“Outsourcing” received a lot of media attention during the most recent presidential election, and many people now assign it vaguely negative connotations. It’s true that some American communities have lost jobs as a result of positions being sent overseas, but this specific form of outsourcing is called “offshoring,” and it’s hardly the only shape that outsourcing can take.
If a factory hires a local security firm to staff night shifts, or if a small business uses an accountant to help them out around tax time, that’s also outsourcing. Outsourcing part of your small business can be part of contributing to your local economy. Of course, so can outright hiring.
So should your business outsource or hire? The answer is probably a mix of both, and that mix will vary according to the unique situation and needs of each business. Here are a few questions to think about when considering your personnel makeup.
The Business Dictionary defines “core activities” as business functions that are “critical, and closely related, to a firm’s strategy expressed in customer service, marketing, product design, etc.” It defines non-core activities as those “not necessarily required by a firm in fulfilling its value proposition to its customers.”
If you run an HVAC installation service, both your installers and whoever answers your phones perform core activities–their skills and services directly impact whether your customers like your company. Accounting work for this theoretical HVAC firm is still essential for keeping it above water, but it’s not a core activity. If your customers are displeased with your company’s product, they’re probably not going to jump to blaming your accountant.
In most businesses, the majority of employees perform core activities. Since they fundamentally affect your business’s long-term relationship with its customers, you need to be able to manage them more closely than an outsourcing arrangement would provide for. On the other hand, outsourcing non-core activities is less risky–if an outsourcing arrangement doesn’t work out, you can cancel or change it without much immediate effect on your customers.
Many businesses face fluctuating needs over the year. Most retail establishments, for example, face significantly increased demand around the holidays. Target planned on hiring about 100,000 temporary store workers for their fall/winter 2017 busy season. Many companies need help around tax time to prepare their documents, or at other times to take on large projects outside their normal delivery scope.
Target likely preferred to hire their seasonal workers, rather than outsource them, because their temporary positions did not require significant training or expertise. Part-time workers, students, and the unemployed could all be hired and trained to fulfill these personnel needs at a reasonable cost.
But most businesses who need an accountant around tax time will outsource one rather than trying to hire one part-time. Because accountants need a professional license and a far more specialized knowledge base than seasonal cashiers, they’re more likely to be attached to companies such as accounting firms that provide them generous, full-time salaries. To get skilled accounting help for tax time without keeping a trained CPA on staff, you will likely need to outsource.
Many outsourcing firms have access to a concentration of knowledge your firm probably doesn’t have. And that can make trying to do some things yourself difficult, for the same reason that you’ll probably hire a lawyer instead of trying to represent yourself if your firm ever winds up in court. With this increased knowledge base comes higher efficiency, and missing out on that efficiency can cost you.
Small Biz Trends reports that about 40 percent of small businesses pay an average penalty of $845 per year for tax filing mistakes. Even if you could more or less do what an outsourcing firm does on your own, you’d do it at a much slower rate and higher margin of error–costing you valuable time when you and other employees could be focusing on core tasks.
On the other hand, some tasks may require your own close managerial control. Even the most diligent outsourcing companies, after all, are focused first on their firm’s profit and second on your business’s long-term health. Many core activities discussed above require too close managerial control to allow an outsourcing relationship, but you may find that some non-core activities are also so essential that they require the close managerial oversight and in-house knowledge provided by hiring.
If you’re a five-employee company, it makes little sense to hire someone just to manage your computer network. If ten years down the line you have fifty employees, however, hiring a full-time IT administrator is no longer quite such an absurd-sounding idea. For some companies, particularly larger ones, it may be more financially efficient to simply hire a knowledgeable person full-time for a non-core activity. For smaller companies, of course, this can be a prohibitively huge expenditure, and outsourcing provides a solution.
Discussion of the outsourcing versus hiring issues can go on for pages because so many factors influence it, but at the end of the day, you won’t find a one-size-fits-all answer. The only way to truly know what’s best for your company is to assess your own needs and capabilities. Hopefully, the questions above will provide you with a starting point for thinking things over.
If you’re interested in learning more small business financial optimization tips, don’t hesitate to reach out to Currency today. We’re always available for a call at 877-358-4595, and would love to answer your questions and guide you toward the best option for your business.