Insourcing refers to the practice of assigning work to an individual or department within an organization instead of contracting it out to a third party. That is, the company uses its own resources to perform the work rather than those provided by another entity.
Understanding insourcing
Insourcing is a process where work that would otherwise be outsourced is carried out internally.
Insourcing may be the preferred option for several reasons:
Increased responsiveness
In today’s dynamic global market, businesses must be more agile than ever.
Outsourcing work is normally a slower process which can hinder a company’s responsiveness.
In fact, insourcing is more expensive in the short-term, yet might turn into a much more viable strategy in the long run.
However, it’s always critical to ask whether you’re trying to insource a critical function of the organization or not.
In many cases, if you need to test something quickly, which is outside of the core of the organization and yet worth undertaking, outsourcing might be a great way to start testing that out.
Take the case of how companies like Amazon “outsources” product discovery to third-party stores on top of Amazon.
As finding out new products might be quite expensive, Amazon hosts third-party stores on top of it, and for the third-party stores that turned out to be more successful, Amazon might buy them out or launch their own version.
While, of course, this might turn into a predatory tactic on the part of Amazon, when done in a more strategic way, it might be actually a win-win.
There are also other companies like Thras.io, which have built a whole business on top of Amazon’s third-party sellers.
In other words, it’s important to balance out outsourcing and insourcing to build competitive moats.
In some cases, it makes sense to insource right on (especially when the function is very close to the core of the business).
In some other cases, it makes sense to outsource (especially when the function is far from the core), to kick off fast experimentation, and plan the insource if the experiment works out.
Knowledge and social capital
In the most successful organizations, social capital fosters collaboration between ambitious employees who are motivated to reach their objectives.
Insourcing keeps this knowledge in-house, where it can be utilized with the greatest impact.
For some companies, insourcing is part of the culture. Whereas those organizations try to develop most of the processes in-house.
For other organizations, it’s the opposite, where they use primarily outsourcing as a way to develop the business.
It’s worth highlighting that most companies, as they scale, they use outsourcing to quickly expand (as insourcing all the business processes right on might be too expansive and slow).
As we’ll see, a hybrid way is to use an outsourcing process where you rely on strategic partners.
Which work almost as if they were internal to the organizations, this enables the company to move faster and yet make sure that the outsourcing partner understands the specifics of the core of the business.
Lack of control
In some cases, poor-quality work is produced by the outsourcing company, which results in significant financial losses.
Insourcing can be more desirable since the company has more control over decision-making and the final product.
Also, here, it’s worth highlighting that while in-sourcing brings control, it also increases costs, for the organization.
Thus, it’s always critical to ask, whether insourcing makes sense and if it’s close enough to a strategic side of the business.
Wanting to insource, as a rule of thumb, makes sense as long as it does not increase the cost of doing business, to the point of making the organization too expensive and inefficient to run.
How does insourcing work?
Before insourcing can take place, the company must first identify a need, project, or area where it is otherwise lacking that could benefit from professional guidance.
The company may then transfer one or more specialists to an existing team or create a new team subject to resource constraints.
Insourced staff may work for a predetermined period or until certain KPIs or objectives have been met.
Some may establish new company-wide processes and procedures and/or remain in their new roles indefinitely.
Insourcing Strategies
Let’s look at three models for insourcing.
Insourcing only the strategic units
In this case, the organization only brings in projects that are very close to the core.
Take the case of a fashion e-commerce company, which over time, decides to bring in-house clothes manufacturing, to improve quality and control over the creative process drastically.
Insourcing it all
Some organizations have in their DNA the willingness to insource most parts. of the process.
An example is how Tesla started early on to go direct while trying to, over time, bring all production processes in-house.
Today, Tesla is a vertically integrated organization.
To be sure, it took fifteen years for Tesla to achieve that, yet its “insourcing mindset” led the company to look for all possible ways to bring in-house most of the business processes.
This was an extremely expensive strategy, yet it might turn successful in the long-
Hybrid
An interesting example is Apple.
The company managed to successfully build iPhone’s manufacturing processes outside the US and mostly in China, and yet keep the iPhone as one. of the most expensive tech devices on the market.
How did Apple do that?
It balanced outsourcing with insourcing.
Indeed, while Apple outsourced the manufacturing side, it kept tight control over the design part, which is one of the core tenets of Apple’s business model.
And it kept tight control over the demand side with its branding and expensive store strategy, which is the core of Apple’s distribution strategy.
This hybrid model, enabled Apple to completely unleash its manufacturing capabilities outside the US, thus making the iPhone extremely cheap to make.
While the company kept tight control of strategic assets, such as design (UX) and demand (owned stores strategy).
Insourcing examples
Let’s conclude by describing two insourcing examples that will provide clarity on the practice.
Breakfast cereal company
Consider a British breakfast cereal company that wants to expand its marketing and promotional activities to France and Spain.
Since its ads have only been run in English, the cereal maker requires French and Spanish speakers.
Many companies who have found themselves in a similar position have contracted the creation of the ads to a third party in the relevant country.
The cereal company, however, uses insourcing to recruit native French and Spanish speakers who then build their own internal teams.
In addition to translating existing promotional materials, the new staff play a pivotal role in the creation of culturally-sensitive and relevant ads for French and Spanish audiences.
Agricultural machinery company
In the next example, we have a company that designs and manufactures heavy machinery for agricultural purposes such as combine harvesters, tractors, and balers.
In preparation for the release of a new harvester, the company recruits its in-house engineers to write the owner’s manual instead of looking for assistance externally.
Sensing that it would be more cost-effective than outsourcing, the company pays for its engineers to enroll in a technical writing course.
With more internal control over the process, the manuals are more likely to be of a sufficient standard.
Key takeaways:
- Insourcing is a process where work that would otherwise be outsourced is carried out internally. Benefits include increased responsiveness, improved knowledge and social capital, and more control over the final product.
- Before insourcing can take place, the company must first identify a need, project, or area where it is otherwise lacking that could benefit from professional guidance.
- A cereal company can use insourcing to hire French and Native speakers as part of an international expansion effort. A manufacturer of heavy machinery can also use it to avoid having to hire external technical writers.
Connected Economic Concepts
Positive and Normative Economics
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