How to Compare Outsourcing vs. Hiring In-House

Should you hire someone or outsource the work?

It sounds like a simple cost comparison, but the hourly rate rarely tells the whole story.

An employee may look cheaper until you include benefits, recruiting, training, software, equipment, workspace, and management time. An outside provider may charge more per hour but already have the tools and expertise needed to get the work done.

The better question is not, “Which one costs less per hour?” It is, “Which option makes more sense for this work?”

Start with the fully loaded in-house cost

Salary or wages are only part of the cost of an employee.

Depending on the company and jurisdiction, total employment cost may also include payroll taxes, insurance, benefits, recruiting, training, software, equipment, workspace, and management overhead.

Those costs vary considerably, so this should be treated as a planning framework rather than a tax or legal calculation.

Then calculate the real outsourcing cost

Outsourcing can look simpler because the vendor sends an invoice. But there may still be other costs to consider.

• Vendor fees
• Setup or onboarding
• Contract management
• Change orders
• Communication time
• Price increases
• Switching costs

A cheap vendor that requires constant supervision may not actually be cheap.

How often do you need the work?

Frequency matters.

If you need a specialist for five hours a month, hiring a full-time employee probably does not make sense. If the work has become a daily part of the business, continuing to outsource it indefinitely may become expensive or cumbersome.

Volume can change the answer over time.

How important is control?

Some work needs tight day-to-day control. Other work simply needs to be completed correctly by a deadline.

Internal employees are usually easier to direct closely. Outsourcing means depending on another company's priorities, processes, and availability.

That tradeoff matters more for some functions than others.

Where does expertise live?

Specialized work often favors outsourcing because an outside provider may perform the same task for many clients and maintain expertise that would be expensive to build internally.

On the other hand, work that depends heavily on company-specific knowledge may be better suited to an internal team.

Think about risk too

Outsourcing a critical function creates dependence on a vendor. Bringing everything in-house can create dependence on one employee.

Neither option is automatically safer.

A useful decision framework looks at four things together:

Cost, frequency, strategic importance, and required expertise.

Outsourcing tends to make more sense when the work is specialized, irregular, or difficult to maintain internally. Hiring becomes more attractive when the work is frequent, strategically important, and expensive to keep purchasing from outside providers.

And the answer can change. What makes sense at $500,000 in revenue may not make sense at $5 million.

Related reading: How Much Does an Unfilled Position Cost a Company? →