Difference between Outsourcing and Subcontracting

Outsourcing

Outsourcing is primarily a business strategy wherein the tasks (which are a part of a business function) that were being done in-house are now being performed by a third party vendor. For example, if a US-based company hires another firm in India to handle their website, this process is called outsourcing. It is important to note that outsourcing is primarily a measure that helps in cost-cutting by getting the tasks (which were earlier being done by the employees) completed with the assistance of individuals and businesses that are not affiliated with the firm. Many companies have increasingly warmed up to the idea of outsourcing because of its cost advantages. It also helps the main company to let another service provider perform the task within a lesser duration and with greater quality output.

There are three major ways in which the process of outsourcing takes place. These three methods are described below:

  • Onshore outsourcing – The onshore outsourcing process involves a company delegating a branch or part of a business function to an external service provider that is also located in the same country.
  • Offshore outsourcing: The offshore outsourcing process takes place when a firm delegates a part of its work to an external service provider that is located in a distant country.
  • Nearshore outsourcing: The nearshore outsourcing process involves a firm delegating a part of their work or a business function to a third-party vendor that is located in a neighbouring country.

Subcontracting

Subcontracting is a process which involves a company hiring another individual or firm to complete a specialised task or function that the internal team is not equipped to perform. It does not involve allocating out entire departments or jobs on a permanent basis. It is just a contractual agreement between the two parties for a limited time period. Subcontracting traditionally involves the practice of bringing in an outside company or an individual and asking them to take control of specific parts within a business contract or a project.

It is important to know that in most of the cases, a company focuses on subcontracting another business to help them perform a particular task that cannot be handled within the firm. The subcontracting company, as well as the provider, combine forces to work closely throughout the completion of the project, and the hiring party has the bandwidth to a reasonable degree of control over the entire process. If a building company gets hired for constructing a model house, but their staff is not skilled in the area of interior design, then the builder will make a decision to subcontract the decor out to complete the job.

Difference between Outsourcing and Subcontracting

Both outsourcing and subcontracting have their benefits for any company in the long run in terms of cost and time efficiencies. There are a number of similarities between the two as well. However, it is important to understand that there are some major areas of difference between outsourcing and subcontracting, and we need to discuss them in the below table to get a much better insight into this topic:

Outsourcing

Subcontracting

Definition

Outsourcing is mainly a cost-cutting strategy wherein a business allocates out entire business functions within their firm to a third party on a permanent basis.

Subcontracting is a process where a business hires an outside individual or organisation to perform a specialised task that cannot be completed internally.

Duration

Outsourcing is generally done on a permanent basis.

Subcontracting is generally done on a temporary basis.

Control

An outsourcing contract is formulated by the service provider, but they don’t have much control over the work.

Subcontracting involves a greater degree of control as the service provider can negotiate and specify all the details regarding the end product.

Sectors

Outsourcing plays a greater role in sectors like information technology, digital marketing, data entry and customer support.

Subcontracting is more prevalent in construction and other large scale industries.

Chain of command

Outsourcing involves a direct chain of command between a company and their service provider.

Subcontracting involves an indirect chain of command wherein a company directly communicates with their contractor, who in turn delegates the work to the subcontractor.

Conclusion

Both outsourcing and subcontracting are extremely important facets of today’s business world. It helps the company achieve cost and time efficiencies without compromising on the quality of work. While companies appreciate the difference between outsourcing and subcontracting, they are also looking forward to reaping the benefits out of these two practices, both in the short and long run.

Frequently Asked Questions

What are the main pros and cons of outsourcing?

The major pros of outsourcing are as follows:

  • It helps companies to cut down their overall costs by performing the same task for lesser money
  • It allows the firm to focus on their core functions
  • It can help provide a better quality of product or service

The cons of outsourcing are as follows:

  • The company that is outsourcing its business function to a third-party vendor may end up in losing managerial control
  • There may be issues like improper communication and language barriers between the two parties
  • Outsourcing may lead to hidden costs and quality control issues

What are the main pros and cons of subcontracting?

The major pros of subcontracting are as follows:

  • It helps companies to handle large projects with greater ease
  • It is comparatively less expensive than hiring employees on a full time basis
  • It helps to bring specialised expertise to the business that is not present among their employees

The cons of subcontracting are as follows:

  • There is zero scope for the staff developing expertise in the function that they are subcontracting on a regular basis
  • Contractors may have to spend excessive time looking for subcontractors, which may hamper the quality of output

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