Five years ago, outsourcing work overseas looked like the future of doing business. Major U.S. companies such as General Motors and Caterpillar were outsourcing aggressively to bring down costs and at the peak of the outsourcing movement, about 30 percent of call center jobs were sent overseas.
However, the benefits of outsourcing are beginning to look like short-term fixes rather than long-term solutions, and the very same companies that touted this movement are now bringing many of their divisions back to the U.S.
For instance, GM has since moved its entire IT department back in-house to become a faster, leaner and more unified company and currently only about 12 percent of its call center jobs remain offshore. Other businesses like Disney and Microsoft have offshored work to India recently. Yet experts are now predicting that the technological and back-office work being outsourced will wane after 2014 and dry up entirely by 2022 as the market for the work being offshored has been saturated. It's just not a few big-name companies feeling this way -- many businesses, big and small, are pulling back on outsourcing to other countries.
For those entrepreneurs that recently launched a company, here are a few reasons to consider insourcing along with determining what functions to bring back in-house.
Why insourcing is the future for startups
- Decreases supply chain vulnerability, saving startups from potentially disastrous setbacks.
- Keeping work in-house streamlines operations, which drives down costs.
- Insourcing generally means better customers service -- a serious competitive advantage in its own right.
- Because talent is such a precious commodity in the startup community, hiring skilled full-time employees can actually increase a company’s valuation.
- Training employees in-house allows a startup to expand its skill set and improve its core competency.
Most importantly, insourcing means maintaining full control of the company’s operations. One of the reasons GM brought its IT department back was because it believed it could speed up the entire product development cycle with employees who were trained to meet its standards. What GM spent on higher employee salaries, it regained with quicker turnarounds.
Deciding which functions to outsource
While outsourcing can still be a viable solution for some companies looking to cut costs, it’s important to first consider whether a function falls within your startup’s core competency. Is a function essential to your company’s business model? Does the department in question have the potential for innovation? Will it need to adjust as your company pivots? If so, then outsourcing may actually cost more in the long run and cripple your startup’s ability to adapt.
However, if the function isn’t your business’s core competency, perform a cost/benefit analysis. Are the costs of developing and executing internal processes greater than their potential future value? This value can be measured in the form of a defensive play (e.g., a barrier to entry) or numbers that will lead to increased margins. Can another company perform the function better than you can? If so, insourcing this function may not be worth it.
For instance, many startups choose to automate functions such as HR and accounting using services such as Zenefits or inDinero. These areas are often outsourced as they’re not a core competency and the costs of keeping them in-house usually outweigh the benefits of a dedicated staff member in the beginning.
Instead of outsourcing core functions (for cost reasons), startups hoping to grow quickly should look to develop airtight processes and technology to streamline in-house functions such as marketing, lead generation and customer-relationship management.
While outsourcing will always have its place, it should rarely -- if ever -- be front and center for your company. Startups should seek to grow their companies with a strong foundation of in-house talent and technology rather than rely on an army of outsourced help.