Internalizing Versus Externalizing: How to Utilize Both for the Benefit of Your Company Creating a strategy to evaluate the decision between internalizing and externalizing is essential for your success.

By David Jarrett

Opinions expressed by Entrepreneur contributors are their own.

Almost every single aspect of a company changes as it shifts from startup to small business to large, successful company. However, the core strategies regarding whether to internalize or externalize remain the same, and defining your approach to making this decision can be essential to building a successful company.

The deciding factors

Leveraging talent to meet company needs is critical in attaining your goals, and without the ability to do this well, you will likely struggle — and your growth will stagnate. Early-stage entrepreneurs tend to believe that internalizing as much as possible is important, and often don't consider the use of externalized talent or services. However, startups rarely (if ever) have the ability to perform all necessary roles well. Instead, they need to focus on understanding and nurturing their strengths while utilizing strong external partners and resources to fill in the gaps.

Your company can (and should) be a blend of both internal and external talent. When weighing the decision to internalize or externalize in your company, one of the first things to consider is whether a particular need is short-term or long-term. When evaluating a task, if you can determine that a certain need isn't going to last for longer than a year or doesn't have the potential to grow into a greater function, you might not want to risk time and money on hiring for that process.

Further, consider if you will be able to secure top talent in the specific industries that will shape your company. Another benefit to externalization is that it doesn't have to be permanent. Consider the importance of immediate performance. A new hire can be a risk, but externalizing to a credentialed outside partner can help increase the odds that the job will be done professionally. If you expect a long talent acquisition process, bridging critical functions by externalizing them temporarily can allow you to get work done at high quality while continuing to seek the right person for permanent hire.

Related: Why Growing Companies Need to Both Buy and Build Their Talent to Meet the Post-Pandemic Movement

Internalizing doesn't always equal success

Startups and smaller companies often spend significant time building their employee count, equating a higher headcount with greater success. In reality, externalizing tasks allows you to outsource support from experts in any given field, resulting in more agile, adaptable and effective organizations. You can leverage diverse skill sets at any given time and gain the added flexibility to dynamically scale your teams and capabilities. Companies that externalize often have higher profit margins and are left with more time to innovate and focus on high-value activities.

By contrast, fully internalizing mission-critical functions can actually be dangerous. Anyone who hires for a new role understands that, when it comes down to it, the hiring process is just a calculated bet. Like any gamble, it runs the risk of ending in loss. Leveraging a blended approach of both internal and external resources can actually better serve companies in fulfilling mission-critical functions with a lower risk profile than a strictly internalized team.

The ability to balance externalization is often a sign of a mature company that wisely manages its financial resources. Assessing your business model to identify where you can externalize gives you the space to focus internalization efforts where they matter most. You can't rely on externalization to build leadership pipelines, secure talent for consistent and long-term needs, or develop new intellectual property, but it will allow you the space to focus on the work that you and your internal teams are most suited for.

Related: A Healthy Approach to Hiring That Actually Works

How to make a decision

When weighing a decision to internalize or externalize, start with incisive questions. Clarify what you need to get done and what success looks like. Assess the impact that a project could have on your company. Map out the internal resources who have the necessary expertise to support the project or function, and think critically to identify gaps in capacity, capabilities or experience that might lower your odds of achieving your goals.

Related: Here's How to Know When You Should Outsource

Whether you choose to internalize or externalize roles and technologies, moving forward requires a leap of faith. Externalizing tasks has the ability to bring in top talent in areas where you are not an expert, creating better opportunities for company growth and increased revenue. Internalizing, on the other hand, can help develop talent for your core competencies and intellectual property. By creating a consistent approach through which you evaluate your needs, you are able to clearly see whether internalizing or externalizing is the best choice for any given scenario.

Wavy Line
David Jarrett

CEO of Rootstrap

David is the CEO of Rootstrap, an award-winning custom software development agency that has built web and mobile apps for startups, publicly traded companies, and public figures.

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