Outsourcing vs. Subcontracting: What’s The Difference?
While the distinction can be subtle, the business practices of outsourcing and subcontracting are unique in the goals they are meant to accomplish.
Outsourcing is an option used to reduce costs in the long term. Subcontracting is usually temporary and designed to obtain specialized services or skilled work on short-term projects.
It’s important for business leaders contemplating outsourcing or subcontracting to understand the primary goals of each. Both can tremendously benefit your company’s mission and bottom line, but they also have drawbacks.
Below, we’ll outline the advantages and disadvantages of each option.
- Subcontracting and outsourcing acquire talent outside a company’s regular staff or geographical recruiting pool.
- Outsourcing’s primary objective is to permanently reduce or cut costs and enhance weak points within the company.
- Subcontracting’s primary objective is to acquire expert knowledge or skills to complete a project, usually temporarily.
What Is Subcontracting?
Companies subcontract when they need to delegate special and advanced projects to other businesses or individuals with hyper-specific skills in that field.
Due to the specialized nature of this type of work, subcontracting is usually a temporary arrangement. The most common form of subcontracting comes from home and commercial builders and architects.
For example, most general contractors are skilled at broad tasks like laying the foundation, framing the walls, installing doors and windows, and coordinating the build with the client or customer.
However, a home requires plumbing, electrical installations, driveways, landscaping, painting, cabinet building, stone laying, etc. Instead of hiring experts as full-time staff members, most general contractors will subcontract these services to other companies that specialize in the specific skill needed. In doing so, the general contractor can tap into those expert services on-demand for a temporary period.
Once the job is completed, the subcontractor and the general contractor go their separate ways until the next build.
Highly specialized skills and expertise is on-demand, and no one is locked in long-term.
What Is Outsourcing?
Outsourcing is usually done permanently to meet an ongoing need for a company. Outsourcing a task or team, such as customer service or online customer experience development, involves partnering with another company to provide those services so that your employees can focus on their key tasks and responsibilities.
Determining what to outsource involves identifying what services and products you excel at and which you are weak at. Your business’s weaknesses are often the key areas where outsourcing can help reduce costs and increase profitability.
By eliminating the need to focus time, energy, resources, and employees on a certain department or service, your company can devote its full attention and resources to pursuing your core mission, product, and competencies.
For example, customer and information technology services are two of the most commonly outsourced business departments. Both departments often require expertise in software development, hardware implementation, telecommunications, website design, front- and backend development, anti-virus and malware security, data collection and storage, and more.
Hiring these experts, purchasing the necessary hardware, building the infrastructure, and allocating space for the work can be extremely costly. By outsourcing these services to firms with the talent and infrastructure, your company can focus on what you do best.
What Are the Cons of Subcontracting?
Subcontracting offers many benefits, but it is not without its disadvantages, such as:
- Lacks Consistency
- High Demand for Skilled Workers
- Permanent Employee Morale
Due to its temporary nature, subcontracting often involves using many different subcontracting companies from project to project. Consistency is a friend of quality control, and it can be difficult to maintain consistent results when using different subcontractors from project to project.
For instance, if you subcontract with freelance web development agencies to update your website every six months, you’ll likely get a different developer every cycle. Each freelancer or subcontractor will have their skills, design preferences, and talents.
The result? You’ll likely be left with an inconsistent online experience for customers, and you may pay extra for the newest subcontractor to redo parts of the previous subcontractor’s site.
High Demand for Skilled Workers
Subcontracting can also be challenging because skilled workers are often in high demand and do not have trouble finding work. Even if you find a subcontractor you like, working with them again in the future will depend entirely on their availability.
Another disadvantage to consider with subcontracting is simply the price. While you’ll save money in the long run by subcontracting for special or time-limited services, in the short term going with a subcontractor has a higher price tag than anything else.
The disparity in price could lead to some issues. You may view the expense of subcontracting as an issue, and you wouldn’t be alone. The same services a payrolled employee would perform cost more, damaging your bottom line.
Permanent Employee Morale
Outside of profit, however, the employees you have on payroll may resent the disparity in pay. Either way, the subcontracted workers will not be familiar with the company culture, leading to conflict and butting heads even in relaxed workplaces.
What Are the Cons of Outsourcing?
Outsourcing is also not without its challenges or issues, including:
- Loss of Control
- Disruption of Labor Force
Loss of Control
The most significant challenge presented by outsourcing is losing control over some aspects of what you outsource.
For example, if you outsource your IT department to another company, you should expect to lose control and choice over those services. The company you choose to outsource with has already established their preferred programs, software, hardware, and talent.
This means you will have little input into what type of systems or hardware they use with your company.
With outsourcing, you may also lose much of your oversight. Once outsourced, that service becomes the responsibility of your partner company — as does the responsibility for managing its staff.
Therefore, conflicts will have to be resolved by coordinating with both companies. This can be a point of contention when issues arise.
Disruption of Labor Force
Another major negative impact of outsourcing is the disruption of the labor force and, at a broad enough level, the disruption of whole economies. This may not apply to small businesses but is important to keep in mind when you operate on a larger scale.
Outsourcing jobs when your business company provides essential opportunities within particular communities amounts to stripping entire populations of their livings. Outsourcing in the U.S. has gutted various major industries, and many cities, such as Gary, Indiana, that were vibrant industrial centers half a century ago are now ghost towns.
What Are the Pros of Subcontracting?
Subcontracting, of course, offers tons of benefits as well, including:
- Can Actually Save You Money
- Retain Control
- Subcontractors Are Highly Skilled
Can Actually Save You Money
Despite its temporary nature, subcontracting is a great company resource and provides major cost-cutting benefits. Using a subcontractor, you only pay for those services while they are performed and needed. Once the project is completed, you can cut those costs entirely.
Additionally, because subcontractors work closely with the project managers who hired them, you do not relinquish much control over design, service, development, or business process decisions. If an issue arises, you can address it directly with the subcontractor or their management in real-time.
Subcontractors rely on positive relationships with their employers, which allows you to retain most of your quality control over the project. Where outsourcing comes with reduced control and limited oversight, subcontracting allows you to maintain more or less the same content, quality control, and managerial leadership that you’re used to.
Subcontractors Are Highly Skilled
Subcontractors are also hyper-talented at what they do since it is often all they do. Their skill has been honed and perfected through countless hours of experience, so they can produce a finished product that cannot be replicated by a person who only does that kind of work from time to time.
What Are the Pros of Outsourcing?
At the same time, you lose a certain amount of control — especially managerial control — over certain parts of your company may seem unpleasant, but outsourcing a trouble area in your business can also bring tremendous benefits, such as:
- Rise in Profits
- You Can Focus on What Really Matters
- Better on Your Employees
Rise in Profits
The greatest advantage is the reduction of costs and increases in profitability. You’re looking for the cheapest service provider to give you the best results, and outsourcing companies are competing for your business.
Additionally, outsourcing will allow you to skip the development of an entire department for the specific niche you outsource, or it will allow you to dismantle it. Overseeing the whole operation in-house also means paying more salaries and having more resources, for the simple fact that your company has more services it needs to perform.
Outsourcing helps you cut the fat off your balance sheet, but it also enables you to increase profitability. Through outsourcing, you’ll be able to dedicate energy toward scaling your business and developing strategies to maximize your profits.
If done correctly, outsourcing is a method for maximizing your profit margins from both sides of the balance sheet.
You Can Focus on What Really Matters
A close second is the space it provides your company to focus on your mission, leading to increased innovation and better results.
Whenever you reallocate your current staff and resources towards a problem area within your company, you distract them from the core part of the business strategy you hired them to accomplish.
Better for Your Employees
Redirecting your current assets to tackle a problem can also result in your staff becoming stretched thin, overworked, and stressed, reducing worker morale. These issues can lead to attrition and recruitment, which are costly and detrimental to your business’s success.
Choosing to outsource your weaknesses so your existing employees can focus on their core strengths will help prevent these issues from arising. Outsourcing opens up doors of opportunity for your company to focus on your core purpose and innovate with your products and services.
Subcontracting and outsourcing help companies from all industries tackle tasks requiring specialized skills, talents, and infrastructure to accomplish. The two may seem similar, but they have unique pros and cons and ultimately serve very different purposes.
However, outsourcing and subcontracting offer your company the ability to acquire talented experts. The digital and remote work revolution has further opened the floodgates for companies to tap into the global talent and amplify their pursuit of excellence.
Awesome CX partnering with companies as a trusted outsourcing resource in customer service and customer experience. We’ve made it a mission to reduce the issues companies often encounter with outsourcing, such as managerial control and team culture.
We diligently partner with you and your staff to ensure that we reflect your company’s culture, mission, and purpose. We offer unparalleled access and control retention that gives you the peace of mind to transform your business’s weaknesses into strengths.
Contact Awesome CX to learn how we can be a trusted partner on your journey towards transforming your product or service!
Outsourcing vs. Subcontracting: What’s the difference? | Investopedia
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