Lean Business Tips: Hiring Contractors for Fun and Profit(ability) Mike | January 28th, 2013
We write often about ways small business can reduce expense, increase productivity, and operate more efficiently through a lean approach to marketing, technology, and operations. Today I want to write briefly about a strategy we have used to very good effect when hiring new workers: outsource. When we hear that word, we typically envision massive call centers or bucket shops filled with developers writing code half-way across the world. I am not talking about outsourcing work to other companies, but rather finding, hiring, and developing a network of freelance vendors or contractors.
The crowdSPRING business model is part and parcel of this strategy: businesses from around the world can find great providers of creative services when posting a project to our community, and often the relationships developed between Buyers and a winning Creatives on the site can lead to long-term relationships between that particular independent contractor and that small business. The business benefits by gaining a capability that it may have lacked and the contractor by gaining a paying client.
This does not just apply in the world of creative services. Small businesses hire contractors that range from professional services such as attorneys and accountants, but also by leveraging skills and services ranging from software developers to delivery drivers to computer repair technicians. Outsourcing to an independent contractor allows us to gain expertise that we didn’t have, save money, gain flexibility in our workforce, and experiment with different contractors at significantly lower risk than hiring full or part-time employees.
One of the side-effects of the economic downturn is that literally hundreds of thousands of skilled workers lost their jobs in the last 5 years and have populated the freelance marketplace. By leveraging this abundance of skills, experience, and talent many businesses are taking advantage of a game-changing opportunity. There are many reasons that this strategy works well for lots of these businesses but, particularly for small business and startups, but here are 5 reasons why it can provide your business with incredible value.
Reduce, reduce, reduce. Expense, that is. By hiring outside vendors companies can reduce expense in several very meaningful ways. First of all, every employee that a company hires represents not just a salary expense, but everything that goes along with it. When we budget for a new hire, we typically use 135% of the annual salary as their full employment cost; payroll taxes, health benefits, worker compensation insurance, and 401k expense add a significant amount to the cost of each new employee. In addition, every worker we hire needs a computer, monitor, keyboard, etc which can represent a significant capital expense associated with that hire. Finally, a new worker needs a space to work. According to the United States General Service Administration (USGSA) study, 218 rentable square feet per employee is a reasonable benchmark. With commercial office space in Chicago renting at around $20/sf that is an annual expense of $4,360 per employee and that doesn’t count the cost of the desk, the chair, and the various other furniture and office supplies each worker requires! By reducing headcount, we not only save the fringe payroll expense, but reduce other expense in a meaningful way.
Increase workforce capacity. Capacity management has as much to do with human capacity as it does with technological capacity, factory capacity, or logistic capacity. Many companies have cyclical business demands that require them to increase capacity at certain times while reducing it at others. Instead of endless cycles of hiring, training, layoffs, and re-hiring companies can benefit through a flexible workforce that can be expanded or contracted as demand requires. For instance, many graphic design firms leverage crowdSPRING to increase their creative capacity during times of high demand without having to make the investments that would be demanded by traditional hiring strategies. In addition, because independent contractors will typically start as part-time help, once they are fully trained and understand your company and their role, it is a simple matter to increase their hours without having to train another new worker and move them up the learning curve.
Build competencies. Most small businesses do not have an ability to draft a contract, prepare a complex tax return, or design and code a great web page. Nor do they have enough need for these to hire a worker and develop one of these competencies in-house. Outsourcing specific skilled work to independent contractors is one way that even the smallest of businesses can compete effectively with larger firms that might be able to afford these skill-sets. This does not just go for skills that require a great deal of training or a high-priced education; even the hands-dirtiest forms of expertise can be added to the list of competencies that your company leverages.
Save the planet. Every worker who has to travel to your office, store, factory, restaurant, or shop has an impact on our environment and uses resources in the simple act of showing up to work. Contractors often perform their work at a location remote from your own and do not need to travel to you to perform their tasks. Imagine the positive impact on our environment if even 10% of the overall workforce was abe to work from home or another remote location!
Experiment in small batches. Hiring contractors also allows a business to get a “look” at a potential new hire without taking the risk that things might not work out. Companies waste millions of dollars every year on hires that don’t work out; administrative costs, training costs, and HR expense are several lines in the budget that can take a real hit when a new employee isn’t a good fit fr any number of reasons. By hiring contractors, a small business can get a good look at someone and then, if they decide they want to, can bring that person on as an employee.
Form 1099-misc: U.S. Internal Revenue Service