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Outsourcing and subcontracting in business

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Numerous factors can make businesses decide to outsource or even engage a sub-contractor in their day-to-day activities. Results of many surveys indicate that some of the key reasons for this are the competence of the third party, cost reduction purposes, reaction to government policies, and unpredictable business climate, among others. However, the current reality of the harsh environment, the novel Coronavirus (COVID19) pandemic, high economic pressures, and the craving for business survival lay at the heart of the need for outsourcing or subcontracting as a strategy to stem the tides of these challenges.

Outsourcing is primarily a cost-efficient solution and cost-cutting measure where regular business tasks are completed by individuals or businesses outside of the firm. Subcontracting, on the other hand, (subcontractors, co-contractors, or partners) is when a company hires another individual or company to complete a specific specialized task that sometimes typically cannot be done internally.

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While the practice of outsourcing and subcontracting are not new, the popularity especially in a developing and emerging economy like Nigeria is largely due to costs of labour, operations, and production. Around the country, there are lots of critics of outsourcing/subcontracting due to associated risks and the attendant negative impacts. Distinctively the practices can easily be noticed around the country, chiefly with the increasing use of contract staff, in many sectors of the economy. It has spread across industries, from manufacturing to services industries, and other occupations, including construction, banking, oil and gas, telecommunications among others. However, under the employment regulation, a contract staff is perceived as an unemployed person; who is supposed to take a temporary job while looking for a permanent role. Conversely, in Nigeria, some contract staff usually remain as far as 10-12 years or more on the role. This negates the campaign against unemployment and poverty reduction initiatives by the government.

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It can be said that the attraction to subcontracting or outsourcing practices in business operations is mainly because companies do not necessarily have to make provisions for workers benefits such as compensation, pension, health, wardrobe, holiday, or even sick leave.

Nevertheless, whether the consequences for subcontracting or outsourcing are good or bad, lots of surveys conducted in recent decade have shown that the practice improves business profitability and drastically reduces the cost of doing business. However, much is still desirable in the area of regulations, engagement contracts, protection, and formality by government and policy makers. Agreeably, the whole idea of the practice is to reduce business costs by entrusting part or all not too sensitive role to an outsourcing or subcontracting company or individual. Besides, business owners, operators, and entrepreneurs often use outsourcing and subcontracting interchangeably; however, in reality, the two practices are quite different and distinct. Empirically, outsourcing and subcontracting differ greatly from the descriptions. On the contrary, from the business perspective, and in my view subcontracting and outsourcing have similar objectives which are that both strategies are adopted in a business to save time and cost, despite being two different terms. Both reduce the cost of service and production which in turn affect sale prices, operation expenses, labour cost, and more importantly it improves competitiveness when multiple businesses have the same goods or services.

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This led me to conclude that the difference between outsourcing and subcontracting is very indirect. But the primary difference lies in the amount of control a company has over the work process and the length of time of engagement in my opinion. Significantly, subcontracting does not involve permanently allocating out entire jobs or departments within a firm and the job is usually agreed upon on a contract basis. On the other hand, outsourcing is governed by a contract stipulating the services expected and the payment terms that may be fixed-priced for the duration of the contract or based on some sort of pay-per-use/service arrangement. Common business operations that can be outsourced or subcontracted are training, recruiting, facility management, security, information technology operations, research, software, and network services, and so on.

With the pandemic and the new normal, it is evident that to stay competitive, business organizations particularly Small and Medium-sized Enterprises (SMEs) need to review their business process and consider outsourcing or subcontracting where necessary to maintain a competitive edge and customer satisfaction.

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Currently, businesses need to focus more attention on their core functions and on increasing their productivity. In fact, high-cost business activities can be outsourced to specialists and professionals to keep operating expenses, payroll, and overhead low. More so, with these practices, freeing up time to focus on value-added and the main services of the business can easily be achieved. For instance, to meet up accounting functions in any small business, companies do not necessarily need to employ the services of a sit-in chartered accountant to achieve the stipulated duties of an experienced accountant. Outsourcing can be leveraged upon to achieve the task for a quarterly or annual retainership fee. This usually covers the bookkeeping, and management, and maintenance of records or software if need be.

In conclusion, to grow your practice or business, it is essential to consider subcontracting or outsourcing as a strategy at this time because of the aforementioned and harsh current realities. Functions such as compliance tasks, that is Tax matters (Withholding, Company income tax, VAT, and PAYE), technology and software requirements, preparation of accounts to meet regulatory framework, and stipulated guidelines can be conveniently outsourced. Accounting is one of the most common areas where small businesses choose to outsource for effectiveness, compliance, and to maintain an adequate business structure, this you can also key into. Handing the accounting task off to experts has shown to decrease costs and increase compliance. Likewise, the non-sensitive functions like social media marketing, software, facility management particularly cleaning can be outsourced to reduce operating expenses going forward. Good luck!

Dr. Olubiyi is an entrepreneurship and small business management expert with a Ph.D. in Business Administration.

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