Outsourcing, also known as "contracting out," is the act of sending specific tasks and jobs outside your small business to be completed instead of handling them in-house.
Technology and the rise of the gig economy have made outsourcing more accessible to small businesses. What's more, 34% of the U.S. population is currently freelancing. With such an extensive network of skilled workers available for hire around the country, it could mean great things for your small business.
- Consider hiring a freelancer if your company is growing so fast that your existing team can't handle it, or if you need help on a short-term project.
- Contractors are great for tasks that require specialized knowledge that you don't possess or to free up your time by performing highly repetitive jobs.
- There are many benefits to outsourcing, such as increasing efficiency and reducing costs.
- Your responsibilities, as an employer, are different vis-a-vis employees and contractors, so be careful to classify your workers correctly.
When should a business outsource?
Small businesses may need a contractor at different times and for various reasons. You might consider hiring a freelancer if:
- You're growing so fast that your team can't handle the additional workload. Contractors are often highly skilled, so they can help you deal with expansion without interrupting the flow of your business. Since the worker is already skilled, you won't have to rush through onboarding a new employee to relieve your struggling team. If you need the person's expertise for longer, you may decide to hire them as a permanent member of your staff.
- You need someone for only a short period. If you have a short-term project, like designing a new ad campaign or setting up your new point-of-sale system, it might make more sense to hire someone you don't have to train. Because it's only a one-off project, it may be more cost-effective to hire someone else to handle it than to do it in-house.
- You're a seasonal business that could use a little extra help during the busy periods. During certain times of the year, you might need all hands on deck to help your customers. That could be the right time to outsource some lower-priority tasks so you don't have to play catch-up when business slows down. Furthermore, you may find that outsourcing is simpler than hiring temporary staff, because you won't have to turn around and lay off those additional workers when the busy season comes to an end.
- Your expertise falls short. It's important to recognize your own strengths and weaknesses. If you know that you're not the best person to handle a particular task, it's OK to pay a professional to do it for you. That way, rather than spending hours trying to master a new skill – like web design or accounting – you can focus entirely on the things that only you can do.
- You don't have enough time to get everything done. There are only so many hours in a day. Spend your time on tasks that bring in revenue or help your business grow. If you notice that some items keep slipping through the cracks, contract them out. This will free up your schedule, relieve some of your stress and help you prevent burnout.
5 areas small businesses should outsource
Don't try to outsource your business's core competencies. Instead, focus on what you're good at and let someone else handle the rest. If you have the financial resources, consider contracting out the following tasks:
- Marketing: Promoting your company is essential to its success. A marketing specialist can help you develop and implement new strategies, produce engaging content, and schedule all those social media posts that you just don't have time to do.
- Bookkeeping: You don't want to make any mistakes in your small business's financials, so let a professional handle them for you. Hire a contractor to keep accurate records for you so you have everything you need when it's time to file your taxes.
- Scheduling: Whether you're trying to squeeze in a meeting with a new client or create fair shifts for your employees, scheduling can take a lot of time. Let someone else handle it.
- Information technology: You likely don't need an IT professional onsite every day, maybe just when you have to install new software or troubleshoot printing issues. By outsourcing IT, you can call for occasional help and pay by the hour or the job.
- Logistics: If you ship your merchandise to customers around the country, let a third-party provider handle it for you. This will not only save you time, but could save you money if they get volume discounts.
The benefits of outsourcing
There are many advantages to hiring a contractor to help your small business. Here are a few of them:
- Save on labor costs. If you have a short-term project, you can hire someone to complete it without providing benefits, increasing your tax liability or offering vacation time. When the project is complete, you won't have to choose between laying them off and finding more work for them to do.
- Focus on priorities. Freelancers can enhance your existing team by taking some work off your employees' plates. With this additional bandwidth, your staff can focus on their most important tasks and leave your contractor to handle other day-to-day items.
- Improve efficiency. Trying to accomplish certain projects in-house could cost you a lot of time, especially if your team needs training to get the job done. Working with an individual who already has the experience and education can save you hours. Plus, they're likely to deliver a product that meets or even exceeds your expectations on the first try.
- Find top talent. Hiring a freelancer can help you level the playing field. As a small business, you likely can't afford to compete with larger companies, but outsourcing can give you access to the same expertise. When you are only looking to hire local talent, the options may be limited. If the job can be done remotely, your contractor could be located anywhere around the world.
The disadvantages of outsourcing
There are also some downsides to outsourcing that you should consider before diving in. Here are some shortcomings to be mindful of with outsourcing:
- Rate changes: You'll have to revisit the freelancer's contract regularly to ensure it's still beneficial for both parties. Every time you review the agreement, you run the risk that the worker will increase their prices.
- Missed deadlines: Because the contractor is likely working for multiple companies at once or has a full-time job, you might not get their full attention. When you're writing the contract, emphasize how important it is that they stick to a timeline.
- Security concerns: The person may need access to sensitive data about your company or customers to do their job well. Make sure you have security measures in place.
- Worker classification errors: Your responsibilities are very different when hiring an employee versus hiring a contractor. Because of this, you increase your risk of being audited for worker misclassification when you hire freelancers. When deciding how to classify someone, consider whether you have the right to control how work is done, whether you reimburse them for job-related expenses and how long the relationship will last. Do not blur the lines between employment and contracting.
- Lack of control: With an employee, you have the right to dictate how and when they work. With a contractor, you typically only have control over the final result; the worker can accomplish the task however they like.
How to begin outsourcing
Although they may not be with your company for the long term, it's still vital to take your time finding the right freelancer. Follow these five steps to ensure you hire a quality worker:
- Define your needs. When you're hiring a new employee, you likely know what role you're filling and have a thorough job description written before posting a job ad. Hiring a contractor shouldn't be much different. Before you begin your search, know what job you want help with and how long you expect to work with the person, then decide whether they should be local.
- Set a budget. When you're determining how much you're willing to pay a contractor, look at what other small businesses are paying for similar positions. Try to be competitive. This will ensure you make an informed and fair offer.
- Outline your expectations. You must be clear about what you want from your contractor. Make sure you know the full scope of work, including timelines, check-in points and deliverables. For example, if you're hiring someone to redesign your website, you might expect a mockup within the first two weeks, then regular updates until the site is completed. It's highly unlikely that your contractor will be in your office all the time, so clearly convey what you require from them.
- Find a reputable contractor. Ask other small business owners in your area who they have used. Talk to them about their experience with the person and if they've ever had any issues. You might also consider asking local companies whether any of their staff members have recently retired and have the skills you're looking for. Many baby boomers are becoming freelancers because they aren't ready to retire completely but want to escape the typical 9-to-5 corporate world, so they have the experience and skills to do professional work. Besides asking other business owners, you can also use job boards dedicated to hiring freelancers, like Upwork, Fiverr and Guru. These sites are especially helpful if the person doesn't need to be local, because you can hire the best talent, no matter where they are.
- Understand your tax obligations. If you already have a few employees on your team, you're likely familiar with the tax forms they need to fill out, including a W-4 and an I-9. Onboarding a contractor, however, may be new territory. You typically won't have to withhold any taxes from their pay, but it's still important to collect their Social Security number or taxpayer ID number so you can adequately report their income at the end of the year. You can do this by asking them to fill out a W-9. Then, at the end of the year, you'll file a 1099-MISC form. To simplify the tax process, choose a payroll system that can handle contractors' pay and tax forms.
4 things you can do to be a good client
For your part, try to ensure your freelancer has a great experience with you.
- Stick to the contract. After you've found the right person for the job, make sure you have a clear contract so you're both on the same page. Clearly identify the details of the tasks to be completed and how long you expect the relationship to last. You might also include a clause about how much notice either party needs to give before terminating the relationship. Having a contract in place helps ensure that both parties live up to their end of the deal.
- Pay on time. Contractors will take your reputation as an employer into account before accepting the job, so always pay them when you said you would. If that sounds challenging, consider using an automated payroll solution that lets you pay your whole team – employees and contractors – on time from a single platform. Once you have them entered into your system, it makes the transition more manageable if you later hire the person as an employee.
- Be respectful of other cultures. Hiring a contractor allows you to employ the best talent available, no matter where they live. If you hire someone from another country, keep in mind that their culture is likely different from your own. You must respect those differences to maintain a good working relationship. For example, it might be common for workers in your area to respond to emails as soon as they receive them. In other countries, someone might only check their email when they're actively working on your project. You should also keep in mind that they're likely in a different time zone, so try to be considerate. If you're hiring someone overseas, talk about their work expectations upfront so you can respect their needs.
- Leave a review (or give a referral). As a small business, you likely know how critical reviews are for you to attract new customers. They're just as helpful to freelancers, so leave a comment on their online accounts or social media profiles praising their work. You can also help other small businesses out by recommending great workers when they're looking to outsource tasks.