The global outsourced services market is expected to register a CAGR of 8.5% over the next ten years.
Why is this business practice important for businesses around the world? Why are business leaders spending so much money on outsourcing key business tasks? And how does outsourcing compare to its opposite, insourcing?
What are insourcing and outsourcing?
Insourcing and outsourcing are not perfect opposites. They’re really two different approaches to solving business problems. When a business is confronted with a task that needs to be completed—like screening a job applicant, running a credit check, or answering a customer’s question—they need to figure out the best way to accomplish said task.
Outsourcing and insourcing are both ways of finding people to work on tasks like these. The big difference lies in whether the workers completing the task come from within the organization or from outside of it.
Outsourcing involves people outside your company
Outsourcing is a business practice in which a company hires an outside organization to perform tasks, provide services or handle operations. Workers from this third-party company will complete tasks for the hiring company. There are three common types of outsourcing:
- Offshoring - offshoring is when companies contract with vendors in distant countries, such as a company in the United States outsourcing to someone in India. Offshoring is often the lowest-cost option, because it enables companies to access talented workers in areas of the world with low costs of living.
- Nearshoring - nearshoring still involves outsourcing to another country, but typically one that’s much closer to the hiring company. For example, a company in the USA might outsource to Mexico or Colombia. Benefits of nearshoring include making it easier to manage time zones and to visit outsourced employees.
- Onshoring - onshoring is when companies outsource to contractors within their country. It can be more expensive than offshoring or nearshoring, but it can also eliminate cultural differences or complexities involved in working with an international team.
A typical function to outsource is IT.
IT makes sense for outsourcing because most companies will need IT support at some point, but most don’t need to have a full-time technician present on a full-time basis until they reach a certain size. Hiring a contractor or a business process outsourcer often makes more sense in terms of budget and flexibility.
It’s also common to outsource customer service, human resources tasks (such as recruiting), and financial operations such as payroll. Some companies might need help from one person and decide to hire a software engineer as a contractor; others might outsource the entire department, such as customer support.
Insourcing involves using internal employees
Whereas outsourcing involves external workers, insourcing relies on people within an organization. It’s about bringing tasks in-house.
If you’re working with an outsourced team and you begin to pursue an insourcing strategy, that might mean parting ways with your outsourced team, even if you need to hire additional employees to take on the additional work. Depending on the scope, you may simply distribute that work across your existing team members, which can involve training and upskilling current employees to work on jobs that would typically have been outsourced.
A good example of insourcing would be eliminating an outsourced customer service team by adding new internal support agents.
Pros and cons of in-house vs outsourcing
There’s no one-size-fits-all solution to decide whether to opt for an outsourced approach or an insourced model. It depends on your business goals and expectations. Both insourcing and outsourcing have pros and cons you should weigh before deciding.
Pros of insourcing
One of the main advantages of setting up an insourcing model is that you have more direct control. Since you’re only relying on internal employees when insourcing, you’ve got a direct line of sight into every process and task.
In environments where regulations are tight or security is strict, having complete control of operations can be crucial. For example, if you have a business that relies on patents or high-technology research, outsourcing part of the team might not be ideal for you. Insourcing might be the better fit.
Cons of insourcing
Insourcing is generally expensive. If you’re building a whole new internal team, you’ll need to spend time and money on recruiting, interviewing, and training your team members (not to mention the ongoing costs of payroll and management). Even if you’re only insourcing by adding new projects to an existing employee’s plate, you’ll be forced to deal with tradeoffs, because the time your employee spends on this new task won’t be available for spending on other tasks. This might mean other projects get delayed or you’ll need to hire additional employees to help.
Another cost of insourcing is training and development. If you’re asking employees to take on new tasks that are a stretch for them, you need to make sure they’re well-resourced. This often means investing in new hardware, software, or training courses to get them up to speed.
Pros of outsourcing
There’s a foundational principle behind outsourcing: the outsourcing company is generally an expert in what they do.
Because the third-party provider you outsource to focuses on a particular task, it can usually do it better, faster, and cheaper than your own company can do internally. For example, imagine you outsource your customer support to a business process outsourcer (BPO). This BPO provides customer service teams to dozens of other companies across many different industries.
You’d better believe they’ll know their stuff.
Outsourcing brings additional big advantages:
- Access experienced talent faster: Hiring the right person can take months. Outsourcing provides access to a pool of highly-experienced candidates so they can start to add value from day one. Peak Support, for example, can launch a new team in as little as 1 or 2 weeks. An established outsourcer will support you in handling spikes in demand, seasonal variations, major product launches, and other high variance factors. This additional flexibility makes it far easier to adapt to your customers’ needs.
- It allows companies to focus on core aspects of their business: Outsourcing non-core activities can improve efficiency and productivity. Instead of spending time and resources on pre-screening candidates for an open entry-level sales position, you might want to have your recruiting team focus on more strategic roles. One way to accomplish this is to rely on an outsourcer to take the pre-screening off your plate, freeing your internal employees up.
- Reduce costs while increasing efficiency: There’s a reason why outsourcing is recognized as a flexible way for companies to save money – Deloitte found that 70% of interviewees mentioned cost reduction as the primary reason for outsourcing. The impact of COVID-19 played a key role here, as an uncertain economic environment makes businesses focus even more on the numbers.
- Improve customer service quality: A good customer service outsourcing partner is an expert at supporting customers. They know how to set up an effective team, which KPIs to measure, and how to adopt your brand voice for a consistent experience. They’ll bring experienced agents to the table, quickly giving your customer experience a boost in quality.
Companies of all sizes can benefit from outsourcing, but those looking to scale often rely on it. For example, maybe you’ve reached a point where you need to begin offering weekend customer support at your business. The easiest and fastest way to start is probably going to be relying on an outsourcing company to cover those weekend shifts.
Cons of outsourcing
Outsourcing is a great fit for many situations, but it also comes with its own set of challenges:
- Trust and control. A certain degree of oversight is lost when a business has employees in another city or another country. Working with a proven and reputable BPO can help with this, but ultimately every company exploring outsourcing needs to confront this internal barrier.
- Communication. Depending on how you set up your outsourced help, communication can be a struggle. Language barriers are a reality that may need working through. You’ll also need to decide how tightly to integrate your outsourced workers with your internal communication tools, such as Slack or Notion.
Is outsourcing right for your business?
The short answer is, it depends.
Outsourcing has undoubtedly been a go-to solution for plenty of companies over the last few decades. According to one study, as many as 7 in 10 UK businesses claimed to outsource to third parties.
Outsourcing can be an excellent fit for your company when you have an important task, such as customer support, that needs to be done well but is not your core product.
A good general rule of thumb is that you shouldn’t outsource your core business.
As explained in this Peak Support’s outsourcing guide, if your business is a “telehealth company that provides remote, video-call, mental health, and wellness counseling, you probably wouldn’t want to outsource its agents because the agents are the business.”
You’ll need to apply this logic to your business. What’s that core, integral part of your business that needs to be kept close to home?
However you’ve answered this question, chances are there are some aspects of your business where outsourcing makes sense. In fact, the best solution is usually a combination of insourcing and outsourcing.
In customer support, for example, an outsourced team might handle lower-tier tickets while the in-house agents take on the more complex issues, live chats, and phone calls. This mix allows you to be efficient with the support queue while maintaining a high level of quality for all customers.
A similar methodology can work well across other functions like recruiting, sales operations, marketing, and finance.
In or out, that’s the question
Smart companies recognize that both insourcing and outsourcing bring unique value and unique challenges. Once you’re informed of what these pros and cons are, you’re better positioned to make a strategic decision around where outsourcing makes sense for your business.
In short, it’s not about insourcing vs outsourcing. It’s about understanding your business needs to find the right solution.
If you need a flexible solution to scale your customer service team or handle repetitive back-office tasks, book a free consultation call with Peak Support. Our outsourcing experts will help you understand what the right approach is for your business.