Outsourcing vs Subcontracting

Outsourcing vs Subcontracting

1. Introduction

   • Used interchangeably
     • Differences may seem nuanced
   • Relationships with the firm have an impact on project/activity
   • Will be examining 6 differences
     • How it relates to relationship management
   • Critical analysis of their use

2. 1: Fundamental Difference

   • Outsourcing
     • The hiring of a party outside a company to perform activities that traditionally were performed in-house (Grossman)
     • Common outsourcing activities (Outsourcing Insight)
       • HRM
       • Marketing
       • Customer service
   • Subcontracting
     • Prevalent in areas where complex projects are the norm, such as
       • Construction
       • Information technology
     • Many projects have a middle-man (contractor) that deals directly with the client and then gives out individual tasks out to subcontractors
       • Multiple subcontractors within the same project, each having their own unique role.
       • Prevalent in contruction
     • Some conflict regarding definitions
       • Gubnik characterised by relationship with the client firm based on two elements
         • Substitution: the subcontractor takes over the technological and financial risk of the partner
         • Subordination: the subcontractor has to follow the partner's instructions
       • The subcontractors' products are part of the end product but not the complete end product itself (Hovi)

3. 2: Motives for Use

   • Outsourcing
     • To Add Value
       • Social Exchange Theory: the firm will choose alternatives from which they expect the most value or the least cost.
         • SET examined in buyer-supplier relationships by Holthausen
       • Previously seen solely as a budget-cutting strategy
         • Increasingly used as a tool for speeding up innovation and business efficiency.
         • Allows firms to focus on their core value-adding activities
         • Deloitte survey of 500 executives found that cost optimization is no longer in the top 5
     • Growth fueled by Globalisation
       • Used to adapt business models to be more flexible, competitive and attractive to customers in the global market (Bulajic)
       • Example: Unliever expanded many geographies but faced operational problems
         • Different business groups used different ERP systems
         • Outsourced development of ERP system to IT specialist
         • $700m in ops savings
   • Subcontracting
     • Cross sectional analysis shows that as specificity grows, firms tend to subcontract less (Arrunada et al.)
     • EU study on reasons for Subcontracting
       • Followed by financial reasons (cost-cutting) and access to geographical areas with growth prospects
       • Lack of in-house capacity and need for accessing external expertise/technology are primary reasons
     • Useful in situations where the range of required capabilities for a project is too diverse to be carried out by a single general contractor

4. 3: Use of Resources

   • Outsourcing
     • Resources belong to outsourcing company
       • A firm that outsources manufacturing does not own any of the production factories
         • Example: Harley Davidson outsourced manufacturing overseas to avoid retaliatory tariffs placed by the EU on US motorcycles
           • Triggered backlash from Trump who was not happy with the loss of American jobs
     • Resources can also be transferred once the contract has been signed
       • Example: Employees transferred to Unisys when The Co-op Bank outsourced its check-clearing operations
   • Subcontracting
     • Client company owns the infrastructure or facilities
       • Example: When building a house, one subcontractor builds the roofs while another will install the electrical wiring

5. 4: Scope

   • Outsourcing
     • Firms may outsource entire departments
       • Tends to be longer-term with no specified end date
       • Strong relationship is built as a longer-term contract leads to further integration between subcontractor and client
   • Subcontracting
     • Contract usually specifies a particular task within a project and the contract is terminated once this task has been fulfilled

6. 6: Transferability of Contract

   • Outsourcing
     • Outsourced contracts can be subcontracted
       • Can subcontract parts of the contract
   • Subcontracting
     • Sub-contracts cannot be outsourced
       • Must be carry out the task themselves
       • Contractually does'nt make sense

7. 5: Control

   • Outsourcing
     • Terms of the contract are usually set by service providers, especially for SMEs
       • Quality control can be difficult
   • Subcontracting
     • Relationship starts with negotiations. Opportunity to work directly with the team and ensure your goals are being met
       • Sustainability focused client may wwant to ensure their suppliers adhere to the triple bottom line aapproach to accounting

8. Critical Analysis

   • Outsourcing
     • Critics of outsourcing blame it for a loss of jobs
       • 14 million jobs or 11% of the employed labor force is at-risk to outsourcing offshoring (Bardhan & Kroll)
       • 300,000 jobs get outsourced out of the US each year
       • During the height of the Global Recession, 86% of Americans blamed outsourcing for exacerbating the crisis
         • This public perception of outsourcing may affect a firm's relationships with their customers as they won't want to a company that uses this practice
     • Data security is a top concern for 68% of outsourcing companies who are considering moving to cloud technology
   • Subcontracting
     • Cases of use by companies to circumvent safety regulations
       • North Dakota oil fields accident
         • Oasis (well owner) not held accountable the site missing several key safety features
         • Two dead, two injured after explosion
         • No exposed employees on the site because they hired subcontractors
   • Forced labor and slavery concentrated portions of supply chains where subcontracting and outsourcing are the highest (LaBaron)
     • Example: In the garment sector, labor-intensive activities like sewing and dying, are subcontracted to un- registered “shadow factories,” in which exploitative labor practices are commonplace (Harney)
       • These shadow factories evade retail monitoring systems and therefore there is little incentive to promote labor standards
     • Suppliers may subcontract activities to smaller firms that use exploitative employment practices
     • Highlights importance of relationship management
       • Sako's institutional Trust Model

9. Conclusion

   • Outsourcing
     • Unstable trajectory since 2012
       • Revenue peaked at $104.6 billion in 2014, then dropped to $88.9 billion the very next year.
       • Outsourcing statistics from 2018 show that the trend of rising and falling revenues has continued
     • Deloitte 2018 survey indicated that disruptive outsourcing solutions are fundamentally transforming traditional outsourcing
       • Led by cloud and automation
   • Subcontracting
     • Strong growth in Uk subcontracting sector (31%) despite uncertainty in the manufacturing industry
   • A firms' choice on whether to use outsourcing or subcontracting is dependant on the nature of the project/activity
   • Regardless, proper relationship management practices need to be implemented