Outsourcing or subcontracting – what’s best for my organization?

In the never-ending quest to reduce business costs and increase efficiencies, it is increasingly common for executives to consider outsourcing or subcontracting. The only problem is too many of those executives do so without appreciating they are not one and the same and as a result, risk adopting a model that fails to deliver the precise benefits they were searching for. Whether you are a business leader or a team member wanting to help educate one, let us guide you through how they work, their respective benefits and the key differences that will help you decide which one is best for your organization.

Outsourcing or subcontracting – what’s best for my organization?

What is outsourcing?

Outsourcing is the practice of assigning tasks that would normally be completed in-house by one’s own employees to a third-party vendor outside of an organization. Such tasks may include a specific project, multiple activities or an entire business function and it is an excellent way to reduce labor costs while maintaining a significant amount of control on staffing and processes. Outsourcing comes in three location-based types – onshore (partnering with a provider in the same country), nearshore (partnering with a provider in a neighboring or nearby country) or offshore (partnering with a provider in a more distant country).

What is subcontracting?

Subcontracting is the process of hiring an individual or company to complete a specialized task that usually cannot be done by an in-house employee or team. Crucially, it is a temporary arrangement and does not involve permanently allocating jobs or departments. Rather, the task or requirement is agreed on a contract basis and once the terms of the agreement have been fulfilled, the partnership comes to an end.

Comparing the benefits

Benefits of outsourcing

Partnering with a specialist outsourcing provider in countries with lower costs of living such as the Philippines can reduce labor costs by up to 70%, along with negating the need to invest in related infrastructure such as office space, technology and equipment. However, while many companies initially consider outsourcing for financial gain, they soon discover it delivers a range of other benefits.

This includes delivering products and services of higher quality courtesy of being able to tap into talent pools that are well-educated and passionate about their work. The ability to outsource repetitive and time-consuming tasks also means in-house staff are better placed to focus on more meaningful and rewarding tasks, thus increasing productivity and creating a more motivated team. Furthermore, outsourcing allows businesses the flexibility to easily and quickly scale their human resources up and down to match seasonal demand and unexpected booms or slumps.

Benefits of subcontracting

Subcontracting is a great way for companies to tackle large projects with ease as it enables them to bring in specialized expertise they may not boast internally. Many firms also see the fixed nature of a contract as a positive, with the onus on the subcontractor to deliver a project or task by a certain date.

Working with a subcontractor is also less expensive than hiring full-time employees, although some businesses feel restrained by not having direct control over the quality of the people working on their projects. While outsourcing providers often work closely with onshore partners on the likes of recruitment, talent identification and staff development, subcontractors tend to work as solo operators on a project basis.

The key differences between outsourcing and subcontracting

  • Work sectors: outsourcing providers can deliver tasks across an infinite number of fields ranging from customer support, IT and data entry to administration, marketing, healthcare and financial services. More importantly, they are experts at tackling often routine and time-consuming tasks that require ongoing attention. While subcontracting is most famously used in the construction industry, it can also encompass fields such as IT, finance and customer support but usually more so in the form of large-scale projects.
  • Chain of command: outsourcing sees a direct chain of command between the provider and onshore company, with the two parties appointing representatives to ensure clear lines of communication and responsibility. This often means in-house managers can play a direct role in guiding offshore staff development, setting KPIs and recruitment. Subcontracting involves an indirect chain of command, with the hiring company essentially appointing an entirely separate organization – with its own people and practices – to complete a project as they see fit.

Subcontracting vs outsourcing

Outsourcing and subcontracting have one big thing in common – they have both helped organizations around the world become more efficient, more profitable and reach goals faster. Deciding which one works best for your business will come down to various factors including the scale and ongoing nature of your project, the type of tasks and activities you wish to place in someone else’s hands and just how much control you wish to retain.

Step inside a collection of real-life businesses that have used offshoring in the Philippines to reap huge rewards. This eBook features a dozen case studies including an engineering firm that grew from five to 80 quality employees in 31 job profiles and a national insurance brokerage that used offshoring to increase one team’s productivity by 34%.