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Should You Outsource

Feb 23, 2011

A leading trend for growing companies in the next year will be increased use of outsourced employees at all levels of the business.  Although this trend will not help ease recession level unemployment figures, it is emerging as a structural trend across industry.  Pundits have talked about the virtual corporation for years and this trend will directly feed that concept. The reasons why more companies are considering outsourcing and subcontracting are many.  Cost is a significant reason – with in-house employees carrying overhead burdens of as much as 40%.

Wage and Overhead Costs

As all employers with payrolls are painfully aware of, the base wage they pay their employees is only a portion of their actual cost.  When you include federal and state payroll taxes, FICA, insurance benefits, vacation pay, equipment, office space and training, the “real” cost of an employee can be over twice their “base” pay.  Aside from payroll itself, employee benefits are one of the biggest cash drains on businesses both small and large.

 Increasing employee benefits costs are pricing small companies out of the market – especially for more experienced employees. The U.S. Chamber of Commerce places the cost at nearly 40%.  Depending on the type of health care benefits you provide and if you’re bound to a contract agreement, the additional employee costs can be staggering.  The U.S. Department of Labor reports than more than 44% of company payrolls in 2005 consisted of employee benefits!

Additional Costs of In-house Employees 

These cost only deal with wages and overhead.  What about all the other costs associated with hiring full-time employees?  When employees are “on the clock” what are you really paying for?  How many of these unproductive and costly habits do your employees practice?

  • Frequent socializing
  • Running personal errands on company time
  • Prolonged Internet surfing
  • Late to arrive/early to leave
  • Personal phone calls and emails

Sub Contracting

You sub contract when entering a contractual agreement with an outside person or company to perform a certain amount of work. The out-side person or company in this arrangement is known as a subcontractor, but may also be called a free-lance employee, independent contractor, or vendor. Many small businesses hire subcontractors to assist with a wide variety of functions. You might, for example, hire an outside payroll firm, or an accountant to help with record keeping and tax compliance, or maybe a free-lance worker to handle a special project.

Outsourcing offers a number of advantages for small businesses. It can free up time and resources to enable the small business owner to concentrate on making money and growing the business. In addition, hiring a subcontractor is usually less expensive than hiring a full-time employee, because the small business is not required to pay Social Security taxes, workers' compensation benefits, or health insurance for independent contractors.

A small business cannot simply call someone an independent contractor in order to avoid paying Social Security taxes and benefits. The U.S. Internal Revenue Service (IRS) scrutinizes employer-subcontractor relationships carefully, and any misrepresentation may be subject to severe financial penalties. To avoid confusion, small business owners should be aware of the distinctions between independent contractors and employees and consult IRS guidelines when making subcontracting decisions.

Professional Advisors

While many Atlanta companies have hired part-time and temporary workers at the lower experience levels, the trend has now expanded to “C” level employees.  Many companies would benefit from the expertise of a seasoned financial manager to help build cash flow and profitability and position the company for growth and value.  A full time CFO might cost $150K + in base salary with overhead and bonus pushing their cost way above $200K a year.  In contrast a part-time CFO might be hired on a weekly or monthly basis for little more than $12K.  The same logic applies to other expertise that is required consistently but not 24/7.

More from David Kirkup…

About the Author

David has over two and a half decades of business experience and is a proven financial management expert. Working in Europe and the USA, David has served as Divisional CFO at a number of Fortune 500 corporations: including Reuters, Marsh & McClennan, Zurich Insurance and ADP as well as numerous small and mid size companies. As part owner of a small software company, he was heavily involved in the marketing efforts and ultimate sale of the company. As CFO with a national PEO firm he dealt with the credit and financial issues facing hundreds of small business clients. David also spent 5 years in Bermuda managing captive insurance companies.

View David’s Personal Website

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