Contracting out to reduce overheads or build capability

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06/02/2018

Outsourcing is the contracting out of a business function to an external provider, rather than do it yourself. Businesses of every size outsource certain functions; you don’t need to own a bank to have a bank account, or run a cell network to make a call. A rapidly growing business can use also use outsourcing to add expertise, either by introducing a new service or by contracting out a particular business function.

Mature business may see outsourcing as a way to reduce costs and gain efficiency. They may contract out activities that are already done in-house — such as human resources or information technology services — or they may find an outsourcing solution that can create a new customer benefit, such as a 24-hour customer hotline service.

Business owners often adopt outsourcing to enable them to focus on their core business.

What tasks can be outsourced?

In order to determine what can be outsourced, you need to conduct a thorough review of your business practices and look at where you’re spending the most money. When you do this, keep the following in mind:

• Of each task, consider how much time you’re spending on it (or your employees) and ask if that time wouldn’t be better and more profitably spent elsewhere?
• Would it be cheaper to outsource the task than to pay an employee to do it?
• A common example for smaller businesses is the time it takes to invoice each month. Is your time as the owner best spent ‘doing the books’, or can you employ a part-time bookkeeper instead?

The great thing about outsourcing is that it frees you up to spend more time in activities that grow your business. This is especially true of administrative tasks, so you could look at outsourcing:

• Payroll – this can be time consuming and often stressful, especially if you make mistakes. Outsourcing this task eliminates those factors and frees you up for more profitable activities.
• IT support – unless you’re an actual IT-based business, retaining someone to look after your IT needs is a very costly expense.

Some business owners feel that it’s a waste of money to outsource a task (and paying a high hourly rate) that they think they should be doing themselves. But depending on how fast your business is growing and how much time you’re spending on admin, you could be actually losing money in the long run if you’re best to spend your time building sales.

Short-term projects

If you have need either new skills or more staff to fulfill a sudden increase in demand, and you’re unsure if you need a full-time person, consider hiring contractors for a short-term project. Whether it's for a couple of weeks or a few months, hiring a contractor fills the gap and lets you identify if the need is permanent. If the demand or need settles down, you can end the contractor’s role without the same issues as if they were a full time employee.

By bringing in a contractor for short-term projects, you’ll:

• Gain access to their expertise. A key benefit of hiring contractors for many businesses is being able to quickly adapt to changing demands for skills.
• Gain access to people fast. If you're hiring you can probably get a consultant more quickly than an employee who requires to provide notice to existing employers.
• Not need to provide the usual employee benefits such as holiday pay, sick pay, employer taxes, or pension or superannuation payments.

Build capacity and capability

Contracting doesn’t always have to be for labour. You can also contract other businesses to help with any short-term demand issues. For example;

• Having similar businesses take any surplus demand you are unable to handle.
• Access specialised machinery or equipment that is uneconomical to buy or lease, but you could borrow or pay another business to access.
• Be able to consider new work, joint ventures or projects you currently either can’t deliver or don’t have the capacity to deliver on your own.

Making contractors cost-effective

Contractors often quote a set hourly rate, or a project rate. To make sure you’re getting value you should:

• Watch out for ‘scope creep’, where the contractor quotes a low price to get the work, then expands the work or takes longer than you thought.
• Eliminate any unforeseen blowouts such as allowances, materials and product selections by making the contractor have limited ability to buy on your behalf.
• Pay in instalments each time a specific task within the project has been completed to your satisfaction.
• If you'll need them for a longer period, ideally re-negotiate a lower rate, as usually the longer the term, the better value it should be. You’d expect to pay more for a person for a day, than if you contracted them for a year.

Getting the most out of contractors is down to making smart decisions when you hire them (reference and reputation checking), making sure you have a clear description of what you want them to do, and clearly worked out contract agreements.

Summary

It’s worth any business owner’s time to take a careful look at the range of tasks in their business and seriously ask themselves if keeping employees on staff to perform those tasks is cost-effective, or if they couldn’t be done faster, more cheaply and more effectively by outsourcing them. Although this is particularly true of administration and IT, it’s still worth your time to decide if other tasks could be delegated to a contractor as well.It’s worth any business owner’s time to take a careful look at the range of tasks in their business and seriously ask themselves if keeping employees on staff to perform those tasks is cost-effective, or if they couldn’t be done faster, more cheaply and more effectively by outsourcing them. Although this is particularly true of administration and IT, it’s still worth your time to decide if other tasks could be delegated to a contractor as well.

Contracting can also lead to a range of synergies and partnerships with other businesses that can help build sales and future opportunities.