Will Outsourcing Benefit Your Business?

Before you decide to outsource, be sure to consider the benefits and drawbacks.

If there isn’t enough time in the day for all the responsibilities that come with running your small business, it might be time to outsource certain tasks. While you may feel uncomfortable with the idea of farming out jobs to nonemployees, most businesses already do this. Whether it’s legal work, payroll services, or IT support, turning to outside professionals for certain functions is often essential. Let’s look at the pros and cons of outsourcing and how it might be a good move for your business.

The Benefits of Outsourcing

Outsourcing isn’t just for middle-market businesses and big corporations. It’s an important way for small businesses to increase efficiency and scale while staying nimble and focusing on their strengths. The benefits of outsourcing include:

• Labor costs can be reduced significantly.
• Some expenses for overhead, equipment, and technology can be eliminated.
• With more available resources, work may get done faster.
• You’ll have access to a larger talent pool.
• By outsourcing particular tasks and functions, you can benefit from experts in the field.
• Using 1099 contract workers provides tax benefits.
• You can focus on providing the best products or services for your customers.
• You can enhance your efficiency and customer experience, helping your business – and revenue – to grow.

The Drawbacks of Outsourcing

Despite the many benefits of outsourcing, you’ll want to consider potential drawbacks. These include:

• Communication between your company and outside providers may be challenging and can delay projects.
• Providers’ time zones may not match your business hours.
• When multiple parties can access sensitive data, you may be vulnerable to increased security threats.
• Coordinating logistics with outside agencies or contractors can be time-consuming.
• By farming out work, you lose some control over how tasks are being monitored and performed.
• You may experience problems with quality and will need to clearly express your expectations upfront.
• While outsourcing is generally considered cheaper, read all provider contracts carefully to make sure there are no hidden costs.

Once you’ve determined how outsourcing will support your company’s growth and bottom line, decide which functions should be outsourced and which should remain in-house. Consider your needs and the cost of different skill sets:

• Highly skilled work. Having full-time analysts, attorneys, or other experts may be very useful, but employees with advanced training or extensive experience command high salaries. Your best bet may be to hire these professionals on a per-project basis.
• Specialized services. It’s often good to outsource tasks that require unique skill sets – such as IT, web design, and accounting. Unless you and your team are skilled in these areas, highly specialized services should be handled by experts to provide the best quality of work and to help your own team focus on producing revenue.
• Unskilled labor. Jobs that require minimal training or highly repetitive tasks are often vital, but labor costs vary widely. Weigh the expense of outsourcing against the cost of hiring a new team member.

Best Practices for Successful Outsourcing

While outsourcing tasks can improve your business’s productivity and drive growth, it’s important to understand how labor laws, tax regulations, and contractor relationships fit into this equation. Knowing the do’s and don’ts of outsourcing will help your small business avoid pitfalls like fines, legal problems, and unsuccessful contractor relationships.

• Is outsourcing the right choice? Bringing in outside help can be an important way for your business to grow, but the IRS and Department of Labor discourage using contract or freelance workers in some situations. This is because businesses don’t provide health insurance or other benefits to independent contractors or freelancers, and they don’t withhold these workers’ payroll taxes either. When deciding whether a position should be filled by an employee or a contractor, be sure to follow government guidelines so you can avoid legal conflicts with workers as well as government fines.
• Government Guidelines… The IRS lists several factors that determine who is considered a contractor. Independent contractors have more control over how, where, and when they work; they are responsible for job-related expenses and supplies; and their work takes place over a set length of time. The Department of Labor adds that an independent contractor should not be “economically dependent” on your business. Since these rules are not always cut and dried, it may be helpful to consult a legal expert.
• Working with freelancers and independent contractors. Although the definition of an independent contractor can be ambiguous, there are ways to ensure your outsourcing strategy doesn’t result in any disputes. Hiring an independent contractor who works outside your workplace and relies on their own resources can help keep your business separate from your contractor’s business. Also, the IRS says independent contractors shouldn’t do a job that’s central to your business. For example, if you are a software startup, your software developers should be employees, but you can hire independent contractors for support services like bookkeeping. Although it’s sometimes more expensive, you can avoid potential disputes by hiring a temp agency or other company, which employs the workers – not you.
• Contractor Relationships… As you prepare to outsource certain support functions, carefully research your options. Get pricing from multiple contractors, compare their experience and services, and check their references. The workers you contract with should be professional, reliable, and trustworthy – after all, they’re contributing to the success of your business. If they will have access to confidential business or customer information, make sure they sign nondisclosure agreements. And, as in any relationship, communication is essential, so your conversations and the contract should set clear expectations about the nature of your relationship – including how long this job will last and how you will gauge the quality of their work. Also, remember that contractors face a learning curve with any new client: Allow them time to learn your needs.

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