Business Dilemma: Outsource a Function or Keep it In-House?

All startups, including the most successful unicorns, were first merely a potential business idea. However, having a breakthrough idea is not enough for a success story.

No. The most important part is executing the idea and realizing it into a truly functional business.

In other words, if you don’t materialize your idea, it will hold no value.

As a founder, you probably won’t have the technical expertise, infrastructure, financial expertise, knowledge of laws and regulations, and most importantly, a team to turn the idea into reality. (Suggested Reading: How to know that you are hiring the right people for your startup?)

So, like any other business, a new startup also finds itself at a crossroads. You will have to choose between two paths lying ahead of you:

Build all expertise in-house
Outsource functions you lack expertise for

Now, that’s a big dilemma for any business with a new idea and looking to launch its new product (1, 2).

So, how would you make a decision? Keep on reading this guide.

Typical Business Functions

Before diving further into the battle of in-house vs. outsourcing a business function, it is essential to understand typical business functions regardless of what kind of business you run (3).

Production
R&D
Purchase
Marketing
HR Management
Finance and Accounts

Outsourcing Vs. In-House

Whenever you aim to create a successful business, you first need to understand that running a company means taking on a lot of responsibilities, both familiar and unfamiliar.

And if you know what responsibilities and tasks you can outsource and build in-house from the start, it could be the secret to your success story.

The Benefits of Keeping Business Functions In-House

There are many reasons why you and any other founder would want to keep your business functions in-house.

It means that you – the founder, and the entire founding team keeps experts in-house and arrange a workspace for everyone to work in collaboration to run your business (4, 5).

The major benefit of keeping all the business functions in-house is that your entire team works under the shared cultural values and working methods.

You Can’t Outsource Your Core Offerings

You may want to choose in-house development if your offering is primarily based on proprietary technology or method (6).

For instance, your target prospects are tech experts if your business offers API development via a specific framework. In such a case, you can’t compromise on it at no cost. In short, you can’t hand over your core offerings.

In contrast, if you are running a company like Uber, technology is at the secondary level, and your introductory offer is helping people find rides. In such cases, you can outsource your technology without compromising your commute facilities.

Full Control

Control is one of the major things that worry founders the most. Most entrepreneurs are passionate about their products and are ready to wear many hats to keep things under their control.

And if you choose to outsource, you are giving up this control. Meanwhile, in-house, you can keep a tab of everyday progress on the development. You know what each staff member is working on and can promptly offer remarks for smooth progress.

More F2F Team Interactions

Many entrepreneurs out there believe that face-to-face interactions with their team are necessary while working on anything. While we hope this gets changed soon, no level of discussions over calls, collaboration tools, Zoom meetings, etc., can meet their needs.

And with an in-house team, you can be assured about that. You can go over to your staff’s desks and have a discussion. With an in-house team, you will also be able to see the progress and changes first-hand.

In short, if you wish to build a team with whom you can interact face to face, in-house development is what would be best for you.

In-House Team Enables Quick Changes

Another critical factor that often compels most founders to keep their functions in-house is quick iterations. After all, there is greater flexibility with changes if you have an in-house team, especially when you don’t clearly understand certain aspects of the function.

Hence, it is better to stick with an in-house team instead of outsourcing when you know there will be a lot of changes.

Challenges with an In-House Team

Greater Costs, Especially If You Have Limited Funds

When it comes to building an in-house team, you don’t have to consider the budget for hiring the right staff. You will also need to consider relevant software, system, infrastructure, licenses, training, and other overhead costs.

We don’t need to say more to justify that developing an in-house team is a lot more expensive than outsourcing. Hence, it is not at all advisable if you have budgetary constraints (7).

Lack of Expertise

Every business function will need individual expertise. And you can’t employ the same team for all the products.

In other words, if you hire certain experts for particular expertise, you would have to keep them idle until you need them the next time.

You May Get Distracted From Bigger Goals

As a founder, you may have some big goals for your startup. Most never want to stop at one thing. However, if you focus your time and resources on building other aspects of your business, you may get distracted from your big core goals.

Of course, an in-house team will give you complete control over your business. However, it may keep you from making innovations (8).

Scaling Issues

As you grow your company, you will need more members in your team. Similarly, there will be situations when you don’t need certain staff members or experts.

And it is not ideal for businesses to frequently hire and fire team members.

Therefore, you are likely to get stuck with a big team with no work and overload your small team. Neither are the best scenarios.

Outsourcing will solve this issue since it allows you to expand or narrow the team as per your need.

Your Main Person Can Walk Out Anytime

You will find yourself stuck if the person handling the majority of the work walks out.

Even though you set up the entire team complete with a range of systems and infrastructure, there is always one team member who takes up the leadership position. And if that person walks out, everything you have done so far may require some major reshuffling.

It can be easily solved if you outsource since there is no main person.

The Benefits of Outsourcing

With the discussion we have done so far, we can say that running a business is a tedious process. You will need extensive processes and perhaps multiple changes. Even then, there would be certain errors that can halt your business growth.

Of course, without a dedicated team, it would be hard to run any startup successfully. However, you can easily overcome several hassles if you outsource certain business functions (9, 10, 11).

You Get an Experienced Partner

It is arguably one of the major benefits of outsourcing: you will get to work with an experienced partner. In other words, the outsourcing company will add the experience and expertise you need to run your business smoothly.

Outsourcing a business function offers you an edge as it balances the lack of expertise and experience you lack.

The Freedom to Scale Up and Down

As we mentioned above, in the challenges of building an in-house team, you will have the flexibility to scale your team when working with an outsourced company.

In fact, with the right partner, you do not even have to worry about scaling. The outsourced company would analyze your product needs and keep adding new experts as per your needs.

Cost-Effective

As mentioned, there are several costs involved if you wish to build an in-house team. And if you have limited funds, it is always better to outsource certain business aspects – functions that are not primary or core, so you won’t have to compromise on your company’s overall quality.

Faster Development

When it comes to startups, your market can outgrow you anytime. Hence, faster development is the need of the hour at present.

You will need to build your business and do it fast. Otherwise, it is not rare to find your name replaced by a competitor.

Fortunately, speed is guaranteed with an outsourcing company. And since they work within a committed time frame, you will find yourself in the market in no time.

They have the entire team ready for the function – saving your time putting together an in-house team.
With their right expertise and experience, you also save time on testing and errors.
There would be no unwanted delay since outsourcing companies offer to complete your work within the committed time frame.
You also get the freedom to select the outsourcing company as you deem fit.

You will Get a Happier Founding Team

Startup teams work best when they all share the same mindset and passion where everyone can do everything on their own. However, you can’t try to be a master of everything. Otherwise, your entire team will end up overwhelmed and frustrated.

With an external team, you will have experts handling all the secondary needs while your core team manages the bigger goal. In short, everyone will be happier, and you will get the desired results.

Challenges With Outsourcing

At this point, you would think that we are praising outsourcing a little too much. However, it doesn’t mean that there are no challenges even when outsourcing your business functions.

While they are not as big as those with in-house team building and running, they can be a bit demanding. And these challenges often make startups stray away from outsourcing (12, 13).

Miscommunication

Communicating with an outsourced company is undoubtedly not as effortless as an in-house team. When working remotely, there are always chances of several things being missed out or misunderstood.

Despite this, you can easily overcome this obstacle with remote working tools, effective communication, and proper documentation.

You May Lose Control If the Contract is Not Fool-Proof

Outsourcing needs both parties to have a solid trust. And you may lose control if the outsourcing contract is not fool-proof (14).

It would be best to define the extent to which the outsourcing company can exert control over the project, technology, etc.

Unrealistic or Unfulfilled Expectations

It won’t be wrong for you to have high expectations from the deal, especially after considering the expertise and experience of an outsourcing company. However, suppose you believe that once you collaborate with an outsourcing company, they will care for everything for you. In that case, it can lead to a major failure. Don’t have those unrealistic expectations.

Instead, consider discussing every detail to avoid such scenarios. To eliminate any unsaid expectations, get an estimate that includes the contract terms, covered and what is not in the contract, project scope, time frame, budget, IP protection, confidentiality, etc.

It is best to sign the deal with relevant legally binding documents and a non-disclosure agreement.

The Final Verdict

The overall analysis shows that outsourcing is a clear winner if you are looking to grow fast. However, it is not recommended to outsource your core business offering.

Below are the signs that you need to consider when outsourcing a business function.

If you find yourself buried in non-industry-related tasks, consider outsourcing them.
If you don’t specialize in a particular area, common examples include legal, HR, business administration, accounting, etc.
Suppose your business is witnessing rapid growth, or you have stretched in multiple directions. In that case, you may need to outsource since activities that used to be manageable will become too big to handle.

Wrapping Up

There are several reasons to outsource a function of your business. However, when it comes to choosing between building an in-house team or outsourcing some of the responsibilities, the key is to take a thorough, introspective look at your company and find areas that are worth handing over to third parties (15).

After all, many things can go wrong with outsourcing if you start outsourcing the wrong activities or choosing the wrong company.

And now you know how you can leverage outsourcing, even simple business activities, with this review.

Be sure to choose well and make the most of your in-house team and partner so you can focus on the bigger goal and get there soon.