Outsourcing/Contracting

Some roles in a company do not require a full-time employee. For those roles, you can split an employee’s time, or you can either outsource the role to a company that specializes in doing that job, or you hire a contractor that specializes in that role. As a company of 12-20 people, there are definitely areas which can be performed by temporary staff. Areas such as accounting, IT staff, or even marketing may be well suited to contract labor or outsourced to companies that specialize in that area.

Are you making a mistake by outsourcing or by not outsourcing? Well, that answer requires a good understanding of your business drivers and market conditions. However, I will say that for many companies, not considering outsourcing is a mistake.

Outsourced Accounting

Accounting or bookkeeping is a department that once required a staff of several people because everything was done by hand. Accounting software like QuickBooks has made tasks easier and faster over the years, and now $5mm in revenue and associated expenses should be easily managed by one part-time person. That person can work on company premises part-time, or it can be a bookkeeping company. With web-based accounting software, that person can work remotely, and the CFO can log in to check numbers.

Whether QuickBooks, Freshbooks, or one of the other online accounting packages is used, a part-time accounting person is a good way to save money until the company grows to a size where there is sufficient work for a full-time in-house person. If you do outsource accounting, then be sure that a different firm does your audit work and end-of-year taxes than your day-to-day accounting. This will be very important if you decide to sell the business or are going through the due diligence process, where they will want to see records of separation like this for up to five years back.

Outsourced IT department

During the late 90s and early 2000s, it became very popular to outsource IT departments. This was due to a combination of factors which included a lack of qualified IT junior people due to huge hiring for the grossly exaggerated Y2K bug, as well as the internet making long-distance remote working much easier. Another factor was a large, educated class of IT professionals in India who were available for around 15-20% of an equivalent US wage.

Unfortunately, the promise of good quality, cheap labor never came to fruition. The cost and complexity of managing not only teams that were remotely located, with a 12-hour time-zone difference, and with a completely different mentality of what constitutes good work on a project, increased costs and slowed down project execution to the extent that all of the savings were gone. Yes, the dirty little secret over the years has been that whatever cost savings the company will realize from outsourcing a department, more often than not, will be spent on increases in project management and delay in completion. In a dozen Fortune 500 companies (see my LinkedIn Profile) and countless small businesses, I’ve seen projected savings from outsourcing saving wiped away, especially when outsourcing to India. While I have less experience with Eastern European outsourcing, at this point in the current US economy there are an estimated 92 million people who are unemployed, so going out of the country to fill a position should be a last resort.

Having said that, IT is probably a full-time job for at least one person in a company with sales of $5mm. So the question is whether to hire that person or to contract out the position.

Contracting will generally bring a slightly more experienced person and allow the company to have automatic replacements show up in case this person leaves. The benefit of using an IT firm rather than a 1099 contractor, is in the scalability and diversity of talent a firm provides, which is impossible for an individual contractor to provide.

Hiring a person internally means paying lower hourly rates since there is no middleman. But it also means having to deal with no IT person while they are on vacation, and not having a replacement as quickly if they quit. In the end, a dedicated IT person will most likely be necessary as the company grows past $5mm, so the easy decision may well be to simply take the time to hire a competent resource now and add a contractor to help the internal person as the company grows.

Outsourced Marketing

Some people would be surprised that I would even suggest looking at outsourced marketing. However, I’ve had some positive comments from clients about such companies. Essentially they take over managing the marketing that has already been developed and work with the company to continue marketing products and services in the future. If you look at the cost of your company doing its own marketing, it may well be beneficial to outsource it to a company that can use bulk purchase discounts.

You end up with a marketing department that focuses on your company just like an in-house team, but without the HR related issues and with lower payroll overhead. While this book is focused on operations and back-office rather than sales and marketing, I did want to mention that in many markets, there are companies that are able to be a marketing partner and allow you to fully outsource your marketing efforts.

This is not the same thing as hiring an ad agency. This is really replacing an in-house department with an outsourced one, so they operate much more closely with the company and often are actually housed in the company office. If marketing is not your or your management team’s strong suit, this may be a good way to go!

Interns

In many companies I’ve consulted, I brought in a secret weapon called interns. When I was in 8th grade, I got a job as an intern at a custom rubber stamp making company. I learned to make stamps, and each summer I’d have jobs with more responsibility, all while they would get cheap labor. They made rubber stamps using this new-fangled computer called a Macintosh. It was uber high-tech for the time! I was paid $4/hr if I recall correctly, and thought I was The Man for having a real job rather than babysitting or mowing lawns. What I didn’t think about was that the products of my labor were being sold at a rate of about $60/hr, and so I had a real job I could be proud of, but the company more than paid for me, the equipment I used, and for the mistakes I made – being a kid at the time.

Now, I’m not advocating hiring a bunch of 8th graders, but I am absolutely advocating hiring a bunch of college juniors and seniors. The productivity difference between a college student and a recent college graduate is virtually none. Graduate students are often even more skilled and need the money just as much. The benefits of hiring students are that they see this job as a better alternative to flipping burgers, and so they try harder. They also are often still partially supported by parents or student loans, so they are able to take a job with fewer hours and less pay than recent grads who need a job that fully pays for their cost of living as well as paying back student loans.

Interns are best suited to doing easily taught, repeatable tasks. While some people would think that this is simply no different than getting minimum wage employees, I disagree. Hiring interns based on their GPA and class history means getting people at the very early stages of their careers who will most likely be making significantly more money and not be interested in entry-level jobs once they graduate. So you are getting people who will probably be overqualified before too long. You start them off doing these easy repetitive jobs not because they are dumb, but because there is the least risk for the company if the high GPA doesn’t translate into a job well done at work. I’m not saying keep them at those jobs for years! In fact, one of the benefits of hiring bright, young students is their ability to adapt. It may take them a week instead of a month for another employee to get good at something. Once they are doing that job well, you can get another intern to replace them and move them up the ladder to a less repetitive job where they still work closely with an existing employee.

Summer interns make great intelligent, cheap labor for part of the year – full year interns are really part-time employees in your company, often on a fast track. In companies I’ve come in to run, I’ve hired interns and then taken the cream of the crop and given them full-time job offers. In today’s economy, with raging unemployment for the 20-something crowd, having an internship means a chance at having a good job from graduation. I do want to mention that while I’ve hired many interns, I’ve always used paid internships, not free internships. In fact, I always pay interns more than minimum wage, just so that they understand the expectations of them are much higher than working at a minimum wage job. But even at $15/hr, interns often make up the most profitable part of the workforce! Find a good balance between employees and interns, and you can have a lower blended rate pay along with higher output. It’s a win-win scenario for everyone, and a company with 10+ existing staff is a prime candidate to bring in several interns.

Excerpted From The Original

Business Growth Roadblocks: How to use uncommon sense to surpass $5 mil

It’s not always the sales side that is the problem, quite often it is the operations that are keeping a company from growing, but majority of books only address the sales side. This book looks at the most common problems in company operations and how to fix them. The book is written primarily to address companies of $3-5mil with 8-20 employees who seem to have slowed down the growth, and it illustrates how others have grown past that size by changing back end operation.

 

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