Differentiating Between Insourcing and Outsourcing
Whereas outsourcing means the acquisition of an intermediate input or service from an unaffiliated supplier, integration or
insourcing refers to the production of the intermediate input or service within the boundaries of the firm. "Outsourcing can be carried out in the home country of the firm, or in any number of foreign countries, and similarly for integration."
(Helpman, E., "Trade, FDI, and the Organization of Firms,"
Journal of Economic Literature, Vol. XLIV, September 2006, pp. 589-630, visited 2007-06-12)
Insourcing can refer to:
- International insourcing, also called insourcing abroad, or international intra-firm sourcing, meaning production in foreign affiliated firms; or
- Re-insourcing in the parent firm, also called domestic insourcing, or domestic supply: repatriating an activity to the original country and firm.
International Insourcing
International insourcing occurs when the lead company sources to foreign affiliates.
According to Dicken, "the traditional connection between production and market is broken. The output of a manufacturing plant in one country may become the input for a plant belonging to the same firm located in another country or countries. […]
Such offshore sourcing and the development of vertically integrated production networks on a global scale were virtually unknown before the early 1960s. […] These practices of international intra-firm sourcing have become an increasingly important mechanism of global integration of production processes."
(Dicken, P.,
Global Shift: Reshaping the Global Economic Map in the 21st Century, 4th ed., New York: Guilford Press, 2003, p. 248)
Domestic Insourcing
Domestic insourcing (or re-insourcing, domestic supply) is a mode of retrenchment (or repatriation of offshored production).
"In some cases, outsourcing is moving back to domestic markets and many companies are now looking at ‘
insourcing' their operations by internalizing operations that were previously contracted out. This movement […] can be termed ‘retrenchment.' The term also refers to the repatriation of offshored production."
(
European Monitoring Center on Change, visited 2011-06-12)
Bargaining for Insourcing
Insourcing can be considered as a strategy used to minimize layoffs by increasing the workload of employees. This can be accomplished by
insourcing work that is presently outsourced or subcontracted, transferring workers to positions elsewhere in the company, creating jobs, and encouraging and supporting the creation of small enterprises by employees.
Unions and employers may also agree to give employees the opportunity to bid in order to keep the work in-house or to repatriate in-house activities and functions that have been outsourced, a practice called "contracting-in" or "
insourcing."
(adapted from Jalette, P. and Poirier, I.
Subcontracting in the Canadian Manufacturing Sector:
Strategies and Motives of Local Actors, CRIMT, visited 2011-06-12)
Subcontracting to Employees
"
Insourcing" is used to describe a practice in which the employer effectively subcontracts work out to its own employees. This is done by helping employees establish a business and then contracting the work done by those employees to that business. These practices enable firms to reduce costs, but at the expense of working conditions, as workers then absorb the costs of their social protection.
(adapted from the
ILO, visited 2011-06-12)
Quasi-internalization
"In order to cut costs and limit investments that tie down resources and reduce the firm's agility, activities which are independent from the firm's core competencies should be externalized, i.e., managed through market links. Such specialization of the firm creates new needs for interfirm cooperation arising from coordination requirements between firms performing closely complementary activities (process of quasi-internalization – a strategy alternative to externalization and full
internalization).
Consequently, the reconfiguration of a firm's boundaries involves not only the externalization of independent, or standard competencies, but also quasi-internalization of complementary competencies." These new management strategies can be seen as forming a consistent management model, including:
- Internal development of core competencies;
- Externalization of standard competencies; and
- Quasi-internalization of complementary competencies.
(Prokopenko, J.,
Globalization, Alliances and Networking: A Strategy for Competitiveness and Productivity, ILO, visited 2007-06-12)