When the time comes to start a software development project, businesses have to make one of the most critical decisions – outsourcing or insourcing?
Outsourcing and insourcing are two fundamental strategies that businesses use to manage their operations, reduce costs, and achieve strategic objectives.
The two methods have their specifications – advantages as well as challenges – the choice is driven by a company’s unique goals, available resources, and industry dynamics.
An important thing to take into consideration is that there’s no one-fits-all solution.
A complete understanding of the current business state is essential. This is how right and efficient decisions are made.
Keep on reading to explore the peculiarities, benefits, and challenges associated with each cooperation model.
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What is outsourcing about
When it comes to software development, recent years have been a time of rapid growth and evolution. Technology keeps advancing and the way we work is changing completely.
Outsourcing has come as a new big trend and reshaped the world of business. It’s been one of the most hotly debated topics – some people find this cooperation model highly beneficial while others don’t like to see jobs go overseas. The first spoiler: it does not always go overseas actually. Let’s dive deeper into this topic and explore the details.
What is outsourcing about? This is the business practice that involves partnering with a third party, which could be an individual or an organization, to handle specific tasks, operations, or services that for some reason cannot be performed in-house. Referring to the IT Outsourcing Statistics report, in 2022, 49.6% of companies intended to increase their outsourcing share, 40% foresaw no change, while only 10.4% had plans to reduce outsourcing. This leaves no doubt that the outsourcing market will proceed to grow.
The core concept of outsourcing is task delegation which, in turn, brings a whole pack of benefits. Other key elements of outsourcing include
- Contractual agreement that outlines formalized terms and conditions defining the scope, responsibilities, and payment terms.
- Project-based (short-term) or ongoing (long-term) cooperation depending on the business needs.
- Processes can be outsourced to a local company or a team from another country (offshore outsourcing).
- Cost efficiency is the primary motive for most businesses relying on outsourcing.
In order to navigate the complex landscape of outsourcing effectively, meaningful insights are needed.
Advantages of outsourcing
Partnering with an external team is reasonably considered a very beneficial cooperation model. And here’s why:
- Lower operational costs. It is more cost-effective to cooperate with an outside vendor rather than hire employees, train them, buy new equipment, relocate, or change processes.
- Access to advanced expertise. With outsourcing, you can involve specialists with exactly the expertise level that you require. This opens up a global pool of talent and enables partnering with teams on the other end of the world. A broad range of skills and knowledge brings about a higher quality of work, increased efficiency, innovation, and competitiveness.
- Faster task completion. An outsourcing company takes responsibility for all the tasks related to recruitment and your team can be assembled in a few days.
- Focus on core business activities. Let everyone do what they’re best at. While outsourcing non-core functions you’ll be able to concentrate on what differentiates your business from competitors and contributes to its value proposition.
- Room for scalability and flexibility. External vendors are prepared to handle fluctuations and can adjust their processes promptly thus allowing businesses to respond to market changes, seasonal variations, or sudden growth opportunities effectively.
Outsourcing pitfalls and challenges
We wish workflows were always seamless and stressless but they’re not. Outsourcing involves certain drawbacks and pitfalls to be ready for. However, if taken responsibly enough, they will not disrupt operations.
- Lack of control over the outsourcing process. Working with a third-party vendor can be challenging in terms of tracking the project’s progress. So, focus on double-checking your potential partner’s reputation.
- Data security issues. Outsourcing often involves sharing sensitive information, intellectual property, and confidential data with external providers. In such a case, proper safeguards are needed to minimize the risk of data breaches, unauthorized access, or intellectual property theft.
- Communication gap. This is a common issue for businesses outsourcing tasks to teams from other countries. Language barriers and cultural differences can hinder communication and collaboration. This results in misunderstandings, delays, and unmet expectations.
- Dependency on an external team. Outsourcing tasks means becoming dependent on a vendor’s timelines, expertise, and capabilities. Their internal changes might affect your project and limit your flexibility. Switching providers or bringing operations back in-house becomes a real challenge.
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What is insourcing
As the opposite of outsourcing, insourcing revolves around allocating internal resources to complete a project. This might include team reorganization and involving experts from other projects.
To cut a long story short, insourcing means assigning projects within a company instead of looking for external enhancement.
The key element of this model is placing the full responsibility for a project on an in-house team. Insourcing can cover the management of specific tasks, customer support, and more.
Similar to the outsourcing model, insourcing has a bunch of benefits and drawbacks that impact the final decision.
Zinnov states that 67% of companies chose insourcing to have better control over process, quality, and IP, closely followed by improved customer experience at 60% and reduced operating cost at 63%.
The major IT functions insourced by companies include software development (75%), technical support (56%), and IT operations (50%).
According to the study that uses Danish register data to examine how insourcing affects employees overall, insourced employees increase their work income and employment (i.e., number of working hours) 1 year and 3 years after insourcing.
Insourcing pros
Having all the tasks performed within the company must be a good idea for the following reasons:
- Complete control over the project’s progress and resources. It also brings more flexibility and allows tailoring strategies as per specific needs.
- Risk reduction. It becomes easier to implement proper security measures, control access to sensitive information, and implement risk management protocols based on the company’s unique needs.
- Seamless and transparent communication. Insourcing eliminates bottlenecks associated with time-zone differences or gaps in languages or company culture. Furthermore, in most cases, daily face-to-face communication facilitates effective collaboration and boosts productivity.
- Sharpening internal skills. Insourcing often requires investments in employee training and development. This way a company can take its overall expertise to the next level.
- Business understanding. A core team has better insights into a company’s goals that plays a pivotal role in achieving them.
Insourcing cons
And what about the things that make insourcing challenging? You should know them to make sure your team is able to cope with these pitfalls without sacrificing product quality.
- Bigger expenses. Insourcing is more expensive as compared to outsourcing. There are operational costs that a company needs to cover. Expenses related to salaries, training resources, and equipment need to be considered.
- Slower task completion. You may lack the required expertise in your team and therefore spend time on recruitment and training. These time-consuming processes might affect efficiency and result in delays.
- Limited scalability. Organizations may find it more challenging to scale their operations up or down as needed. This can result in underutilized resources during slow periods or insufficient capacity during peaks.
- Lack of flexibility. In the case of insourcing, managing fluctuations in business demands gets more complicated. This limits the company’s ability to promptly adapt to dynamic market changes.
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Factors Influencing the Decision
To outsource or not to outsource? That is the question.
The choice between outsourcing and having the entire project completed by an in-house team is complex yet highly responsible. But how do you know what will work out best for your company?
Weighing the pros and cons of the two approaches might not be enough – there are a few more factors to focus on. Remember that what’s beneficial to one business may be completely unsuitable for another. The entire project down to the smallest task must be evaluated thoroughly so that you are sure you go with the right option.
Pay attention to the following when choosing between outsourcing and insourcing:
- Project strategic nature. Evaluate the scope of work and particularly the tasks that can be possibly outsourced to see whether the internal expertise is enough to handle them properly. Consider that outsourcing is preferable for non-core tasks. When the stakes are too high, insourcing seems safer.
- Company current state. At early stages, companies often lack the resources needed to attract the right level of talent to build a core team. Startups prefer outsourcing as an optimal and cost-effective option. This allows them to involve highly skilled specialists immediately to get their product built.
- Budget. Financial constraints are at the heart of the decision-making process. As mentioned above, insourcing is more expensive as compared to outsourcing. It’s important to select the option that meets your company’s budget.
- Project deadline. Outsourcing is perfect if you need experts to start work quickly. If your internal resources are enough to support your pace of delivery, insourcing might be your option.
- Available resources and expertise. Many projects require specialized resources and getting these might be more practical or cheaper through outsourcing.
- Long-term objectives. The expertise that is supposed to be a strategic value to the organization should be retained in-house. With non-core competencies, outsourcing works quite well.
- Quality requirements. Whatever approach you choose, quality control requirements must be taken into consideration. Neglecting them will turn out to be a disaster for your business and damage the company’s reputation.
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The Hybrid Approach to Outsourcing and Insourcing
Some projects must rely mostly on outsourcing and some projects can be successfully completed by in-house teams only. But there’s more to it – in some cases, sticking to one model just isn’t enough. What does it mean? It means applying a hybrid approach that involves making the most out of the two solutions.
Mixing insourcing and outsourcing can be very effective and profitable. You have an in-house team with all the core skills needed to complete the project. And you hire an external individual specialist just to enhance the internal skills with deeper expertise.
This way you get the specialized experience that you need without any long-term costs. However, investments associated with this team member’s onboarding and training will take place anyway.
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Conclusion
So insourcing or outsourcing? These are two viable means of obtaining superior expertise.
The decision must be strategic for your company. Each approach has its specifications which must be analyzed thoroughly. Take into account the nature of the tasks, resources you have at your disposal, budget, and your long-term objectives.
Law firms and IT companies mostly rely on insourcing, while others, like cybersecurity and financial advisory, tend to choose outsourcing. In some cases, however, the insourcing-outsourcing model works out best. This allows for retaining talent globally.
Assess your unique business needs and select what aligns with its strategy best.
Need to enhance your team with skilled and trained talents? Then reach out to us via hello@pecodesoftware.com ASAP and let’s discuss the possibilities of cooperation!
