Outsourcing vs. subcontracting: Are they the same?

Outsourcing and subcontracting are often used interchangeably, but each has distinct characteristics that set them apart. Companies may need one or the other or, in some cases, both to meet the needs of the business.  

Understanding the differences between the two and knowing which one to use will help your business get the best solutions from service providers. 

Outsourcing   

There’s probably a million and one articles online that try to define what outsourcing is, but they all agree on one thing: it involves allocating a department or function of the business that’s normally done in-house to a third-party provider.   

A newly minted startup, for example, may hire an outside HR company to handle recruitment and payroll, while corporations looking to offload their customer service arm can go outsourcing to the Philippines.   

This allows businesses to build a team of professional experts to handle specific business functions, while reducing operating expenses and eliminating the need to invest in office space and equipment.    

Many outsourcing providers are located overseas in countries with lower labour costs (a practice known as “offshoring”), although there are firms that also cater to clients within the same country (onshoring) or within the same region (nearshoring). 

Subcontracting  

Subcontracting, meanwhile, is a process where a third party is assigned one or more tasks that the company is unable to do in-house. These are usually highly specialized tasks that need specific skills, tools, and equipment.  

For example, the same startup that we’ve mentioned earlier may also enter into a subcontracting agreement with a developer to create a timekeeping portal for their employees. These agreements are mostly temporary and, outsourcing professional services, do not cover entire functions of the businesses.   

All the tasks and requirements are previously agreed upon in the contract with the subcontractor usually charging a flat hourly rate or lump sum as payment for their services.  

Subcontracting is mostly used in large-scale industries such as construction. The contractor of a building project may hire subcontractors specializing in electrical wirings, plumbing, dry wall, cooling and ventilation, and more.   

Outside the construction industry, event planners also engage in subcontracting as needed or when they have booked a client. Some of the roles they subcontract include cooks, waiters, entertainers, and bartenders.  

People hired to do these specialized tasks can work independently with very minimal supervision, which could very well work for any company.   

The one big drawback in subcontracting is the control over the quality of work, as the people doing the tasks would not have the same training and culture as the company’s employees.  

Which one is right for you?

Outsourcing is not only a flexible option for businesses to save on operating expenses but also a great way to gain access to a highly skilled and experienced talent pool.   

Having mundane, time-consuming jobs outsourced can also free up core staff and allow them to focus on more important tasks, improving efficiency as well as employee morale.   

And while the company may lose some control over how certain projects are managed, this can be mitigated by simply maintaining clear lines of communication and responsibilities between parties.  

On the other hand, for large-scale projects that require some degree of specialization, subcontracting may be the better choice.   

Compared to hiring and training new employees, subcontractors can work almost immediately for a fraction of the resources needed even when compared to regular outsourcing.  

Companies may also find the fixed payments and the contractual nature of subcontractors more preferable as it provides a more definite timeline on when the end product will be delivered.  

It should be noted, however, that in case the contract is extended, paying a flat rate for subcontractors may be more expensive in the long term than hiring a full-time employee. 

Both outsourcing and subcontracting have made countless businesses worldwide become increasingly efficient at what they do. 

Knowing which one is suitable for your business depends on various factors such as the scale of your projects, the type of tasks you need to offload, and how much control you want to retain over it.  

Discussing these with your outsourcing provider can also help you determine what type of service your business needs and identify stumbling blocks in the process.  

In fact, you may be surprised to learn that there are many outsourcing providers today that can also offer highly specialized skills in very flexible terms, such as database outsourcing, data entry, and architectural outsourcing.

You can usually find these providers in countries with a very mature outsourcing market and deep talent pools, like the Philippines.  

Having a partner that offers specialized talent and flexibility can be useful when you are looking for both long-term outsourcing and project-based solutions that require very specific skills. 

In the end, identifying the right business solution is a matter of listing down your pain points, determining specific goals and timelines, and finding the right provider.