When to Outsource and When to Hire In-House: A Guide

Posted on: September 5, 2019

When it comes to managing the staff of your small business, it seems that it's always difficult to figure out what the best way of bringing in new employees should be. On the one hand, having more full-time employees means you have people that you can rely on, who are “your” people, and who will learn to do things the “company way”.

On the other hand, outsourcing business tasks to freelancers or service businesses means you don't have to invest in the infrastructure to support the task. Just as importantly, overhead you typically have with employees isn't an issue, and as outsourced service providers, they're always trying to make sure that you're happy with their work.

In some cases, it’s obviously impractical to hire in-house. For example, i you manufacture products, setting up a factory that your company owns might be financially impractical, when factories already exist and can manufacture your products for a fraction of the cost. For other businesses, the exact opposite is true. You can't really run a restaurant by outsourcing your labor in the kitchen and on the floor.

The only rule is that there aren't any rules. You don't need to make an absolute decision about hiring in-house or outsourcing everything. You need start by evaluating each task that needs doing, then deciding which are more practical to fulfil with full-time employees, and which can be done by a freelancer.

Determining when to outsource tasks and when to hire in-house is a complex balancing act that can mean the difference between the smooth operation of your business and constantly simply trying to make it through another day without a staffing catastrophe.

Look at You Core Business

Whatever your core business is, that's where you need to make the hardest choices on whether or not you should hire in-house or outsource. It's at this level where the decisions you make will have the greatest impact on your business.

Let's say you run an online retail business. You may not manufacture the product in-house, but you will probably want to consider bringing in web development people to help you maintain your online presence. If you're trying to build and maintain your online brand, you don't want to cycle through freelancers who will want to constantly upend what the last person did. In this case, it is your online presence that is really your core business and bringing in the people to support that should be your priority.

There are some business tasks that you will probably need right from the beginning even though they might not have anything to do with your core business. Bookkeeping is a classic example. You need someone on staff to be responsible for tracking the day-to-day income and expenses for your business. Do you hire someone and pay their salary even though they might have a light workload in the beginning, or do you outsource your bookkeeping and plan to bring it in-house in the future?

Graphic design is an aspect of business where outsourcing might be more practical, depending on your business. If you're in financial services, law, or other professional businesses, you may need someone to design business documents, presentations, and so on. Having someone on staff to do design work, when there isn't much design work to be done, could be a waste of resources that ends up costing your company more than it's worth.

Consider one of the newest transportation business models, peer-to-peer ridesharing. Uber, Lyft, and Gett are all well-known examples. None of these companies are actually in the business of transportation. They are all in the business of building the technology that provides the logistics for people to either order rides or provide ridesharing services. None of them actually hire drivers as employees; the drivers are all outsourced. They don't even own their own technology infrastructures; that's outsourced as well. These companies focus on their apps and ensure that their ridesharing business can always be at peak performance.

Even though your business might be defined by something else, you need to properly identify the core business tasks that your company performs in order to correctly staff your business with the right people.

Loyalty

One of the less popular things to talk in small businesses is employee loyalty. Years ago, employees were hired at low-level positions and through years of hard work and dedication, they would rise through the company ranks, earning a well-deserved retirement pension at the end. Nowadays, this employee model is becoming more and more rare. Companies are much less likely to hire for the long-term. Workers know this and have adjusted their expectations to match accordingly. Even your best, most-dedicated employees might decide to leave if they find a better opportunity. It's up to you to make sure that your company remains attractive to the people you want to retain.

The cost for recruiting, hiring, and training a replacement employee has been estimated to cost up to as much as three-quarters of that employee's annual salary. That's why businesses work hard to keep their employees happy; retention is cheaper than finding new hires. Hiring employees with the right work ethic means that you'll be getting someone who is more loyal to your company than a contractor could ever be. If employees see that their company is willing to invest time and money into their education, wellbeing, and job satisfaction, they will be more inclined to stay with a company longer.

As harsh as it might seem, outsourced freelancers and contractors are mercenaries. They are loyal to their own businesses first, and that can work in your favor. As long as you keep your freelancers happy – namely, paying them on time and giving them enough work to do – they will continue to provide excellent service. As with employees, if you treat them poorly – if you don't pay them on time, if you constantly change your working arrangement with them, or don't give them enough work to do, they will eventually stop working with you and find easier clients to work with.

Still, it’s worthwhile to note that sometimes change can be good for a company. Google is one of the more notable companies that doesn't focus on employee loyalty. They're known for perks and incidental benefits, and not for employee longevity. According to an article at Next Level Performance, they suggest that a higher turnover might actually be to Google's advantage. By bringing in new employees constantly, they may actually increase their capacity for innovation, something that is very important to the foremost technology innovator in the world.

Space

It's nice to think that everything will magically grow along with your company. Reality, however, is somewhat different. You might find that one of the things you have to weigh when deciding whether to hire employees or bring in contractors is a simple, practical one; your physical space. If you're starting out, or have a small boutique business, you might not have the physical space to have too many people working in-house. After all, just because your company is growing doesn't mean the space you're in currently can grow along with it. You might be in a spare room or an office building; it doesn't matter. You have to be prepared to either make do with what you have – which might mean outsourcing to people who don't have to work on site, or get a little creative with your space management. In companies with shift-based schedules, hot-swapping desks between two or more employees would be a reasonable solution. Or maybe just rearranging your layout would free up some space for a new person.

Time

Along with physical space considerations is often whether the time is right or not. Check your lease to see what provisions are made for leaving your space early. Maybe your landlord will be willing to swap if they have a larger space available. Perhaps upending your company and packing it into boxes isn't practical at the moment because you're on a deadline that must be made.

It's not only a matter of when. Sometimes, it's a question of how long something will take. When you hire an employee, there's usually a period of time when they have to learn the ropes of the company before they can become a productive member of the team. If your company is working on a deadline, there might not be time to bring the new hire up to speed, and it might actually impact the company's schedule. If your new employee is integral to a project's success, it could impact the delivery schedule while they are getting acclimated.

They say practice makes perfect. With a full-time employee, once they've been properly trained, can repeat the same task in less and less time, until they are fully proficient, taking the least amount of time possible to complete the job. If you constantly have to outsource the same task to different contractors, it will always take the same amount of time, with no significant improvement. This concept works especially well in assembly-line manufacturing, where repetitive tasks are done quickly and efficiently.

It's not unreasonable to assume that someone with more experience may be able to perform a more complex task in less time than it would take someone who hasn't been working as long. It's also not unreasonable to expect that someone with more experience will charge more to perform the same task. This is in fact very common among freelancers. Depending on your own business schedule and the importance of having your deliverables ready on time, it may be smarter to outsource the task to a more experienced – and expensive – freelancer so you can get what you need on time.

Money

Salaries are probably the single largest consideration when making the decision whether to hire or outsource.

Typically, freelancers charge well above the rate an in-house employee costs your business. The benefit, however, is that you only pay an outsource service for the work that they perform, which is less than what it would cost to bring on a full-time employee.

If your company doesn't have the budget to hire a full-time employee, including benefits and training, you'll need to consider outsourcing the work where there are no additional costs. Likewise, if your company can't afford to pay the rates that freelancers are charging, you'll need to hire someone for less and have them do the job you would normally have an outsource company do, working up to the level of proficiency that an experienced freelancer can provide.

There are some business models that work very well by relying on outsourcing the majority of their work. They can manage their labor costs without having the overhead of having to pay employee benefits.

Quality

Your customers expect a certain level of quality from your company, whether you provide products or services. Compromising on that quality should never be an option. You expect the people who work for you to be able to consistently provide the level of quality your business is known for, so that your brand remains consistent and your customer experience remains positive.

When deciding on whether to outsource or hire in-house, consider which will be able to provide the same high-level quality you've spent so much time cultivating and maintaining. Bringing in talent in-house will give you the opportunity to control the quality level on-site, as well as provide you with an opportunity to use their skills and talents to innovate and improve. Anything done by an employee of a company is considered the intellectual property of the company, including any patents or copyrighted work that comes from them. Companies often provide handsome bonuses to employees who contribute in this manner. Outsourcing gives your company access to resources that may have more experience and be able to provide the quality you want, but you won't be able to have the same level of control over the process.

If you’re more confused now than you were before, don’t get frazzled. Use the guide above to weigh the pros and cons of hiring in-house or outsourcing the work you need to get done, and you’ll be one step closer to making a smarter, more efficient decision to propel your business forward.

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