Outsourcing vs. Subcontracting: An Overview

Business executives often blur the line between outsourcing and subcontracting; however, in reality, 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 is primarily a cost-cutting measure where tasks done in-house are now being completed by individuals or businesses outside of the firm and not affiliated with it. It is often part of a company's strategy to reduce labor costs and applies to many areas within a firm.

Subcontracting, on the other hand, is when a company hires another individual or company to complete a specialized task that typically cannot be done internally. Subcontracting does not involve permanently allocating out entire jobs or departments within a firm and the job is agreed upon on a contract basis.

As it became increasingly popular in the late 20th century, outsourcing became a buzzword, causing confusion between what qualifies as subcontracting and what is truly outsourcing.

The difference between outsourcing and subcontracting is subtle, but it is important to define the terms when businesses deal with stakeholders and clients.

Key Takeaways

  • Outsourcing and subcontracting both involve allocating jobs outside of a firm but have important differences.
  • Outsourcing is considered a comprehensive cost-cutting strategy by a business that seeks to allocate out entire jobs or departments within a firm to an external firm, permanently.
  • Subcontracting involves hiring an outside firm or individual to complete a specialized task that cannot be done internally and is usually temporary by design.
  • Both outsourcing and subcontracting, but primarily outsourcing, have become controversial practices.

Outsourcing

Tasks that are outsourced generally are processes that could be performed by a company's internal staff. By outsourcing some functions, the company can reserve company personnel for their key tasks.

Outsourcing is supposed to provide a cost-efficient solution to keeping payrolls, operating expenses, and overhead low. A company may contract an outside provider to manage its administrative work, for example, 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 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.

In most cases, a company subcontracts another business to perform a task that cannot be handled internally. The subcontracting company and the provider work closely throughout the project, and the hiring party has a reasonable amount of control over the process.

As an example, 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 are not skilled in interior design. The builder subcontracts the decor out in order to complete the job.

Special Considerations

In the real world, both outsourcing and subcontracting have become controversial, and the distinctions between the two have become blurred. Rather than freeing up internal staff to do other tasks, some companies are firing these staffers and outsourcing their jobs to be performed off-site.

Outsourcing has decimated many industries in developed countries as companies move the jobs overseas. Manufacturing is a prime example.

Some much-debated practices include the following:

  • Reducing or eliminating in-house departments only to sub-contract their functions out to companies that pay less generous salaries and offer fewer benefits. This saves the company money at the expense of local workers and local economies.
  • Outsourcing jobs to overseas companies that pay substantially less. Accusations of substandard working conditions and even child labor have been made against some contractors abroad.
  • Outsourcing to overseas companies that have inadequate safety standards. For instance, in 2007, many American pet food brands were recalled after a number of pets were poisoned. The food was produced by a Chinese contractor who cut production costs by replacing wheat gluten with a poisonous substance, melamine.
  • Outsourcing routine administrative tasks such as bookkeeping to crowdsourcing sites that may pay pennies per task.