What is 'Insourcing'

Insourcing describes the practice of assigning a task to an individual or group inside a company, as opposed to outsourcing, where a company assigns a task to a third party.

BREAKING DOWN 'Insourcing'

Insourcing encompasses any work assigned to an individual, team, department or other group within an organization. In practice, insourcing generally describes a task or function that a firm could also outsource to a third party. As a general rule, insourcing provides companies with more control over decision-making and the ability to move more quickly and precisely, especially where institutional knowledge factors into elements of the process. To the extent that employees’ time costs a company more than it would pay a third party to do the same work, however, insourcing can produce higher expenses than outsourcing. Such decisions also depend upon the best allocation of resources across a set of tasks as well, since employees on an insourced task might also be more profitably deployed on other projects.

Insourcing Compared to Outsourcing

Outsourcing involves hiring an outside party to undertake a task, project or function for an organization. The practice became widespread and controversial through the 1990s, as many businesses sought to reduce their expenses by hiring outside companies to perform tasks including human resources management, customer service and support, manufacturing and marketing. With improvements in global communications and logistics spurred in part by the growth of the internet, outsourcing became a growth industry in a number of developing countries where labor costs remained low.

Outsourcing brings with it a set of risks and additional overhead, however. Allowing non-employees to have access to systems, particularly certain back-office systems such as accounting, creates security risks. For example, even a company with a strong cybersecurity profile becomes prone to additional risk when it allows relatively unknown employees of a third-party organization access to its systems. Furthermore, variations in international law can generate challenges with regard to drawing up contracts that adequately protect an organization in the event a vendor fails to live up to expectations.

By contrast, insourcing offers some companies a competitive advantage if they can provide more consistent, superior customer service by spending a bit more money to keep the functions in house. Insourcing also can become more palatable for companies in loose labor markets, where the cost of hiring additional employees, and the prospect of doing so at lower salaries, provides a set of strategic advantages. For complex projects, companies may also find that insourcing requires less time and expense for training, since employees often have greater familiarity with an organization’s products, services and culture.

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