Outsourcing vs Subcontracting – What’s Best for Your Business?

Business executives frequently confuse outsourcing and subcontracting, but the two techniques are actually quite different. The main variations are based on how much control a business has over the work process and whether the task could have been done internally.

Outsourcing is a cost-cutting tactic that companies lean towards when functions that were previously handled inside are now carried out by people or companies outside the company that are not associated with it. It applies to many sectors inside a corporation and is frequently an element of the strategy to cut labor costs.

On the other hand, subcontracting is the process through which a business engages another person or business to carry out a specialized work that is often unable to be completed internally. The work is agreed upon on a contract basis, and subcontracting does not entail permanently assigning out entire positions or departments inside a company.

Outsourcing became a catchphrase as it gained popularity in the late 20th century, which made it difficult to distinguish between what counts as subcontracting and what is actually outsourcing.

Although there is a slight difference between outsourcing and subcontracting, it is crucial to distinguish the terminology when dealing with stakeholders and clients.

What is Subcontracting?

Subcontracting is the term used to describe the practice of hiring an outside organization or person to carry out a certain task as part of a commercial agreement or project. For example, as part of a bigger project, a digital marketing company might hire a copywriter to handle the content and copywriting tasks.

The majority of the time, a corporation will hire a different organization to complete a work that cannot be completed internally. The employing party has a decent amount of control over the procedure, and the subcontracting firm and the provider collaborate closely throughout the project.

Onshore outsourcing (partnering with a provider in the same country), nearshore outsourcing (partnering with a provider in a neighboring or adjacent country), and offshore outsourcing are the three location-based types of outsourcing (partnering with a provider in a more distant country).

Benefits of Subcontracting

By bringing in specific knowledge they might not possess internally, subcontracting enables businesses to take on enormous projects with ease. Many businesses also view a contract’s fixed nature as advantageous since it places responsibility on the subcontractor to complete a project or assignment by a specific deadline.

Compared to hiring full-time staff, working with a subcontractor is also less expensive, but some companies feel constrained by this lack of direct control over the caliber of the personnel working on their projects. Subcontractors typically operate alone on projects while outsourcing providers frequently collaborate closely with onshore partners on things like hiring, talent discovery, and staff development.

What is Outsourcing?

Processes that are outsourced typically may be carried out by a company’s own workforce. The business can reserve firm people for their critical activities by outsourcing some functions.

Payroll, operating, and administrative costs are meant to be kept to a minimum through the use of outsourcing. For example, a business may hire an outside provider to do its administrative tasks so that its employees may continue to concentrate on production or sales. The third-party provider completes the required task alone, coordinating whenever necessary.

In 1989, outsourcing was acknowledged for the first time as a business strategy, and by the 1990s, it had become a crucial component of international business economics.

Benefits of Outsourcing

In addition to avoiding the need to invest in relevant infrastructure, such as office space, technology, and equipment, working with a specialized outsourcing provider in nations with lower cost of living, such as the Philippines, can save labor costs by up to 70%. Although many businesses originally think about outsourcing for financial gain, they quickly learn it offers a number of other benefits.

This involves providing goods and services that are of a higher caliber as a result of having access to talent pools that are educated and enthusiastic about their profession. In-house personnel are better able to concentrate on more important and fulfilling activities thanks to the opportunity to outsource monotonous and time-consuming tasks, which boosts productivity and results in a more motivated workforce. Additionally, outsourcing gives companies the freedom to swiftly and effectively adjust their human resource levels to accommodate seasonal demand as well as unanticipated booms or slumps.

Subcontracting vs Outsourcing: Which Wins Out?

Customer service, IT, data entry, administration, marketing, healthcare, and financial services are just a few of the industries that outsourcing companies can provide services in. More significantly, they are masters at handling repetitive, tiresome tasks that demand constant concentration. Although subcontracting is most commonly associated with the construction business, it can also apply to other industries, including IT, finance, and customer service, though this is typically more common with large-scale projects.

With outsourcing, there is a direct chain of command between the provider and the onshore company. To guarantee clear lines of communication and responsibility, the two sides select representatives. Because of this, internal managers frequently have direct influence over hiring, defining KPIs, and directing the development of offshore workers. The hiring business effectively appoints a totally distinct entity – with its own employees and methods – to execute a project as they see fit, resulting in an indirect chain of command.

One significant similarity between outsourcing and subcontracting is that both have facilitated increased productivity, profitability, and timeliness for enterprises all around the world. The size and continuing nature of your project, the kinds of duties and activities you want to delegate, and how much control you want to retain will all play a role in determining which one is best for your company.