Outsourcing vs Insourcing for Tech Startups

Varun Omprakash

Content writer at Flexiple. Passionate about sales. Loves reading.

Last updated on20 Feb 2024

In this blog post, we take a look at outsourcing vs insourcing in the context of software development at a tech company and understand which one is the best based on use cases.

What is Tech Outsourcing?

When you hire an external entity or person, like a contracting firm or freelancer to work on a job, it is known as tech outsourcing.

Outsourcing vs Insourcing: What’s the difference?

Insourcing

Insourcing is the process of hiring an employee in-house to fulfill a position in your company. Whoever you hire will be on the company payroll, and will enjoy the perks and benefits that are typically offered by your company.

• Companies generally hire in-house employees to fulfill core business functions. These ‘core’ roles are related to tasks that provide direct value to the customer.

• For example, in a company that manufactures bicycles, the roles directly involved in manufacturing, like the site engineers, mechanics, etc. would be ‘core’ roles.

Outsourcing

Outsourcing is when you hire someone external entity or a person, like a contracting firm or a freelancer to complete a specific job or even recurring jobs.

• Typically, but not by rule, companies outsource jobs that are non-core. An example of this would be a SaaS company outsourcing the maintenance of its office building, or a manufacturing company outsourcing the development of its website.

• Across industries, businesses tend to outsource their end-to-end software development to development agencies, or ‘dev shops‘. Here, the dev shops take up the product development in its entirety, and the onus is on them to deliver the finished article.

• If companies want to have more close control over the product, they prefer to hire contractual developers to work alongside their internal team. By hiring talent on contract to supplement their existing team rather than replace it, quality standards can be easily controlled.

Bottom line, companies choosing to outsource or insource certain skills comes down to whether:

• There is a pressing need for the skills to be in-house, or
• An external entity can do a better job in one or more parameters: skill, time, money, and/or effort.

Problems with in-house hiring

Hiring in-house employees is beneficial on many fronts and is often preferred by most companies when given a choice. However, it does come with a few difficulties, like:

1. Long recruitment process

It takes a long time to find, interview, and hire permanent employees. In the tech industry alone, it takes an average of 55 days to fulfill an engineering position. In addition, commitments such as notice periods further delay the time taken to join the company.

The effort spent here by the company’s recruitment to carry out the hiring process should also be taken into consideration. If the company ends up making a bad hire, the lost opportunity cost can be substantial.

2. Dipping employee-employer loyalty

The average tenure of the workforce is currently 4.4 years but has been dipping as more millennials enter the workforce. According to talent managers, a large fraction of resumes right now are filled with job stints of just a year or two.

Of course, companies spend many months training their employees. Therefore, losing them in less than a couple of years is a huge waste of resources spent in this process.

3. Reduced flexibility

A company’s agility and ability to adapt its workforce to the market’s needs is a huge advantage.

For example, in certain situations call for scaling the company’s workforce fast, sometimes to solve a highly-specific problem. In such scenarios, going through the lengthy and resource-intensive process of hiring in-house employees can be hugely limiting to a company.

Outsourcing vs Insourcing: Which is the right one for you?

Of course, both – outsourcing and insourcing – come with their own benefits and drawbacks. Each is better suited to solve a particular use-case.

Let’s discuss a few factors that can help you decide which one would be the best for you.

1. Stage of company

Early-stage companies and startups can find it very hard to compete with larger companies for great talent. At the same time, quick product development cycles and rapid iteration is also a critical aspect of their growth, which means they can’t afford to lose time in long hiring processes.

With hiring full-time permanent employees being a costly and time-consuming ordeal, startups can save time by working with contractual talent. Of course, it would be a good idea to find a core employee with or around whom the contractual employees can work.

2. Core business function

As mentioned in the first section, businesses tend to outsource jobs that are not related to their core business function. However, there are certain exceptions to this, especially for startups.

For example, if you’re an early-stage tech startup without a technical co-founder, it can sometimes be more beneficial to outsource the development of the MVP. This frees up bandwidth for the non-technical founders to work on other important tasks.

However, once you are ready to scale, it is important to hire a core team member (maybe a CTO or someone with similar capabilities) who would work full-time to handle the development. Needless to say, such a person can be assisted by external and/or internal help, ensuring that your USP in tech lies within the company.

3. Speed of delivery

As discussed, hiring permanent employees involves extended interviews to evaluate candidates, negotiations, and possible delays due to a notice period, employee induction, etc.

So if there is a need to hire people fast to keep up with tight product deadlines, outsourcing is the best option as it is much less time-consuming. However, if the objective to hire is with a long-term vision in mind, insourcing could be better.

Also, in cases where there is a long-term need for someone, the stringency of fit becomes higher. This makes it tougher to find the right person. Clearly, companies can’t stop or postpone work as a consequence.

Until you find a suitable replacement, hiring a contractual employee to augment the team on a short-term basis could be smart. This allows you to meet internal deadlines, while still not hurrying the process of hiring a quality permanent hire.

4. Duration

Hiring permanent employees for one-off or short-term projects is quite tricky, possibly even unethical, as they would be rendered redundant once the project is completed. Hence, for such short-term projects, it is better to hire talent on contract and outsource the work as the cost savings are significant.

For long-term projects that require a regular and consistent workflow, it is best to focus on building an in-house team. However, if you are open to working remotely in perpetuity (which is fast becoming the norm), you can save money by employing talent on long-term contracts. You can also negotiate a discounted price with them in return for a long-term commitment.

Also, Software developers with a lot of experience and skills in competitive fields are courted by many suiters with lucrative offers. It is hence cheaper to hire them on a need-basis than permanently.

5. IP-related risks

Intellectual property (IP) – related risks is an ostensible issue that sometimes hinders companies from deciding to hire contractual talent. The notion that a company’s IP is safe only when its employees are under constant supervision and are physically present in the office aren’t true.

The future of work is remote and distributed, with employees working independently in various parts of the world. This will test and eventually break the often-held association of safety with a close presence nearby.

However, in any case, companies can execute legally-binding contracts that can be enforced in case the need arises. So, from the perspective of having a legal recourse, hiring on contract is as safe for IP as insourcing.

Another concern that companies have is about these talent meeting the company’s quality standards. This is a legitimate concern due to the noise in the tech talent hiring market, but vetted tech talent platforms like Flexiple and Toptal have made it very easy to hire quality talent without risk.

When is Outsourcing the clear option?

So to summarise, outsourcing your work to a contractual employee is the best option when any of the below points are satisfied:

1. Build a flexible workforce and want to take advantage of worldwide talent
2. Hire people fast in order to meet product goals
3. Work required is on short-term projects
4. You wan to reduce bloated overheads and keep costs low
5. Hire experts in a niche technology when needed
6. Increase your internal team’s bandwidth

Using a mix of Outsourcing and Insourcing

Remote working has become the norm across the world and the coronavirus pandemic has accelerated its adoption. The differences between working with an in-house team vs contractual employees are getting blurred for companies.

Working with them in the past required stringent protocols (like perfect documentation) and extra effort in communication to make it work. With the growth in technology and the adoption of remote tools, the entire process has become easier.

Overall, companies can no longer take a hard stance on going only one way or the other. Rather, companies need to align with the goal of the particular case in question.

There are many websites that make the process of hiring tech talent on-demand friction-less and risk-free. Read more about our picks here.