Insourcing

Insourcing definition, explanation, pros and cons - toolshero

This article provides a practical explanation of Insourcing. After reading, you’ll have a basic understanding of this powerful management tool.

What is Insourcing?

Insourcing is a term that is refers to the opposite of outsourcing. It means that instead of outsourcing business activities to other parties, activities and tasks are now conducted in-house. Whereas the reason for outsourcing certain activities or processes is often to reduce costs, the reasons for insourcing are more numerous. For example, in order to maintain control, a company may decide to produce a specific, often important, component itself. This control is important, for example, to be able to guarantee quality.

Insourcing often involves processes that must be controlled by specialists. These specialists are hired by the organisation to provide temporary work or educate existing staff to perform tasks that would otherwise be outsourced. An example of this is hiring an IT specialist who writes technical manuals for complex systems. Such manuals may subsequently be used by other personnel.

Other reasons for using insourcing is a capacity shortage, gaining a competitive advantage, quality improvement, and customer satisfaction.

Reasons for insourcing

Several reasons for companies to use insourcing have already been briefly mentioned above. Below is a more detailed description of these reasons.

Insourcing reasons - toolshero

Quality Management

Insourcing offers companies the opportunity to guide and control the entire development process. This allows quality to be monitored in every phase of development and implementation. Changes made to a project can be quickly tested, and defects can be quickly remedied through repairs. All these benefits and the control wouldn’t exist if a company decided to outsource its activities.

Insourcing also increases control over decision-making. Important production aspects or complications no longer need to be communicated to the project owner via a third party, but can be handled directly within the organisation itself.

Monitoring intellectual property

Compared to outsourcing, one advantage of insourcing is that intellectual property—such as knowledge, skills, or technology—can be sufficiently protected. With insourcing, the organisation has greater control over resources, employees, privacy, and intellectual properties. As a result, the organisation generally also runs a lower risk of loss or theft of intellectual property. Intellectual property can be protected in various ways.

Firstly, there is the trademark. A trademark is a unique symbol or word, or set of words, used to represent a company or its products and services. Think of companies like McDonald’s with the golden M, or the Nike logo. Once a company has registered a trademark, other organisations can no longer use it. This applies for a period as long as the trademark remains in use, and as long as the costs for the registration procedures are paid.

A second way to protect intellectual property is by means of copyright. Copyright is a form of protection offered by law in most countries. Copyright protection applies to products that have been recorded or published in a tangible form. This includes products such as paintings, literary works, software, photos, films, or live performances.

The third and final way to protect intellectual property is to label confidential business information as business secret. This approach to protection is especially effective in combination with insourcing. After all, with insourcing, no other party has access to confidential data, which significantly reduces the risk of of information leaking. Trade secrets usually include manufacturing or industrial secrets, trade agreements, or ingredients.

Efficiency in Communication

Outsourcing is known for being a potential threat to effective communication. The risk of misunderstanding and noise is greater because the project and project owner are in different locations. This problem is smaller in the case of insourcing. Here, employees communicate directly, often face to face.

Cost efficient

With insourcing, certain costs such as intermediary costs are avoided. Suppliers that use a value-based pricing method may also be selected.

Brand Building

Consumers generally prefer to buy products and services from a nearby brand or provider. With insourcing, organisations create jobs for local residents, who then in turn form an emotional bond with the organisation in their neighbourhood. These factors ensure one obtains a more extensive customer database. Consumers can also solve problems faster and more effectively with an organisation that does insourcing than with companies that outsource.

Control over External Factors

Outsourcing activities may also bring difficulties such as cultural differences, time zones, currency differences, and climate issues. With insourcing, on the other hand, organisations are less often exposed to risks from such differences.

Pros and cons of insourcing

Pros of insourcing

There are various factors that influence when insourcing and outsourcing are suitable. Compared to outsourcing, insourcing offers a number of benefits:

  • Increased control over production and development
  • Shorter delivery times
  • Less risk
  • Insourcing creates jobs
  • Better protection over intellectual property

Cons of insourcing

Insourcing also has several potential disadvantages. One example is costs. Although not all companies see the benefit in producing in cheap labour countries, labour abroad is often cheaper for many companies. If the right capacities are not available in-house, the costs of insourcing can increase significantly. This will come at the cost of scarce resources such as time and money. Another disadvantage of insourcing is the fact that more tasks have to be performed, and that this may lead to a distraction from core activities. A design agency should not spend too much time on things like accounting or HR. After all, these activities do not add value to its core business.

Trend

In recent years, companies’ approaches to strategy have significantly changed. They are increasingly aware that production in cheap labour countries is not always beneficial, so more and more companies start to create jobs in their home countries. This is particularly the case for the United States. Many US companies (such as General Motors) are bringing production activities back to the home country, and are reversing more and more decisions to outsource activities.

Insourcing is also popular in the IT world. This often concerns the insourcing of application or information systems development.

To summarise

Insourcing has gained significant worldwide popularity in recent years. In particular, companies that previously used cheap labour abroad are increasingly making the decision to relocate all production to their country of origin. This often benefits the country of origin. For example, companies bring jobs back and ensure that innovations and intellectual property remain in the country. Insourcing is also beneficial for the organisation itself: business communication improves, there is increased control over decision-making, and quality can be guaranteed.

Now it’s your turn

What do you think? Are you familiar with the explanation about insourcing? What do you believe are the benefits of insourcing compared to outsourcing? Are there any typical business activities that you would outsource? And which processes would you like to control yourself? Do you have any tips or additional comments?

Share your experience and knowledge in the comments box below.

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More information

  1. Chapman, R. B., Andrade, K. R., & Anadle, K. R. (1997). Insourcing after the outsourcing: MIS survival guide. American Management Assoc., Inc..
  2. Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications of the ACM, 43(2), 99-107.
  3. Lacity, M. C., & Hirschheim, R. (1995). Beyond the information systems outsourcing bandwagon: the insourcing response. John Wiley & Sons, Inc..
  4. Schniederjans, M. J., Schniederjans, A. M., & Schniederjans, D. G. (2015). Outsourcing and insourcing in an international context. Routledge.

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Ben Janse
About the Author

Ben Janse is a young professional working at ToolsHero as Content Manager. He is also an International Business student at Rotterdam Business School where he focusses on analyzing and developing management models. Thanks to his theoretical and practical knowledge, he knows how to distinguish main- and side issues and to make the essence of each article clearly visible.

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