Insource or Outsource: How to Choose the Best Option

At some point, every small business owner stands at the crossroads of “I need more help—should I insource or outsource this work? “ Either option requires time, effort, and due diligence to implement, so how do you choose?

Fortunately, you don’t have to flip a coin to make your decision. Following a few basic guidelines will help you to sift through the pros and cons of hiring an employee versus contracting with an external resource.

Why Hire a New Employee?

There are 3 good reasons to hire a new employee: it will keep employees engaged, protect your competitive advantages, and diversify your workforce.

Employee Engagement

Engaged employees often improve customer loyalty and increase a business’s revenue. An optimistic employee who goes the extra mile to help a customer or teammate contributes more to your company’s success than a disengaged employee counting the minutes until quitting time.

Source: “Developing and Sustaining Employee Engagement,” SHRM.

Assigning meaningful work to an employee encourages them to remain engaged by growing their skills and providing an internal career path. If you hand out all the “cool” projects to an outsider, you may find yourself with a team of unhappy employees. You may have an existing employee who would like to tackle the new project—so promote them and then hire a new employee to fill their vacant position.

You can also use your new project as a recruitment tool. People aren’t likely to line up at your door for a job vacancy for filing paperwork, but if that opportunity instead includes “decreasing operating costs by converting paper processes to digital”? Well, then you might be sifting through resumes for days.

Protecting Competitive Advantage

Outsourcing the heart of your business is never a good idea. If your claim to fame is your 4th-generation secret BBQ sauce, then you don’t want to outsource its production, as your customers probably envision you standing over the pot stirring it.

But more than perception or non-disclosure issues, your competitive advantage is what makes you, well, you. Hiring in-house makes sense, as you don’t want to give that advantage away or diminish it. Just make sure you know what your competitive advantage really is. For example, Zappos’ competitive advantage is its focus on customer service, not what shoes it sells.

Your employees’ collective memory—aka your business’s internal knowledge base—may also be a competitive advantage. An external contractor won’t be contributing to that knowledge base once their contract ends.

Think of it this way. SOPs are golden, but every company has those undocumented one-off scenarios. Employees, not contractors, will remember why a specific customer requires all shipments on Wednesdays rather than Fridays.

Diversifying Your Workforce

Hiring employees rather than contractors can diversify your workforce, allowing you to meet your diversity and inclusion goals and maybe even help you outperform your competition.

And if your business needs allow it, you could hire and train employees remotely, opening your candidate pool even wider.

Why Outsource Your Work?

Your small business could benefit from hiring contractors to supplement existing staff, provide specialized expertise, support customers round-the-clock, and even control costs.

Supplementing Staff During Growth Phases

If you experience a surge in demand for your services, hiring contractors or freelancers can help you keep up with demand. For example, businesses in a growth cycle—such as the cybersecurity or longevity industries—may find it beneficial to hire contractors to help their customers while they ramp up their employee base.

Suppose you have the opportunity to gain a high-value customer, but your existing staff doesn’t have the bandwidth to onboard that additional customer. A cost-benefit analysis might clearly show the benefit of hiring external contractors to help—and if it does, perfect. However, the math might indicate you’ll lose money if you hire contractors to onboard the new customer. In that case, trust your judgment: the customer’s long-term value may outweigh any initial red numbers related to using external resources.

Short-Term or Specialized Projects

Another reason to outsource work is to get over brief hurdles like short-duration projects or specialized tasks.

For example, maybe you need someone to perform 80 hours of data entry into your new online ordering system. Contractors can fill that short-term role so that employees can continue their regular duties.

Contracting with an external expert for projects that require specialized skills may save you time and money. Is it economical—or advisable—to have an employee figure out the best hosting company for your new company website? Probably not. Hire an IT consultant and let your employees focus on learning how to put content on the website.

You can also hire an agency to offload some of your non-core processes. For example, if you’re struggling to keep up with HR demands, you could contract with a professional employer organization (PEO) to help.

Sometimes it’s even useful to hire an outside resource to help you discover what you don’t know. Suppose you’re considering automating some of your business using AI. Do you even know what questions to ask?

Providing Round-the-Clock Support

A contractor in a different time zone can provide customer support outside your employees’ standard work hours. Of course, in this age of digital nomadism, it’s also possible to hire an employee in another time zone to backfill this.

Controlling Costs

At a glance, hiring outside resources often looks more expensive than the cost of an employee. But if you consider balance sheet numbers such as variable costs and R&D, then external resources may be cheaper.

Contractor expenses are categorized as variable costs, as opposed to fixed costs for salaried employees. This differentiation makes it a manageable expense to decrease when your purse strings need to be tightened or if you need wiggle room to meet year-end projections.

Similarly, hiring external experts could reduce your budget’s R&D line item. Would you rather pay for 6 weeks of consulting time or 6 months of employee time (including R&D) to evaluate a software purchase?

Insource or Outsource?

There’s no hard and fast answer for when to insource versus outsource since your business needs are unique. Neither option is easier than the other. Hiring an employee requires recruiting and onboarding time and expenses. Hiring a freelancer or contractor requires detailed project scoping and then finding the right contractor for the job.

Sometimes, it’ll be an evolution—an outsourced role ultimately converting to an internal position. With some luck, your contractor will hire on, providing you with a seamless transition.