Difference between Outsourcing and Contract

Key Difference: Contract is a binding agreement which is enforceable by law. It exists between two or more parties. Outsourcing involves transferring some of the tasks to the outside company and generally makes use of a contract which is agreed by the involved companies.

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. It provides a good option for the company for cost cutting, as it is often calculated that if those outsourced activities were to be carried out by the company itself then it may have to spend more.

Outsourcing involves transferring some of the tasks to the outside company and therefore it generally consists of a contract which is agreed by both the companies. Both the parties are legally bound to all the terms and conditions mentioned and agreed in the contract. Outsourcing is an arrangement, whereas contract is a legal agreement, which is generally used to denote the document on which the contract is expressed in words.

Contracts are used in various types of scenarios. For example – a company may hire an employee on contract. Contracts also make a part of outsourcing process. Therefore, contracts and outsourcing are two different types of entities. However, contracts exist between the companies engaged in an outsourcing activity (company which is outsourcing, company which is accepting the outsourced task).

Comparison between Outsourcing and Contract:

 

Outsourcing

Contract

Type of entity

An arrangement

A legal agreement

Definition

Outsourcing generally involves transferring some of the tasks to the outside company, consists of a contract which is agreed by both the companies.

Contract is a legal binding existing between two or more parties. It is a type of commitment which is made regarding a course of action.

Types

  • Business Process Outsourcing
  • Knowledge Process Outsourcing

Some contract types are –

  • Fixed Price Contracts
  • Requirements Contracts
  • Multi term contract
  • Lease
  • Lease/Purchase Contract
  • Installment purchase contract

Reasons

  • Focus on core activities
  • Improve quality
  • Reduce costs
  • Conserve capital
  • Faster renovation
  • Increase speed to market
  • Validation for agreement
  • Legitimated under the law
  • Used as evidence
  • Prevent disputes
  • Professional approach

Example

A car manufacturing company outsources its work of advertising to an advertising firm.

A supplier and buyer sign a contract document specifying the terms and conditions of the purchase activity like number of items to be purchased, date of delivery.

Image Courtesy: conlonconsultancy.co.uk, heightsglobalit.com

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