What is the difference between outsourcing and subcontracting?

In all sectors of activity, competition is fierce. The economic crisis that small, medium and large companies are facing does not really help matters. They are now called upon to reduce their operating costs without affecting their offerings.

These must be optimized to meet the growing demands of consumers. Faced with all these elements, companies are resorting to outsourcing and subcontracting.

These are related concepts, but the realities they entail are obviously different. When they are implemented, their implications are truly the opposite. To be levers for improving the competitiveness of the company that adopts them, they must be used wisely.

Subcontracting

Subcontracting is used in all sectors of activity. With it, a company can delegate services or work when it is unable to carry them out itself. This can be justified by a lack of resources, qualified personnel, know-how, or time.

Definition

Subcontracting refers to an operation whereby a company decides to entrust to another company one or more acts of service and/or production for which it is initially responsible. The first company is the principal while the second is the subcontractor.

As a general rule, we distinguish two types of subcontracting. These are :

• Specialty subcontracting;
• Capacity subcontracting.

Specialty subcontracting is the form in which a company completes products or services for its customers. For example, if public works are the company’s main activity, it can call on a subcontractor to ensure that large machines are monitored and operated properly.

As for capacity subcontracting, this is the form that allows a company to efficiently get through a period of increased activity. It is the ideal option that many companies use when they have to take on new assignments while all their resources are allocated to other urgent tasks.

Advantages of subcontracting

Subcontracting allows a company to enjoy several advantages. One of the most important is the reduction of costs involved in subcontracting. The company does not use a subcontractor on an ad hoc basis. It pays the subcontractor for the work it has to do only over a short period. The subcontractor is not an employee who has to be paid 12 months a year. The savings are significant. In addition, the client no longer has to deal with the costs of benefits, employment insurance, and unions.

By outsourcing sensitive work to external experts, the company is assured that it will be done properly. There is no risk of having to ensure that the work is done properly. The quality of the work entrusted is assured. In reality, a subcontractor is a specialist in his field. He is then called upon to put all the means and skills in place to ensure the quality of the products or services. Even before signing the subcontract, the subcontractor listens to the needs and requirements of the client and then defines the strategy to be adopted to provide a quality service.

By subcontracting, the client contributes to increasing its productivity. Even the most difficult tasks will be completed quickly. He will thus be able to complete a large volume of work in record time.

Disadvantages of subcontracting

Despite these many advantages of subcontracting, there are still some negative points to be raised. Knowing them obviously makes it easier to avoid them. One of the first disadvantages of subcontracting is the dependence it can create on the principal. The latter may find itself in a situation of absolute dependence on the subcontractor.

The partners may face a significant lack of coordination; this risk may be compounded by a lack of skill sharing. If the subcontractor does not provide a quality service, the client is the only one to bear the consequences or damage caused to clients.

Outsourcing

Outsourcing for a company generally consists of calling on an independent or a company by entrusting it with one or more operations under a subcontract. These operations are generally related to production. A company can thus decide to outsource its telemarketing campaign to concentrate on its core business.

Definition

When a company entrusts another company with the performance or management of one or more activities relating to its operations, we speak of outsourcing. This operation must be carried out under a contract. A company may decide to entrust the management of its accounts to an accounting firm. It can also contact a specialized service provider to entrust it with the management and maintenance of its computer equipment.

Objectives and challenges of outsourcing

The company that resorts to outsourcing can concentrate more on its core business, on its main and essential functions. It delegates all or part of its parallel operations to another company that is much more specialized in the field.

Apart from the time saving that this outsourcing operation can provide, the company aims to reduce its production costs. For a little more efficiency, it may be worthwhile to accompany the outsourcing project with a good offshoring strategy to a low-wage region. Offshoring and outsourcing can be exploited jointly by garment companies.

Benefits of outsourcing

Several benefits can be derived from an outsourcing operation. However, the institution must ensure that the process is done well. When the process is well done, the company allows its teams to focus on their core business. They are then more responsive to the growing needs of the customer.

Outsourcing also allows the company to develop new skills. This operation enriches the company’s teams, as they benefit from the services provided by the qualified service provider. In addition, it promotes cost control. The company that adopts it reduces the wage bill.

This operation also serves to improve quality. Generally, it is carried out with competent providers who can deliver quality services. They exploit best practices in their field and the innovations that go with them.

Disadvantages of outsourcing

Outsourcing also has its risks. A company that resorts to this solution may face a design quality problem. Problems with not meeting delivery deadlines can also be common. The company’s image may be affected if it uses a service provider who acts in bad faith or does not respect its commitments.

When the company may be confronted with a problem of confidentiality of business data. This is generally the case when the service provider uses insecure means to carry out the tasks entrusted to it.

Outsourcing and contracting out: key differences

Outsourcing and subcontracting contribute to improving the competitiveness of the company that uses them. But they are very different concepts in practice.

Subcontracting: a one-off contract

Subcontracting is simply a one-off contract. In other words, it is a short-term contract between a client and a subcontractor. The subcontractor is called upon to carry out specific tasks according to specifications provided by the client company.

In a temporary or one-off contract, subcontracting actually concerns a well-defined mission. It is thus a contract for performance by task. It takes effect automatically when the subcontractor completes the tasks entrusted to him. For example, a construction company may contact a service provider to delegate the management of a particular project on the site. A company operating in the aeronautics sector may also call on a subcontractor to design certain specific parts.

What must a subcontract contain to be valid?

In most cases, a subcontract is a consensual contract. The parties are not required to draw up a written contract. However, it is always wise to draw up a contract in a due form containing the most essential details to deal with legal problems when they arise. This contract must therefore mention:

• Purpose of the subcontract;
• Terms and conditions for amending the contract;
• Price of the service;
• Terms of payment;
• Penalties in the event of late payment;
• Frequency of orders;
• Conditions and deadlines for delivery;
• Confidentiality of information made available to the subcontractor;
• Guarantees provided to the subcontractor;
• The clause on concealed work;
• Competent court;
• Applicable law;
• The regime for special models and tools.

What clauses should be included in the subcontract?

To protect each party, it is useful to insert certain clauses in the subcontract. For example, there is a payment guarantee which protects the subcontractor. An arbitration clause may be necessary. The two parties define from the outset the modalities for recourse to an arbitrator in the event of a dispute.

The performance guarantee protects the client. And the client ensures that the subcontractor carries out the assignment in the right conditions, without any negligence. If, however, defects and non-conformities arise as a result of the subcontractor’s performance, the subcontractor is obliged by the performance bond to repair them.

Outsourcing: a long-term contract

Unlike subcontracting, outsourcing is a contract signed over a long period, usually several years. When a company chooses to outsource tasks, they are often related to administrative or accounting processes that it is not able to manage properly. For example, a construction company can call on a firm of chartered accountants to handle the accounting and administrative management of its business so that it can focus on its core business.

In addition, a contract must be drawn up between the parties. This must detail in great detail the responsibilities and obligations of each party. It also defines the penalties they incur if they do not respect their commitments.

Subcontracting and outsourcing are elements that are widely used by companies that want to be competitive in a rapidly growing market. It is essential to understand the differences between them before making a choice.

Finally

We hope that after reading this article you will be able to distinguish between the two related concepts of outsourcing and subcontracting.

Would you like to know more about outsourcing? Is your project mature and do you want to delegate part of it? Do not hesitate to contact us! We, Powerlab, are a company that has been specialised in e-commerce for many years. We would be delighted to discuss your projects with you.

To continue on this path we recommend you to read these articles:

• The 5 main benefits of e-commerce delegation
• Delegate to focus on your business
• E-commerce delegation: what future can be expected