Key Takeaways
- Outsourcing involves delegating entire business functions or departments to outside companies to reduce costs and access specialized expertise.
- Contracting involves hiring external contractors classified as employed or self-employed for specific, well-defined projects or tasks to gain specialized expertise for a defined period.
- The critical differences between outsourcing and contracting lie in the scope of work, level of control, cost considerations, and the nature of the relationship with the provider.
What Is Outsourcing?
Outsourcing is a widely embraced business strategy for trimming costs by delegating internal tasks to external entities, such as businesses or freelancers. While in-house staff may be capable of handling specific tasks, outsourcing allows the company to reallocate resources and focus on other aspects of the industry to drive growth.
Outsourcing also allows companies to acquire specialized assistance without additional training, and it is often a more economical option.
For instance, a company might delegate administrative tasks to a virtual assistant (VA), allowing in-house employees to concentrate on sales and production. The VA, acting as an independent third party, undertakes documents and legal missions as required.
Goals Of Outsourcing
- Cost Reduction (Labor, Overhead): Outsourcing minimizes overhead costs associated with office space, equipment, and benefits for in-house employees.
- Access To Specialized Skills: Access to specialized skills and knowledge that may not be available in-house. Faster turnaround times and improved quality due to expertise and experience.
- Increased Efficiency And Focus On Core Competencies: Companies free up internal resources by outsourcing non-core tasks. This allows teams to focus on their core strengths, driving innovation and growth.
Examples Of Outsourced Functions
- Customer Service: Businesses outsource call centers to ensure continuous client service availability beyond regular business hours.
- Manufacturing: Outsourcing production to countries with lower labor costs allows companies to reduce manufacturing expenses.
- IT Support: Companies often contract with specialist IT services to free up internal IT personnel to concentrate on critical initiatives and innovation.
What Is Contracting?
Contracting is a formal agreement in which one party (the contractor) provides goods or services to another party (the client) in exchange for payment. It’s a flexible way for businesses to acquire specialized skills or complete projects without hiring permanent employees. Contracts outline the project scope, payment terms, deadlines, and legal protections for everyone involved.
For example, a construction company might hire a contractor to handle the electrical wiring for a new building rather than having full-time electricians on staff.
Goals Of Contracting
- Access To Specialized Expertise For A Defined Period: Contracting brings in skilled professionals for projects or timeframes, ideal for specialized needs without permanent commitments.
- Flexibility In Scaling Workforce Up Or Down: Contracting enables flexible workforce adjustments, scaling up during busy periods, and ending contracts without permanent staff downsizing challenges.
- Management Of Specific Tasks Without Adding Overhead: Contracting saves businesses from administrative burdens and costs of full-time staff, allowing focus on core operations while efficiently meeting additional needs.
Examples Of Contracting Functions
- Website Development
Outsourcing website development ensures clear communication of business vision, specifying deliverables, timeline, budget, and intellectual property ownership.
- Legal Counsel
Businesses contract legal expertise on-demand for services like contract review, litigation, and ensuring compliance during transactions with specified terms.
- Marketing Campaign
Contracting a marketing agency provides fresh perspectives and skills. Contracts outline objectives, target audience, channels, budget, timelines, and performance metrics for accountability.
Key Differences Between Outsourcing Vs Contracting
| Scope Of Work | Level Of Control | Cost Considerations | Relationship With Provider | |
| Outsourcing | Entire functions or departments (e.g., customer service, IT) | Less control over day-to-day operations | Primarily cost-driven decision (e.g., lower labor costs) | Long-term, ongoing partnership |
| Contracting | Specific, well-defined tasks or projects (e.g., legal – consultation, building renovation | More control over project execution and deliverables | May not always be the cheapest option, but focuses on expertise | Often project-based, temporary relationship |
1. Scope Of Work
- Outsourcing: Involves handing over entire business functions or departments to a third-party service provider. This is often a long-term arrangement focused on reducing costs or gaining specialized expertise.
→ Example: A tech company outsources its customer service operations to a call center in another country to save money on labor and overhead.
- Contracting: Entails hiring an external individual or company to complete a specific, well-defined project or task. This is usually a shorter-term arrangement where the main focus is accessing specialized skills or resources unavailable in-house.
→ Example: A construction company hires a structural engineer (contractor) to design the support system for a new building.
2. Level Of Control
- Outsourcing: delegates business processes to a third party, granting broader responsibilities and decision-making control, freeing internal teams but reducing daily oversight.
→ Example: A software company outsources its customer support function to a call center in another country. The call center manages its personnel, training, and quality control processes. While the software company provides guidelines, they don’t dictate the exact steps and procedures the call center employees use.
- Contracting: engages an independent contractor for specific projects, granting the client control over deadlines, requirements, and progress monitoring.
→ Example: A small software company needs help designing a new user interface (UI) for its mobile app. Since it doesn’t have an in-house UI designer, it decided to contract with an independent UI/UX (user experience) designer. The independent designer works remotely, communicating through email, video calls, and project management tools. The designer has control over their work schedule and process as long as they meet the deadlines outlined in the contract.
3. Cost Considerations
- Outsourcing: Outsourcing often centers on reducing expenses. Companies may outsource entire business functions or processes to regions with lower labor costs.
→ Example: A US-based software company outsources its customer support operations to India with lower staffing wages but still provides equal quality of work. In this case, the company can still provide round-the-clock customer service while significantly reducing operational costs.
- Contracting: The primary reason for contracting is to gain specialized skills or resources that a company lacks internally. Cost reduction may be a factor, but it’s not the central driver.
→ Example: A small e-commerce company is experiencing rapid growth and needs to revamp its website to handle increased traffic and transactions. However, the company’s in-house IT team primarily focuses on maintaining existing systems and lacks the web development and design expertise needed for this large-scale project.
Instead of hiring new full-time employees and investing in extensive training, the company contracts with a specialized web development agency. This agency brings a team of experienced web developers, designers, and project managers with the specific skills and knowledge required to execute the website redesign project successfully.
4. Relationship With Provider
- Outsourcing: Outsourcing involves forming a more strategic partnership with a third-party provider. The focus is handing over entire business functions or processes, often non-core, to the company’s primary operations. This creates a relationship built on a long-term vision.
- Contracting: Contracting typically centers around short-term, specific projects where specialized expertise is needed. The contractor is brought on board to address a particular need or deliverable, and the relationship is often limited to the duration of that project.
Frequently Asked Questions
1. What Is The Difference Between Outsourcing And Subcontracting?
The difference between outsourcing and subcontracting lies in who controls the work and manages the resources. In outsourcing, a company hires another company to handle specific tasks or processes, relinquishing control over the work. Subcontracting involves hiring another company to perform specific functions under the direction and control of the primary contractor.
2. What Is The Difference Between Contract Manufacturing And Outsourcing?
They are often used interchangeably. Contract manufacturing entails outsourcing the production of goods to a third party based on provided designs or specifications. On the other hand, outsourcing involves delegating specific tasks or services, which may extend beyond manufacturing, to a third party. Contract manufacturing is typically more focused on the production process, whereas outsourcing can involve a broader range of activities beyond manufacturing.
3. What Are The 3 Types Of Outsourcing Contracts?
The three main types of outsourcing contracts are:
- Time and materials: Payment is based on hours worked and materials used.
- Fixed-price: A set total price for the project.
- Performance-based: Payment tied to specific outcomes or results.
4. What Does It Mean To Outsource A Contractor?
Outsourcing a contractor means hiring a third-party company to manage and provide the workers (contractors) for a project. This allows a company to access a larger pool of skilled labor without the overhead of hiring employees directly.
