What is the difference between outsourcing and contracting

Outsourcing has become a common phenomenon in this age of globalization. The desire of the companies to be cost effective in the face of cut throat competition from economies that have cheaper labor and other cheaper competencies has led to outsourcing on a very large scale. There is another concept of contracting that confuses many because of its similarities and overlap with outsourcing. This article takes a closer look at the two concepts to highlight their differences.

The process of handing over noncore operations of an organization earlier performed internally by the employees to an outside company or organization is called outsourcing. This has become an important issue in many western countries where local people are crying foul against it. Contract is a type of commitment which is made regarding a course of action. The most important ingredient of a contract is terms and conditions which are understood by the parties involved in a contract.

The amendments may also be made in order to get to the agreeable contract accepted by all the parties involved in the contract. It establishes agreements in business, and therefore plays a vital role in the economic sector. Contracts are widely used in supply chain management. Contracts are legal agreements and therefore are enforced by law. A company can make use of a contract in order to take the services of other company for technical support, etc.

Some of the essential elements of a valid contract are — mutual agreement, free and genuine consent, lawful consideration, necessary legal formalities, etc. Outsourcing is the arrangement in which a company enters into a contract with the other company in order to extract some kind of services from the other company.

It is generally done in order to reduce the cost. A company may decide to carry the core activities on its own and outsource rest of the activities to the companies who are more skilled in those activities. The difference between outsourcing and subcontracting is subtle, but it is important to define the terms when businesses deal with stakeholders and clients. 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 and became an integral part of international business economics in the s. 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.

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:. NC State University. Business Essentials. Career Advice. Company Profiles. Actively scan device characteristics for identification. Use precise geolocation data.