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Business executives often blur the line between outsourcing and subcontracting but the two practices are quite distinct. The primary differences lie in the amount of control a company has over the work process and whether the work could have been performed in-house.
Outsourcing became a buzzword as it became increasingly popular in the late 20th century, causing confusion between what qualifies as subcontracting and what is truly outsourcing.
Key Takeaways
- Outsourcing and subcontracting both involve allocating jobs outside a firm but have important differences.
- Outsourcing is considered a comprehensive cost-cutting strategy used by a business that seeks to permanently allocate entire jobs or departments within a firm to an external firm.
- Subcontracting involves hiring an outside firm or individual to complete a specialized task that can’t be done internally and is usually temporary by design.
- Both outsourcing and subcontracting have become controversial practices.
Outsourcing vs. Subcontracting: An Overview
The difference between outsourcing and subcontracting is subtle but it’s important to define the terms when businesses deal with stakeholders and clients.
Outsourcing is primarily a cost-cutting measure where tasks done in-house are being completed by individuals or businesses outside the firm. They’re not affiliated with the company. It’s often part of a company’s strategy to reduce labor costs and it can apply to many areas within a firm.
Subcontracting occurs when a company hires another individual or company to complete a specialized task that typically can’t be done internally. Subcontracting doesn’t involve permanently allocating out entire jobs or departments within a firm. The job is agreed upon on a contract basis.
Outsourcing
Tasks that are outsourced are generally processes that could be performed by a company’s internal staff. The company can reserve company personnel for their key tasks by outsourcing some functions.
Outsourcing is supposed to provide a cost-efficient solution to keeping payrolls, operating expenses, and overhead low. A company might contract an outside provider to manage its administrative work so its staffers can remain focused on production or sales. The third-party provider works independently to perform the necessary task, communicating on an as-needed basis.
Outsourcing was first recognized as a business strategy in 1989 and it became an integral part of international business economics in the 1990s.
Subcontracting
Subcontracting is an older business term. It traditionally refers to the practice of bringing in an outside company or individual to perform specific parts of a business contract or project.
A company subcontracts another business to perform a task that can’t be handled internally in most cases. The subcontracting company and the provider work closely throughout the project and the hiring party has a reasonable amount of control over the process.
Say a builder is hired to construct a model house. The builder’s staff is perfectly qualified in all aspects of construction but this is a model house and the construction workers aren’t skilled in interior design. The builder subcontracts the decor to complete the job.
Special Considerations
Both outsourcing and subcontracting have become controversial and the distinctions between them have become blurred. Some companies are firing these staffers and outsourcing their jobs to be performed off-site rather than freeing up internal staff to do other tasks.
Important
Outsourcing has decimated many industries in developed countries as companies move jobs overseas. Manufacturing is a prime example.
Some much-debated practices in outsourcing include:
- Outsourcing jobs to overseas companies that pay substantially less gives rise to accusations of substandard working conditions and even child labor made against some contractors abroad
- Outsourcing to overseas companies that have inadequate safety standards
- Outsourcing routine administrative tasks such as bookkeeping to crowdsourcing sites that may pay pennies per task.
What Are Overhead Expenses?
Overhead expenses fund business operations. A business would be unable to operate, at least for long, without the fundamentals that these expenses pay for. They include rent, mortgage, and utilities for the premises where the business operates as well as required insurance coverages.
What’s a Negative Example of Outsourcing?
Many American pet food brands were recalled in 2007 after several pets were poisoned. The food was produced by a Chinese contractor who cut production costs by replacing wheat gluten with melamine, a poisonous substance.
How Does Outsourcing Affect Workers?
Outsourcing reduces or eliminates in-house departments by subcontracting their functions to other companies that pay less generous salaries and offer fewer benefits. This saves the company money but at the expense of local workers and economies. Workers at the outsourcing company can feel disenfranchised and lose a sense of job security. Their productivity may be negatively affected.
The Bottom Line
Both outsourcing and subcontracting are processes of transferring work out of house to an independent contractor or another business or firm. Companies generally engage in these practices as cost-saving measures but they may be forced to do so when they have no one in-house to accomplish a specific task or project.
The ramifications can be far-reaching and they’re not always positive. These processes can affect employee morale and retention but many companies may have no other cost-effective, viable options, particularly smaller ones.
