Insourcing vs. Outsourcing: How to Make the Right Hiring Decision

The decision to outsource roles to freelancers and agencies or to insource them to employees impacts a company's financial health, quality of work, available skills, and workplace culture for years.

But the exact nature of that impact isn't easy to predict. The choice between insourcing and outsourcing is rarely black and white, and the “right” decision will be unique to your business.

So to help you structure those first few pivotal roles, we're sharing a simple decision-making framework for weighing the pros and cons of outsourcing vs. insourcing.

What do “insourcing” and “outsourcing” mean?

Every new role in your company can be filled in one of two ways:

  • Insourcing is what we'd call traditional recruiting—hiring an in-house employee to perform the role, be it software development, accounting, or graphic design.

  • Outsourcing is the hiring of an outside organization to perform a particular business function, typically partnering with freelance professionals or specialized agencies.

The modern idea of outsourcing is often traced back to Peter Drucker's 1989 article Sell the Mailroom, where he advocated outsourcing “clerical, maintenance and support work” in an effort to increase efficiency and lower costs. Drucker argued that outside organizations have to compete against each other for contracts, resulting in lower costs and greater efficiency than equivalent in-house teams could achieve.

Though few companies still have mailrooms, many businesses outsource areas like accounting or customer support. In practice, though, outsourcing is no guarantee of improved performance or lower costs. Both approaches are useful in certain situations; ultimately, the “right” choice will depend on the role you're looking to fill and on your company culture and your recruiting vision.

7 questions to help sourcing decisions

These seven questions will help you weigh the pros and cons of insourcing (or outsourcing) your next role and understand its long-term impact on your business.

1. Is this role a “core competency”?

Certain roles are “core competencies” — essential jobs that provide the foundation on which the entire business is built. For a company like Twitter, it would be software development; for Tesla, it might be vehicle design and manufacture. Outsourcing these functions (or those that may become core competencies in the future) delegates away control over the heart of the business—effectively putting your future in another company's hands.

While core competencies should be insourced, noncore roles (“back room” roles, in Peter Drucker's terminology) can be safely outsourced. These might be functions like accounting, IT, or even marketing: Their smooth running is still key to the company's success, but outsourcing doesn't directly impact your business's unique selling point.

  • Consider outsourcing if the role has little impact on any core lines of business.
  • Consider insourcing if the role is integral to a core line of business.

2. What time and cost savings do we stand to make?

If we consider total compensation—base salary, equity, benefits, 401(k), and so on—hiring a freelancer is usually cheaper than hiring a full-time employee with equivalent skill and experience. The more roles outsourced, the bigger the potential savings: hiring a 10-person agency will be significantly cheaper than building a comparable in-house team.

For a big company, outsourcing might provide a cost-effective way to build a new team function, like accounting or marketing; for a small business, it might be a valuable stopgap, making it possible to fill important roles, even without the budget for a dedicated employee or team.

Though there may seem to be a significant difference between the costs of outsourcing and the costs of insourcing, working with freelance and agency partners introduces its own costs. These are often harder to account for:

  • Account management. Freelancer and agency relationships require active upkeep and regular communication.

  • Editing and quality assurance. It's harder to guarantee the quality of third-party work, and outsourcing may require additional time spent vetting and editing delivered work.

  • Scope creep. Many outsourced relationships work on a per-hour basis. If projects grow in scope—either from poor estimation or increased workload—costs grow as well.

While outsourcing can be an effective cost-saving tactic, it also has the potential to increase the time and energy required to complete work. If the answer isn't clear-cut, do your best to estimate the additional costs associated with outsourcing the role.

  • Consider outsourcing if you're confident that freelancers and agencies will reduce your total costs or you lack the budget for a full-time hire.

  • Consider insourcing if you're concerned about scope creep and management overhead.

3. How urgently do we need to fill this vacancy?

Outsourcing can help companies respond to urgent staffing needs. Sourcing candidates, interviewing, making offers, and onboarding all take time, and there's always a risk that you won't find the right employee. If time is a limiting factor—an employee resigns without notice, or you're gearing up for seasonal demand—it's sometimes faster to outsource the role to an experienced, staffed-up organization.

Outsourcing also has the benefit of being a variable cost. Short-term contracts mean you can stop working with an outsourcing partner after a few weeks or months, allowing you to cut costs when seasonal demand has passed, or insource the role once you've found the right candidate.

  • Consider outsourcing if you need to meet urgent or temporary demand.
  • Consider insourcing if you're filling a long-term role and urgency isn't an issue.

4. How complex is this role?

Some roles are particularly technical or complicated and, without expert personnel in-house, difficult to hire for. IT support is a good example. Past a certain size, companies might struggle to manage their computer network but lack the expertise to fix the problem or even approach hiring for it. In these instances, it's often easier to hand off the problem to an experienced third party, mitigating the need to develop internal skills to understand the problem.

But there's a trade-off. Complex areas like IT often become more important as companies scale. In the long run, it may be more cost-effective to insource and develop the skill set in-house.

  • Consider outsourcing if you're looking to fill a complex role that doesn't align with your team's skill set.

  • Consider insourcing if you're hiring for a role your team understands well, or you're keen to build the skill set in-house.

5. How well-defined is this role?

As the company grows, new hiring opportunities appear. Find yourself inundated with product demo requests and you might consider hiring a salesperson. As your marketing team creates more advertising content, it might be beneficial to hire a graphic designer. In practice, though, it's often hard to pinpoint what these new roles should look like and to predict how they'll impact the rest of the company.

Outsourcing makes it easier to experiment with these novel, undefined roles. By hiring a freelance designer or a sales agency for a few months, you can flesh out your requirements and learn how the role fits into the team. If the role proves to be a good fit, you'll be able to write a detailed job description and insource with confidence. If the experiment doesn't pay off, it's easy to revert the team back to the original structure.

  • Consider outsourcing if you're not sure how the new role will fit into the existing team.

  • Consider insourcing if you're confident that the role will be a core part of your team for years to come.

6. What risk does this role pose?

Whether it's a customer support role or an accounting position, many jobs have an inherent element of risk. That risk comes in many shapes:

  • Compliance risk, like failing to abide by industry standards like PCI DSS

  • Data-security risk, like leaking or losing sensitive customer data and payment information.

  • Quality-control risk, like creating poor customer experiences or low-quality work

When roles are outsourced, there's no guarantee that your internal standards will be upheld. Many companies protect against these risks by adding legal clauses to their outsourcing agreements, but even if the third party is technically liable for infractions, data breaches and poor-quality work can still reflect negatively on your company. Ultimately, the easiest way to maintain oversight of “risky” roles is to keep them in-house.

  • Consider outsourcing if the role poses little risk to your company's data, compliance, or reputation.

  • Consider insourcing if sensitive data, compliance, and quality control are major concerns.

7. How will outsourcing this role impact company culture?

Outsourcing will have an impact on your company culture. Delegating customer-facing functions such as marketing and customer support will change how your company is perceived by the public. Fewer on-site team members will change the “feel” of working at your company and will shape collaboration between teams.

These changes can be positive or negative. Outsourcing marketing might make it harder to accurately portray your company's ethos in your branding and messaging. Equally, working with an experienced branding team could improve the clarity and poignancy of your communication. Outsourcing multiple functions might make the company feel disjointed—or it could strengthen the close-knit dynamic between your in-house team members.

It's important to preempt these change as much as possible and ensure that the decision to insource or outsource strengthens your company culture.

  • Consider outsourcing if the change aligns with your company culture.

  • Consider insourcing if the change risks damaging your company culture.

Making the right hiring decision

Your first few hiring choices will have a lasting impact for years to come, but it's often difficult to decide whether a role should be insourced or outsourced. While clear-cut answers are rare, the effort spent predicting the impact of outsourcing—in terms of potential costs savings, risks, and cultural impact—is well worth it to increase your chances of making the right decision for the business and team.

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