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It’s common for business executives to blur the lines between subcontracting and outsourcing. However, both practices are distinctly different. The main differences fall in the amount of control an organization has over a particular work process and whether or not they could take on the tasks in-house.

Many people mistakenly think that they can use contracting and outsourcing interchangeably because both practices revolve around allocating tasks or jobs to people who are not direct employees of the organization. However, they have important differences. If you own a business, you have to have a solid understanding of both.

This is especially true because the term outsourcing became a bit of a buzzword in the last couple of decades, which led to confusion between contracting and outsourcing. We’re going to break down what both are so you can see what may be the best fit for you when looking for help.

Defining Outsourcing

Outsourcing is popular in business as a cost-cutting measure that takes  in-house tasks and gives them to businesses or freelancers outside of the organization. Generally speaking, the in-house staff may be able do certain tasks, but outsourcing them allows the company to free up their employees’ time, or get more specialized help so no additional training is needed. And in many instances, it’s more affordable as well.

The goal of outsourcing is to provide a cost-efficient solution to help the organization reduce its overhead, operating expenses, and payroll. For example, an organization could outsource their administrative work to a virtual assistant “VA”, so the in-house employees can focus on sales and production. This VA a third-party freelancer who works independently from the organization to complete necessary tasks, and they’ll communicate as needed.

Outsourcing Benefits

  • Allows organizations to focus on more important areas or tasks
  • Delivers services or products at a higher quality level if the organization doesn’t have any in-house expertise
  • Helps companies save costs by performing the same tasks at a lower cost
  • Offers labor flexibility because the organization can quickly scale resources to match demand

Outsourcing Drawbacks

  • Potential quality issues if qualification process is not done correctly
  • Less managerial control with regards to working hours
  • Possible security compromises if sensitive information needs to be shared
  • Language barriers or poor communication if both parties don’t share the same native language

Defining Contracting

With regard to hiring contractors, this is typically a 1099 position vs an employee. There’s less control, however, it’s generally a lower cost since you don’t pay taxes or benefits. Most companies still treat contractors similar to employees though. You deal with them directly and they have a specific role. Common jobs given to contractors are virtual assistants and outbound lead generation such as appointment setting. The company generally sets the rates. Other resources such as software, VOIP, etc. may be supplied by either party. At tax time, the company will issue a 1099 to the contractor.

Contracting Benefits

  • Saves money on in-house staff cost
  • Brings specialized expertise into the organization that you don’t have in-house
  • No need to spend money on training employees
  • Large pool of of potential talent since the hours are flexible for the contractors

Contracting Drawbacks

  • Can be difficult to maintain accountability
  • Contractors may have more than one job at a time
  • Contractors may come and go at will
  • Strict IRS guidelines to follow to prevent penalties

Special Considerations

Both contracting and outsourcing have pros and cons.

  • Outsourcing your jobs without proper vetting freelancers
  • Outsourcing your routine administrative work to crowdsourcing sites that pay a few pennies per task
  • Outsourcing or contracting with overseas companies that don’t have adequate safety standards to protect your information and other digital assets

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