Insourcing vs Outsourcing: What Is the Difference?

For a long time, there were only a few different ways you could structure a company—unless you were a giant in your industry.

But in the last couple of decades, small businesses have been more enabled to use staffing strategies that were previously reserved for multinational corporations. Getting creative with your business structure might mean considering a combination of both insourcing and outsourcing.

I’m going to explain exactly what the difference is, as well as the benefits of each.

What is insourcing?

An old business joke originating with Richard Branson goes:

CFO: “What if we invest in our employees, and they leave?”

CEO: “What if we don’t invest in them, and they stay?”

I bring this up because outsourcing ruthlessly without considering developing your local talent drives away your most loyal and valuable employees.

Insourcing ultimately means leveraging your existing talent to complete tasks or projects they wouldn’t otherwise be familiar with. It’s not just hiring somebody because they’re good at what they do, but taking people you’ve already hired for one purpose and giving them opportunities to learn additional skills. You’re basically making an investment in training up that talent for the long-term payoff.

Fifty years ago, there was a mentality that said you work all your life at one company, get your pension from that company, and retire. Now, things have changed. Employees have realized that they, too, have agency, and if they don’t feel well-utilized or respected, they’ll go somewhere else. So if you want to increase your retention rates, insourcing might be the route to go. It should also come as no surprise that if you already know and trust somebody, then teaching them a new skill might be a safer bet than finding a skilled laborer from an unfamiliar country.

Pros and Cons of Insourcing

These are the three main benefits of insourcing:

• Retention of talent.
• Lower turnover.
• The creation of highly skilled or well-rounded employees.

When talent moves on from a company, a certain amount of institutional knowledge is lost. It’s hard to quantify that knowledge, but everyone knows an example of a beloved employee leaving…a gaping hole in a company. Because it’s not just about getting the job done. There’s company-specific experience built up in every employee, and it’s something that training simply can’t provide. So, insourcing invests into building your employees’ skill sets, converting them into knowledgeable masters of their industry—rather than starting from scratch with somebody new.

The basic downsides insourcing are:

• Speed.
• Cost.

You are investing in team members who are there for the long term. Naturally when we think of bringing on new talent or investing in existing talent, there are a lot of costs. Additional education costs, training costs, benefits (these are full-time employees, not contractors who can be cut after a couple of months). The results will be seen long term but they just won’t be seen immediately.

What is outsourcing, and how does it relate to offshoring?

Fundamentally, outsourcing is the process of taking a business function, even something as simple as a single project, outside of your company. Reasons could be cost (finding cheaper labor elsewhere), speed (when you need someone faster than a traditional hiring process can provide), or focus (as in the case of managed IT services). Technically, you can outsource domestically, but usually outsourcing refers to offshore engagements. In other words, you’re going through an external vendor who can provide you temporary talent on demand. And depending on where that talent is coming from, it may be a lot more affordable than bringing on a new hire.

Pros and Cons of Outsourcing

The pros of outsourcing are of course:

• Immediacy.
• Efficiency.
• Price.

It’s like a heavily simplified version of the traditional hiring process. You pay your vendor for their services, and make your specifications known. Need a product to go live in two to three months? Great. You can find vendors who are able to do that. With insourcing, on the other hand, you would have to factor in hiring and training times. Frankly, with the amount of time hiring and training can take, you probably wouldn’t even be able to get a new developer on such a short-notice project. But with outsourcing, you can find developers who are ready to start at a moment’s notice.

As for the cons of outsourcing, they are:

• No pre-existing business relationship.
• Lack of institutional knowledge.

There are countries outside the US who have heavily invested in STEM for decades. In fact, a lot of them have invested more into tech than the US has. But you need to know which countries these are, because many staff augmentation vendors will fail to deliver on time, budget, or specifications. And it’s difficult to discern between a good vendor and a bad one. You really can’t know for sure until you start working with a vendor, and if you were wrong, you could end up with additional costs that defeat the purpose of offshoring. Maybe you paid them because they were supposed to be affordable and quick, but now you come to find out they’re neither. Either way, it’s crucial to appropriately vet when choosing an IT staff augmentation agency.

Also, realize that even if you don’t have to provide training* per se* for a staff augmentation developer, even the best and brightest will be relatively unfamiliar with how things are done within your specific company. They don’t have that institutional knowledge yet. Furthermore, any institutional knowledge gained over the course of their contract—well, that’ll leave with them, too.

Finally, be aware that better paying clients can take priority away from your project or even poach your developers altogether, if those developers were provided through an IT staff augmentation vendor.

Hybrid Model Case Study: Rootstrap

As I mentioned at the beginning, once you know a little about the two types of talent sourcing, you can start thinking about how to combine them. Perhaps you want the long-term benefit of institutional knowledge with the short-term benefit of speeding up a product delivery. In this case, you would take the time to prepare a solid internal team, and only augment it with offsourcing whenever a sudden deadline or obstacle comes up.

Or you could consider bringing offshore developers into the fold of your company for the long haul. It is possible to do this. Let’s look at an example from my work experience.

My current company, Rootstrap, has two headquarters: one in Los Angeles and one in Montevideo (the capital of Uruguay). Our Los Angeles HQ is mostly for sales, marketing, and the client-facing side of things in general. Of course, it makes sense to have a headquarters on the ground where your clients are, especially in the US, which has the world’s largest economy. But you know that already, so let’s talk about Montevideo.

Montevideo is where our technology is, because we know Uruguay has invested (and continues to invest) so heavily into developing itself technologically. Sure, we could have restricted ourselves to an LA-based entity and used a vendor for outsourcing. But we wouldn’t have been investing in our offshore talent to its fullest extent. Nor would we receive all the payoff of building institutional knowledge in those developers. So, we chose the multi-HQ approach.

Rootstrap currently has 4 partners: two senior leaders in LA and two in Montevideo. This way, we get the benefits of both insourcing and outsourcing. Additionally, we have a satellite office in New York (again, mostly for sales) and one in Buenos Aires, Argentina (another surprising smart city). By creating a permanent fixture in another location, we’re getting the long-term benefits of that talent as well.

I expect a lot of companies moving forward will catch onto this method. Rootstrap is not even a huge company; we’re just over 100 employees. My point is that it’s become extremely accessible to take advantage of these different talent pipelines and create your company across borders. Sure, it’s not for everyone, but it’s a really interesting and highly-effective model. I won’t be surprised to see it catching on in popularity in the coming years.