How to decide between insourcing and outsourcing

The process of trying to decide if your organization should outsource a function is tedious and can be hair-raising. You’ll want to weigh a number of factors during the decision-making process.

Let’s start with the definitions of the two:

Outsourcing — Outsourcing involves two companies: the client company and the outsource company. It is an arrangement that consists of taking operations out of a company and contracting them to a service provider.

Insourcing — Insourcing is the return of a functionality to the company. Just as outsourcing moves resources and personnel from an organization, insourcing increases the amount of resources and personnel in an organization. You have made the decision to bring the responsibility of a function back into your organization.

Aversions to outsourcing

Outsourcing is a major step. You may doubt that your organization will be able to survive the transition. The function you are considering outsourcing is most likely a large budget item, which makes it even scarier.

However, there most likely is a long-standing justification already present and that is why you are considering the move. Maybe you just lack confidence that you can expect an appropriate level of service from the service provider — this is a real and valid aversion to outsourcing.

If you truly feel outsourcing is the right step for your organization, then take the necessary steps, prior to transition and during contract negotiations, to overcome any aversions. One example would be to enter into a service level agreement with key performance indicators with your service provider.

Benefits to outsourcing

In my opinion, the benefits of outsourcing far outweigh the aversions. One example would be the opportunity to move a large budget item to a fixed cost for services over a set period of time. Most service providers will charge a fixed hourly, weekly or monthly fee. This is a win-win situation as insourcing is a variable cost.

In addition, insourcing almost always exceeds your budget.

Are you looking for a way to reduce headcount, lower your payroll and reduce your benefits cost? Outsourcing will immediately shrink these big-ticket items.

Not only does outsourcing lower your headcount but it also removes the responsibility of staffing this function from your company. Staffing is important and very difficult.

If you properly define the constraints and scope of work in your service agreement, you can expect a stable level of service. But the stable level of service will only be achieved if the service provider you select has excess capacity available.

Trigger events

There are a few examples of trigger events that may cause you to consider outsourcing. Some examples include an employee retiring, high turnover at a particular position, low level of service from the position or that staffing the position(s) has become burdensome on management.

 

It’s your responsibility to identify restraints within your organization and to then formulate a plan to overcome those restraints.

Outsourcing isn’t right for everyone. If your organization consistently struggles with one specific function, however, it may be just the answer you are looking for.

 

Dennis W. Lejeck is the president and founder of Black Knight Security. Dennis is a graduate of the University of Pittsburgh Institute for Entrepreneurial Excellence and has also participated in the EY Entrepreneur Of The Year® program.