Outsourcing vs. Insourcing

Outsourcing has become a common business buzzword over the last 10-15 years. Proponents of outsourcing say it reduces costs, makes companies more competitive, and promotes economic growth worldwide. Those against outsourcing say it hurts local workers. In certain ways, both are right.

In a somewhat stereotypical example, a company decides to lay off an employee making $30 an hour, and outsource her work to India for $10 an hour. If the outsourced worker produces the same results (or even more than 1/3 the results, the company is financially better off and can make investments in growing their business. In addition, the worker in India raises her standard of living. The local employee who was laid off now has to find a new job, create one of her one, or learn new skills that are valuable to a new company. In the near-term, she is certainly a victim of outsourcing, but in the long-term, she has an opportunity to improve her life with meaningful and higher-skilled work.

The alternative to outsourcing is insourcing, which is a fancy way of saying hiring local employees. Insourcing is what businesses have been doing for thousands of years. The benefits of insourcing include face-to-face interaction with your employees and hands-on training. You will be able to closely monitor their work, communicate your requirements and company passion more clearly, and build the company culture you want. In-house employees undoubtedly have more “buy-in” to the mission of your company. They’re not just hired guns; if you hired right, they should care about your mission and take pride in their work (I’m not that outsourced workers don’t care, just they probably won’t care as much).

However, insourcing also comes with a number of drawbacks. The most obvious of these is it is expensive. You’ll want to pay a wage that’s high enough to attract the quality talent you’re looking for, and beyond that, you’re on the hook for employment taxes as well. You might have to buy software or pay an accountant to process payroll. If you hire someone full-time, will you be required to provide benefits like medical and dental insurance, a retirement plan, and paid vacation days? Hiring an in-house employee is a big decision for any company, and that first employee is the hardest one.

Other factors to consider include their workspace. Where will your new employee work? I work from a home office, and it’s hard to imagine another person coming over here every day for work. That would mean setting up another desk and buying another computer, which adds into the expense of the new employee.

Beyond the financial burden of an in-house employee, there are a few regulatory burdens that are intimidating to many entrepreneurs. There will be additional state and federal tax filing requirements, as well as fair hiring and firing practices you will have to learn about and comply with. And what happens if you need to downsize or fire your employee? Will you be liable for unemployment claims or a wrongful termination lawsuit?

Every entrepreneur has to make these difficult decisions based on what is best for their business. In many cases, the company would prefer an employee with a physical presence on-site, but is not ready to make that leap. Outsourcing can be an excellent alternative. It allows you to cost-effectively expand your business, hone your management skills, and focus on your core tasks.

As a general rule, companies thinking of hiring their first in-house employee should consider a virtual employee first. If the intention is to have them perform routine tasks that can be done from anywhere, why not take a trial run with a remote worker and see it goes. It is very cheap and very low risk compared with your insourcing alternative.

For more on the topic, please check out the high-quality (and free!) ebook from Bryan Miles of eaHELP.

It’s called 9 Reasons to Rethink Your Approach to Staffing and is definitely food for thought for anyone or any company wrestling with this insourcing vs. outsourcing decision. An email opt-in is required but the book is otherwise free and certainly a worthwhile read.

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