3 reasons why to choose outsourcing over insourcing [costs comparison]

An old saying goes:

“A poor man pays twice”

There’s often an immediate push-back when decision-makers hear the word „outsourcing”. It’s a stigma that’s hard to argue, and let’s be honest, cost-cutting is always at the top of priorities. It’s true – outsourcing is usually more expensive than insourcing. So why is it even worth considering? To answer this question, it’s essential to examine the costs from a different perspective.

In this article, I’ll explore both direct and passive cost comparisons between outsourcing and insourcing. While I have not done the calculations before, my hypothesis aligns somewhat with the quote above. So let’s embark on this journey together and see how it goes!

Outsource Cost comparison

Research done in 2022 by Upcity [1] tells us that, more than ever, small businesses are considering signing outsourced services or planning to do so in 2023. At the same time, the costs are the number one reason for small businesses to avoid outsourcing.

Let’s take a deeper dive and explore the expenses associated with outsourcing. IT outsourcing and insourcing services have a direct cost in terms of salary, but under it also lies various passive costs. 

Disclaimer: The costs have been proportionally adjusted to My Coins (MC) for confidentiality purposes. Of course, you can try to figure out the actual costs, but it’ll be easier to ask me directly. Contact details are at the end of this article.

Direct and passive costs of recruiting insource and outsource comparison:

Position	Insource, MC/h	Outsource, MC/h	Comments
Salary	81.90	136.50
Bonus	1.42		1x/6months
Benefits	0.43
Vacation, sick-leave	8.53		1month/y + sick-leave 1week/y
Equipment	1.03		1x/2y change
Team-building	4.39		integrations, dev-beers etc. + daily atmosphere
On-boarding, off-boarding	0.43		subjective, estimated 2weeks/2y (1x on, 1x off)
Soft tools	0.63		Notion, Gdrive, Miro, Figma…
Growth	0.34		Gallup, Udemy etc.
Accounting	0.63
Recruitment costs	3.55		best case scenario
Operations	3.10		CxO, HR…
(extra) Office, utilities	8.65		for 15 employees
TOTAL	115.02	136.50

This little calculation discovery reveals that outsourcing remains around 15-20% more expensive than insourcing.

You’ll probably need a little clarification about why I’m even bothering to conduct this experiment. Let me explain…

Why does outsourcing even exist, and why do companies even sign outsourced services? 

When it comes to hiring a tech workforce, there are some psychological aspects to take into consideration. Here are three of them:

1. Urgency

Desperate times call for desperate measures. Sometimes hiring a new staff member is urgent. Various catalysts, including sudden off-boarding and lack of project management and others can cause this.

When it does happen, do you put important business processes on halt and dive into hiring? Or pay a little more (15-20% from our discovery) and have the guarantee that the new hire is qualified and can start asap?

You can also go the HR agency route but bear in mind that they also have bills to pay and will ask for fees that can often get quite hefty.

“Hire slow, fire fast”

(Unclear origins – the quote might belong to Ronnie Apteker)

2. Misfit 

Hiring is a little like gambling. You put all your chips onto one candidate, but they are not quite the right fit. Again, the reasons for this can vary from a cultural standpoint to a lack of qualifications, attitude, etc.

When it comes to outsourcing, misfits will inevitably happen, and that’s entirely normal, therefore, hiring a company that offers a substitution guarantee is essential. In the event of a misfit, it is possible to make immediate changes within a week or even faster. However, insource off-boarding and on-boarding can take up to 2 weeks at best, and finding the right candidate may take over a month in today’s competitive job market.

3. Crisis/Recession 

What if a financial crisis occurs? We are actually currently experiencing one, with many companies such as Coinbase, Zoom, and Twitter laying off 20%, 15%, and 10% of their employees, respectively [2].  

Imagine you’re in the same position *knocks on wood*. Lay offs are tough (period). 

In the case of outsourced services, it’s simply a matter of making a call, discontinuing the agreement, and ending things with a firm handshake. 

4. Motivation (extra)

It’s essential to provide your staff with constant attention to set the right mood and offer good leadership. Lack of it can lead to decreased motivation. Decreased motivation results in less productivity/quality of work. Less productivity/quality of work results in a worse product. Worse product = less income. 

Yes, I’m a fan of the Butterfly effect.

Once again, in the case of outsourcing, it’s not your responsibility to take care of your team’s motivation.

Full-time, part-time work?

Full-scope product development requires a team of professionals, including a tech representative, QA tester, UI/UX designer, PM, Architect, and other positions that may vary depending on the project. 

Even though these positions may not require full-time involvement in most projects, they play a crucial role. The Architect position, for instance, is the most expensive on the whole team. 

Depending on your situation, you have different options for hiring these professionals. If not insource, you can turn to HR agencies or outsourcing. Keep in mind that these choices come with the same mental and cost implications explained above. If necessary, you can mix hiring techniques and find the best fit for your business, depending on your vision and capabilities.

You can also use nearshore outsourcing for your projects

Conclusion

I’ll leave you on a philosophical note: Imagine a company that outsourced all of its services except for one founder who handles everything in-house. This hypothetical company would be like the ultimate agency: outsourcing office work, accounting, HR, and services. Would such a business be functional? What do you think?

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TL;DR

Outsourcing is more expensive than insourcing by about 15-20% when all direct and passive costs are considered. However, when focusing more on the non-financial factors that have a psychological impact, it’s ultimately up to the decision-maker to evaluate what’s more important.

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[1] https://upcity.com/experts/small-business-outsourcing-statistics-survey/

[2] https://mondo.com/insights/mass-layoffs-in-2022-whats-next-for-employees/