Insourcing vs. Outsourcing: Definitions and Differences

By Indeed Editorial Team

Updated 6 December 2022

Published 19 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses perform various duties to help them accomplish their objectives. Typically, companies conduct these duties using one of two main methods, which are insourcing or outsourcing. Learning the difference between these two options can help you make decisions that assist the company you work for to achieve its business goals. In this article, we define insourcing vs. outsourcing, highlight the differences between them and provide additional valuable examples to help you understand the two terms.

What is insourcing vs. outsourcing?

Understanding the differences between insourcing vs. outsourcing can help you determine which option is more beneficial for a company. Insourcing is when a company decides to execute projects and tasks from within the company, using its own resources. The company can meet its short- or long-term goals by investing in training programmes to teach employees to perform particular tasks. The entity can also decide to conduct job evaluations for the employees to identify an individual who can perform these duties.

Outsourcing is the practice of recruiting external parties, such as freelancers or agency experts, to perform company projects. A company might use this strategy to achieve cost-effectiveness and ensure maximum productivity and efficiency. There are several types of outsourcing, including IT, professional and project outsourcing.

Related: What Do Freelancers Do? Types, Benefits and Skills

Differences between insourcing and outsourcing

Here are the key differences between these two business practices:

Resources

Resources are the supply of materials, such as funds, employees and any other assets important for performing company duties. In insourcing, the company gains services or products internally using the company's own resources. In outsourcing, companies receive the assistance of an external organisation and its resources to help them perform their duties.

Confidentiality

Confidentiality is the ability to keep company matters private. Insourcing helps to guarantee confidentiality regarding data and operations. In contrast, outsourcing can increase a company's exposure and the risk of a confidentiality breach, as it relies on an external organisation to perform services.

Related: What Is Code of Conduct? (Definition, Examples and Tips)

Cost-effectiveness

Cost-effectiveness is the degree to which an action by a company is effective in terms of saving costs. Outsourcing is a common business practice that typically helps to keep labour and overhead costs low. In contrast, insourcing uses internal staff, requiring the company to meet this labour cost.

Quality of work

Quality of work refers to a company's ability to meet its clients' expectations. A company can use outsourcing to perform its duties to a higher standard by hiring external professionals or gaining more materials, allowing it to maintain or improve its productivity. In insourcing, a company has control over its operations and can monitor the quality of work that its employees provide. In contrast, outsourcing provides minimal control over the quality of the work, and the company relies on the outsourced organisation's reputation.

Innovation

Innovation helps a business to increase the value of a service or product through the application of newer processes and more unique techniques. This process can be important to the success of any business. Insourcing is more likely to improve a company's innovative capabilities since, unlike outsourcing, the company monitors all operations involving the product. This enables the company to identify potential areas of improvement and apply problem-solving techniques to make the product better.

Related: What Does an Innovation Manager Do and How to Become One

Operation completion times

Completion times, or deadlines, are time frames that a business allots to its projects. Each time frame spans the period from when the project begins to its completion. With insourcing, a company can have control over its operations by allocating a project manager who plans the completion times according to the company's preferences. Deadlines may be longer in outsourcing than in insourcing because of the 4X rule, where X refers to the time taken to complete a project. It's typically thought that an outsourced function can take four times longer to complete than an insourced task.

Talent

Talent in business can refer to above-average capabilities in performing specific or overall tasks. A company can acquire such skills by outsourcing employees from other organisations who are capable of these specialised duties. In doing so, a company may achieve a broader range of accomplishments, such as a more extensive market reach. In contrast, a company may contain minimal talent among its employees and, therefore, insourcing can limit its capabilities.

Business communications

Communication in business refers to exchanging information either within a company or outside of it. Business communication can be essential to ensure the efficient achievement of a company's goals. In insourcing, a company's efficiency in conveying information can be at its maximum because it requires fewer communication channels. The company can transfer essential updates directly from management to employees, resulting in a lower chance of miscommunication.

Related: 4 Types of Communication

Brand value

A company's brand value determines its financial worth. Brand value can affect a company's revenue and profits and customer awareness of the goods or services that it currently provides. Insourcing uses internal resources, such as staff. Therefore, performing operations internally can create jobs for local people, which may help customers resonate more with the company's brand. Outsourcing involves acquiring external services, which may even come from abroad. Therefore, there may be a minimal connection between customers and the outsourced products.

Related: How to Add Value to a Company in 8 Steps (with Benefits)

Examples of insourcing

Here are some examples that can help you to understand insourcing:

Marketing department insourcing example

Here's an example from the marketing field:

A large snack company, BetterMade, is launching a new candy bar for 16– to 25-year-olds. BetterMade plans to implement a social media campaign to launch the product, as this age group may resonate with this strategy more than a traditional marketing approach. This launch is the company's first social media campaign. BetterMade has an established marketing department that coordinates the company's official social media platforms. After considering all the financial and non-financial factors that may affect the project's implementation phase, BetterMade decides to produce the campagin on-site because the marketing department has sufficient knowledge to implement it.

Research and development insourcing example

Here is an example from the research field:

An independent research and development firm, Speculate, plans to write technical manuals for some new machines that they designed for company tasks. Speculate has engineers on its employee roster, and some have prior experience in writing manuals for other machines. The company allocates this task to the in-house engineers and provides training programmes to teach the employees how to perform these tasks. To complete this task successfully, Speculate may benefit from purchasing other equipment, such as hardware and software tools. The firm considers using in-house engineers for future projects to encourage innovation among its staff.

Examples of outsourcing

Here are some examples that can help you to understand outsourcing:

Online product selling outsourcing example

This example is from the e-commerce field:

An e-commerce firm, Minka, specialises in selling convenience store and commercial products online. Minka produces a small percentage of its goods on-site and outsources a significant portion of its products from large and small businesses. The company depends on its outsourced products for the continued success of its business through profit. Some factors they also consider are gaining extensive talents and skills. Minka sells its products at an affordable price, attracting an extensive market reach.

Accounting services outsourcing example

Here is an example for how an IT company might outservice its accounting:

Trinket, an IT start-up, is about to perform its quarterly accounting tasks. The company lacks an accounting department or an in-house professional to perform these tasks. Trinket acquires the services of an accounting agency to review the company's books, create a budget and perform any other financial duties.

Legal services outsourcing example

This example shows how a company might outsource legal services:

A small manufacturing company wants to review its employee contracts. The managers decide to contact an outside legal expert to provide guidance on the wording. They work together to create new contracts that adhere to the industry's guidelines.

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