Forming your Startup Team: Insource vs. Outsource

People in smaller companies or in small pockets of big companies don’t always have all the skills they need to achieve what they aim for. And that’s when they ask themselves a question: how do I get these skills?

One option is to go to a seemingly expensive external market. For example, if an external charges 200 euro per hour you might think that “it is quite a lot, maybe I should just hire somebody and they will be in-house and it will be cheaper because I only need to pay them 20 euro per hour”. What they don’t think about is they actually have to pay them the holidays, insurance, and many other things that are not visible at first sight.

Let’s assume that a company pays an employee 100 thou euro per year. Out of that, the person will receive about half of it because of taxes. You, as an employer, have to pay more than 100 because you have to pay other costs like liabilities, insurances, and other coverages and other taxes to the government on top of what is the cost of the employee. Depending on the country that can go all the way up to double. On average it will be about 50% more so your employee which is 100 may end up costing you 150 thou per year. So an external that costs you 200 euro per hour becomes much more economical.

Besides the cost, there are a few clear advantages to contracting externals.

First of all, they offer you skills needed on demand. An example could be an event organizer. Unless you run an events company, how many times per year do you really need the services of an events organizer? Maybe two or three. To have this position in-house would be both pricy for you and demoralizing for your service provider as their highly specialized skills are not being utilized.

The second advantage is the short-term nature of the contract and no strings attached. If you realize you don’t need these services or they are not what you expected, you can easily end the cooperation without hard feelings or penalties on either side. For small companies starting from a one-man business to a group of about 5–8 people that can offer an ability to move fast and deliver the highest quality results.

Another important plus of externals is full accountability for what they deliver. A member of the in-house team could justify underperformance by the lack of cooperation in the team. But if you outsource a job, the service provider has sole responsibility for delivering you the results you expect.