Beginning mostly in the 1990s with technological advancements and globalization Outsourcing prompted business organizations to reevaluate how they manage their functions. Outsourcing offers the benefits of specialized expertise and hopefully cost savings, while insourcing ensures tighter control and better alignment with organizational objectives. Choosing between these approaches requires a clear understanding of business priorities, available resources, their costs and the implications for quality and customer satisfaction downstream.
Deciding between Outsourcing and Insourcing is a critical decision for businesses seeking to optimize efficiency, cost-effectiveness, and competitive advantages. If this is something your company is researching, then “great job” for not just following the process of others assuming that it is also the best for your business. Each company is unique in the way they operate, their staff, management and culture. Therefore, not all outcomes will be the same for each company.
Outsourcing is contracting external providers, commonly referred to as 3PL and 4PL in the transportation world to handle specific business activities. While manufacturing can also be outsourced, known as “tolling”, some common business functions to be outsourced include customer service, IT, logistics, and manufacturing. Organizations often look at Outsourcing to reduce costs, maintain a lean organization, enhance flexibility, and access expertise which they may not have within the business.
Managing a function within the organization, utilizing internal staff and resources, rather than a 3rd party, is known as Insourcing. Prior to the 1990’s companies handled most if not all their business functions. Insourcing is now common for functions deemed critical to the company’s core competencies such as research and development, strategic planning, and quality control.
Advantages to Outsourcing:
- Cost reduction
- Connecting to expertise
- Ability to quickly scale and contract the business
- Additional bandwidth to focus on the core business competencies
Disadvantage to Outsourcing:
- Confidentiality / Data security
- Control – Indirect oversight of the process
- Cultural and communication barriers
- Hidden costs
Advantages to Insourcing:
- Greater control – Direct oversight of the process
- Customization to the process with greater ease
- Confidentiality / Data security
- Employee development
- Alignment with company culture and values
Disadvantages to Insourcing:
- Limits the ability to scale and contract operations
- Internal resources may not have the expertise needed
- Management complexity and organization growth
- Expensive when salary, benefits, training and all costs are considered
In hindsight, after the Great Recession of 2008, companies that had a high percentage of Outsourced functions were able to contract operations in their business to meet the new supply demands and focus on core competencies while mostly insourced organizations spent time on adjusting the business to the new environment. Clearly there is a price to having a flexible organization but there is also a price to not having a flexible organization.
Control and Quality of the process is a something which will need significant consideration in the decision-making process of whether to Outsource or Insource. How comfortable do you feel with the Vendors you are vetting to manage this process? What could be the outcome of having less control of the process and quality? If you were selling damaged goods wholesale perhaps it would not be as much of a liability as opposed to toll producing medical supplies at a 3rd party manufacturing facility.
Costs. Working with your finance Team can help you determine the true cost of a process. If your Purchasing Team purchases Salt for $100 ton and a 3rd party can do the same on their own or with your contract, what have you saved? What is the transaction cost of this internally and what benefits can the organization have to reallocate this bandwidth to a core competency within the business? What would the value be?
Core Competencies, “we do that well and it needs to stay insourced!” Benchmarking and testing the market is a great way to confirm or challenge if a core competency really is a strength for the business. Perhaps it is not or perhaps it is which can help the company to focus more on that process as a competitive advantage?
Outsourcing a specific function might also lessen the load on the organizations IT capabilities such infrastructure , software, licensing, maintenance and updates. This could be a considerable cost to factor in when reviewing various scenarios on Insourcing vs. Outsourcing.
Perhaps there is an area that the company is hesitant to Outsource although it seems like the proper thing to do for the business. The business could continue forward with a “management heavy” approach with the vendors adapting significant oversight to determine if the assumptions that were made in the decision-making process are true. Perhaps the contract with the vendor is left somewhat flexible for a period until such time that the organization feels secure in their work. There are many ways to navigate through these tough decisions and mitigate the risk to the company.
If you have any questions on Insourcing vs Outsourcing, please contact us.
