Outsourcing and subcontracting decisions create a strategic basis of, for instance, company’s cost structure. As is well known, companies develop different processes in diverse business areas to achieve their objectives. Some companies need to focus on the most critical processes. Because of this, they invest more resources in the areas that they consider the most important for the development of the organization. As a result, some companies decide to lighten the burden of fewer core functions by subcontracting them to external actors.
At the same time, companies seek to reduce costs and increase levels of competitiveness. Subcontracting external professional staff will facilitate the implementation of activities. Since this staff comes from the outside of organisation, the costs incurred are lower than with internal resources.
Many people confuse outsourcing with subcontracting, but there are essential differences between the two. In subcontracting, the company that contracts the service only determines the work, and the contractor fulfills it. Outsourcing includes the exchange of information, coordination, and, above all, trust.
Today’s managers running their organisations face changes, including the following examples:
- Globalizing activities
- Growing without having to use more resources
- Reducing costs
- Understanding consumer tastes
- The need to respond to threats and, above all, to opportunities
- The aging workforce
Outsourcing is defined as the practice of an organisation having a third party perform one or more functions that were previously the organisation’s own. At a certain point and for various reasons, the company stops performing them and transfers them to a third party.
For example, call centres offer customers of a specific company personal telephone assistance. The service providers may located outside their client company’s home country. Outsourcing such customer service is much cheaper than having an internal department responsible for this activity. Consequently, a company that outsources its operations gains a competitive advantage.
Outsourcing and Subcontracting Benefits
Outsourcing and subcontracting have proven to be a useful techniques for the growth of companies, for example for the following reasons:
- Reduction of cost and control = In some cases, it is cheaper to outsource certain functions to third parties than to have the organisation perform them itself.
- Service providers have high capacity staff
- Majority of the organisation’s resources and investments may be allocated to its primary objectives
- Greater efficiency is generated
- Access to better technology without investing in it
- Improved time management
- Technological innovation is controlled by the service provider
Making Outsourcing and Subcontracting contracts
Outsourcing as a contract takes on a legal nature and is the main element between the company requesting outsourcing services and the company providing them. In this contract, three dates are necessary:
- The date of signing the contract
- The date the service provider will start performing its activities
- The date when the terms of the agreement will come into effect
The following factors need to be considered when making the outsourcing contract:
- Decide, which services to outsource?
- Determine the resources you will use in negotiations (technical expertise, legal advice, operational management).
- Specify the start date and end date of the contract.
- Ensure the feasibility of using external agents
- Identify the location(s) where our partner will perform the outsourced services
- Determine the equipment your partner will need to provide for the services
- Define the mandate and level of services
- Find out if your partner performs the services at your facilities or at theirs
- Find out whether the facilities that require a separate agreement will be rented or sold to the partner
Method of Payment
- Define the service charge calculation process.
- Define whether your partner will require extra charges for material and time.
- Define the method of payment.
- Determine whether your partner will apply for a discount system if a contract condition is not met.
Outsourcing and Subcontracting – Conclusion
Outsourcing and subcontracting are beneficial tools for the management of organisations. For instance, outsourcing helps companies to disengage from the activities that do not require their full attention. This allows companies to focus on the most important areas, leaving less relevant functions to outside companies. If you are interested in getting more knowledge about outsourcing, we will provide you with it!