companies in another country or continent, mainly for reasons related to cost. Many countries now offer highly skilled work at a lower price. However, a lot of control is relinquished especially with outsourcing work internationally, as communication is more difficult due to distance, time zones, and possible language barriers. So here you need to take special care and make an informed decision when choosing your partner.
Reasons for outsourcing
One of the most important reasons many companies decide to outsource is the cost aspect. Did you know that you could save almost $200,000 when outsourcing a project? Often, external providers offer lower costs for certain tasks than if they were to be implemented in-house. In particular, building a team and the associated costs may not be worthwhile for certain projects.
The second reason builds precisely on this: Many projects that are outsourced are time-consuming but need to be completed in a short time horizon. Outsourced projects by specialised agencies can be completed in a much shorter time than would by a less experienced, internal team. Especially if the expertise for the project is not yet available in the company, it would often take too long to build the required skill set.
This is also the case with projects or departments where the company is uncertain whether the skill set will be needed in the long term. Building a team for a department is a commitment that requires careful consideration of whether or not an external solution might be more worthwhile.
Often, one reason against outsourcing is the lack of quality control. However, outsourcing projects can make this very thing easier for you. Many agencies provide you with a quality that you would probably not achieve if you keep it in-house. So, if you find the right partner, it can have a positive impact on your product or service.
Problems with outsourcing
Even though outsourcing brings many advantages for the companies involved, there are some problems and mistakes that often arise and that you should therefore be aware of:
- Underestimation of the process
Outsourcing is a complex process for which not every project is suitable. The outsourcing of an activity must be well prepared and planned in advance. It is important that, throughout the duration of the project, there is the main person in charge who stays in contact with the partner and is the internal contact person on the status of the project.
- Poor/Precipitated selection
Time pressure is one of the main reasons many companies outsource (parts of) their work and often, it really is faster to outsource a task to an external agency. However, this should not come at any price. When choosing an outsourcing partner, you should take as much time as necessary. In doing so, you will find which agency is the right fit for you. This is especially important for long-term relationships, as the advantage of implementing a project quickly becomes a disadvantage in the long run.
- Arbitrary outsourcing
Not every project is suitable for outsourcing. There are topics that you can and should simply do yourself. For example, many tasks are cheaper if you implement them in your own company or there are topics where it is important that the ‘know-how’ remains in the company.
An important point when choosing a partner is also that the communication and atmosphere between you and the external company are good. Otherwise, problems may be addressed too late, deadlines may be missed or ‘know-how’ may be completely lost from the company because no employee understands what exactly the partner does. It is important to not only communicate the new project at hand, but also the company’s culture and business strategy you wish for them to reflect in their work.
- Contract design
In order to avoid misunderstandings in the cooperation in the long term, you must make sure to contractually define some things from the beginning. This includes the requirements for the project and the outsourcing partner as well as the mutual tasks.
- Loss of ‘know-how’
As already mentioned, some mistakes or problems in outsourcing can cause knowledge to be lost within the company. This is especially the case if you do not work closely with the partner and, for example, outsource an entire department completely to the other company. In some cases, where the knowledge is far away from the core topic of the company this is not a bad thing. However, you should make sure that for relevant topics, you have permanent knowledge about them and understand what exactly the partner is working on.
In House vs Outsourcing
So which activities should you outsource? The following chart shows you the typical trade-offs when deciding for or against outsourcing: