What Is Insourcing?

Insourcing is the assignment of a project to a person or department within a company rather than to a third party. Insourcing is the opposite of outsourcing.

How Insourcing Works

In practice, insourcing is used to describe a task or function that a company could have outsourced to a third party. As a rule, insourcing provides companies with more control over decision-making and the ability to move more quickly and precisely, especially if institutional knowledge factors into some elements of the job.

Since the 1990s, companies have increasingly outsourced rather than insource, seeking cheaper labor in developing nations. To the extent that employees’ time costs a company more than it would pay a third party to do the same work, insourcing can produce higher expenses.

The decision also depends on the best allocation of resources across a set of tasks as well. Employees who are qualified to undertake a project if it is insourced might be more profitably deployed on other projects.

Insourcing Versus Outsourcing

Outsourcing involves hiring an external company to undertake a task, project, or ongoing 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 ongoing tasks such as human resources management, customer service, 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 developing countries where labor costs remained low.

Allowing non-employees to have access to systems, particularly back-office systems, can create security risks.

Outsourcing brings with it a set of risks and additional overhead, however. Allowing non-employees to have access to systems, particularly back-office systems such as accounting, creates security risks. Even a company with a strong cybersecurity profile becomes prone to added risk when it allows unknown employees of a third-party organization access to its systems.

Furthermore, differences 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.

Insourcing offers some companies a competitive advantage if they can provide more consistent, superior customer service by keeping the functions in house, even when it costs a bit more.

For complex projects, companies may find that insourcing requires less time and expense for training since employees are already familiar with an organization’s products, services, and culture.

Example of Insourcing

As an example, say a large snack company is putting out a new brand of candy. Its strategy includes a social media campaign that it hopes will help its brand catch fire.

The company has its own marketing department that has the product and industry knowledge to run the campaign. It already implements the rest of the company's social media strategy although it has never actually launched a new product on social media. Should the company hand over the project to its marketing team or go outside?

Key Takeaways

  • Insourcing keeps a project in the hands of employees who may understand the company and its products best.
  • Outsourcing gives a company access to expertise that may not be in-house, and possibly a lower cost.
  • Since the 1990s, U.S. companies have outsourced more than insourced in order to take advantage of lower labor costs abroad.

If the marketing team is fully booked up with its current projects, the company may well decide to hire the outside social media outfit to launch the social media campaign for its new candy bar. For the initial phase, outsourcing could be the right choice. Once the campaign is up and running, the company may well reverse its decision and insource it.