Subcontracting and outsourcing both involve the allocation of tasks outside of a firm. However, they have some important differences. As a business owner, it is important to have a sound understanding of the two terms so that you can opt for the ideal strategy.
What is Outsourcing?
Outsourcing is fundamentally a business strategy in which tasks that are done in-house are now being completed by a third-part vendor. For example, if a company from the US hires an agency in the UK to handle its eCommerce website operations, it will be an example of outsourcing.
There are 3 location-based types of outsourcing and they are, onshore, offshore, and nearshore outsourcing. Onshore outsourcing is the outsourcing of services to an external provider that is located within the same country. Offshore outsourcing is outsourcing services to a provider located in a distant country. Nearshore outsourcing is the outsourcing of services to a provider located in a neighbouring country.
Outsourcing helps companies save costs by accomplishing the same tasks for less money and allows them to focus on core areas of operation. Delivering products and services of higher quality becomes possible through outsourcing. It also allows labour flexibility as businesses can easily ramp up and down resources.
What is Subcontracting?
On the one hand, subcontracting is pretty close to outsourcing when a firm hires a service provider to complete the desired task that typically cannot be done by in-house teams. It is the practice of assigning, or outsourcing, part of the tasks under a contract to another party known as a subcontractor. Specifically, the subcontracting company and the vendor work closely throughout the whole project, and the hiring party has a reasonable amount of control over the work.
On the other hand, subcontracting does not involve permanently allocating out entire tasks or a firm’s departments and the job is usually agreed upon on a contract basis. An example of the subcontracting practice is when a large construction firm subcontracts some of its projects to the main service provider, also known as the contractor. The contractor can then hire subcontractors to complete the tasks.
Subcontracting allows businesses to handle large projects easily. Bringing specialized expertise to your business becomes possible through subcontracting. Increased productivity and decreased operational costs become possible through this practice.
Differences Between Outsourcing and Subcontracting
Outsourcing activities are in various fields, ranging from IT, data entry outsourcing, back office outsourcing, digital marketing, customer support, and more. Subcontracting is mostly prevalent in the construction industry and IT sectors. Outsourcing requires a direct chain of command between the hiring company and the service provider, but subcontracting doesn’t. The outsourcing contract is largely set by the service provider with little room for negotiation and control over the work. Subcontracting requires a higher level of control as you can negotiate and specify everything regarding the end product.