Scaling a business is difficult. Business growth comes with a number of challenges, key among these is the hiring of staff.
Outsourcing and Subcontracting are two options to consider when growth is the objective. While these terms may seem to be referreing to the same thing, they are not. Differences exist between both of these stratgies that can impact operations and growth. This blog aims to clarify these differences and help you make informed decisions that impact your business.
What is Outsourcing?
Outsourcing involves engaging an external outsourcing partner. With years of experience, they help assist in the recruitment of outsourced staff or processes. This external organisation takes responsibility for the legal requirements, including managing the workforce, and outcomes.
Some of the main use cases for outsourcing are loan processing, customer support and data entry. A number of industries benefit from outsourcing, understanding the right business function to outsource is key.
Key Characteristics of Outsourcing:
- Partnership: Working with a skilled partner to ensure compliance and legal requirements are satisfied.
- Long Term: Outsourcing is a long term solution for growth. Businesses have the highest level of sucess when they take a long term view.
- Cost Effective: Outsourcing can reduce costs by leveraging the expertise and economies of scale of the external provider. As a rule of thumb savings range from 50-70%.
- Focus on Core Activities: By outsourcing tasks, your business can concentrate on its primary objectives and strategic goals.
Example: A mortgage broking firm brings on a new outsourced team member. The team noticed there was a significant amount of time being spend on non client facing activity. The team was spending too much time doing administration, rather than with clients. By outsouring back office administration to an overseas staff member deal flow increased and turnaround times improved.
What is Sub-Contracting?
Sub-contracting is different to outsourcing as it involves a direct engagement between the primary contractor and individual. The primary contractor is fully responsible for the requirements and operational framework of that individual or team, including any legal considerations for employment.
Key Characteristics of Sub-Contracting:
- Direct Engagement: Sub-contractors are hired directly, without the security of a third party.
- Short-Term Engagement: As the realtionship is less formal, it is likely that sub-contracting arrangments are short term. These can also be ‘side-hustles’ for skilled individuals.
- Cost Variation: Without a profesional partner, there can be significant variations in cost. A partner brings expertees of the local market to there is a transparent cost struture in pace.
- Structural Challenges: The primary contractor remains responsible for all elements of the employment and production of work. In unexpected situations, there can be significant disruptions.
Example: An accounting practice has a small team based in metro Manila, the Philippines. Data security is a focus for this firm, and despite best efforts, there has been a data breach. The practice would like to lock down and reissue assets to staff. Without on-the-ground support, this takes days, not minutes.
Key Differences Between Outsourcing and Sub-Contracting
- Support:
- Outsourcing Service: Sutured support for IT, Security, HR and other ancillary employment requirements.
- Sub-Contracting: Needs direct engagement with each niche. Quality control may not exist
- Responsibility:
- Outsourcing Service: Your partner is the legal employer of the staff memeber. Your partner is responsible for the legal employment requirements.
- Sub-Contracting: The primary contractor is directly responsible for data security and adherence to employment legislation in both locations.
- Cost Structure:
- Outsourcing Service: Benchmarked against similar roles in the local market, a trusted provider should always provide transparent details.
- Sub-Contracting: Costs vary on a number of factors.
Choosing the Right Strategy.
When considering the right strategy, ultimately the decision revolves around risk appetite. Using a partner provides additional layers of support and security, however, this increases cost. Sub-contracting will reduce costs, but, increase the onus on the business to provide secure complaint infrastructure.
Outsourcing: Dedicated support through a professional partner (like an outsourcing company). The partner acts as a hybrid between a recruitment service and a labour-hire partner. From day one, you will receive support and guidance through the process. This support continues through the recruitment process, onboarding and then through tenure.
The responsibility regarding local labour laws and employment conditions become the responsibility of the partner. IT equipment and security framework should also be a part of the service offered.
Sub-contracting: As the primary contractor, responsibility for recruitment, data security, complaince and ensuring adhereance to labour laws is yours. Without on the ground support, minor operational needs can escalate quickly.
Without local knowledge, this method can result in a time-consuming and risky engagement.
In Summary
The objective of this blog was to ouline the differences between outsourcing and sub-contracting. The information provided should aid you in making a decision that is in line with your business strategy.
Both options offer ways to improve efficiency, support growth and enhance business operations. The requriements of your industry and internal risk appetite are also important considerations in any decision.
Regardless of the choice, either outsourcing or sub-contracting, business goals and objectives are the overriding consideration. Start with business goals and objectives and work backwards. Clearly defining the engagement requirements helps decide the type of engagement that best suits the business needs.
