October 1, 2004
Inside Or Out?
Q: I started a business not too long ago, and I was wondering whether I should look into hiring additional staff or just outsource everything we can’t do internally. What are the pros and cons of outsourcing?
–T. Easley, Via the Internet
A: Your situation is not uncommon. A lot of small businesses are using outsourcing as a way to cut expenses while getting the job done. A disadvantage to outsourcing is that you are putting part of your company in someone else’s hands, so there’s a trust factor. Legal services, printing, and health insurance are among the more common jobs outsourced.
One approach is to identify your strengths and outsource everything else. This might work early on when the company is small with few revenue streams, but as your business grows, this will become an increasingly bad approach.
One way to determine whether outsourcing is the way to go is to use the following formula: annual salary + commission + bonuses + benefits and divide that sum by 2,040 (the average number of working hours in a year) to determine your actual hourly rate. If the costs associated with outsourcing exceed this total, it’s not cost-effective.
I’d advise keeping the communication lines open with your vendor to gain a working knowledge of the fees involved and how they’re calculated. You might consider outsourcing a small project to test the waters first.
Consult these books to help with the outsourcing process: Turning Lead into Gold: The Demystification of Outsourcing by Peter Bendor-Samuel (Executive Excellence; $12.75) and Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives by Maurice F. Greaver II (American Management Association; $42.95).