At one point or another, most business leaders need to get creative about managing their company’s growth. Adding headcount isn’t always a sensible option, but you can only expect so much from your current team. As a fractional CFO, I see this all the time, and since I’m responsible for helping my clients grow in a financially responsible manner, it often leads to a talk about outsourcing. More specifically, why do companies choose to outsource work?
In the following text, I will share what I tell my clients about the pros and cons of outsourcing. But first, let’s clarify what we mean by outsourcing.
What is Outsourcing
Outsourcing is when a company hires an external provider to perform work or produce products instead of relying upon internal staff. You can outsource nearly any role or task, and it can be a great way to support your growth with limited resources. However, like any strategic business decision, it is important to understand the tradeoffs so you can determine if this is the right choice for you.
Why Do Companies Choose to Outsource Work?
The benefits of outsourcing go well beyond the potential for reducing costs. For instance, there may be times when you need expertise that you don’t have in-house. Or perhaps you need extra staff for an upcoming event. So, let’s dig into the many advantages of outsourcing, starting with the most obvious one:
1. Reduce or Control Costs
Many businesses outsource as a cost-cutting measure – hiring providers in other countries for software development or manufacturing, for instance. In contrast, others use it to control costs because their requirements change with the seasons. But some companies find that outsourcing offers cost savings in less conventional ways.
Imagine that you are the CEO of a small company that built an amazing SaaS solution. You need skilled professionals who can help you grow – an executive team, finance professionals, marketing and sales professionals, and a customer success team. But hiring and training full-time employees is expensive, and while contractor rates may seem high, these arrangements can save you a lot of money, especially if you don’t need or cannot afford to hire people full time.
For example, a small business (roughly $10 million in revenue) can expect to spend about $200,000-$250,000 per year on a full-time CFO’s base salary. Add in bonuses, benefits, taxes, overhead, and incentives (like equity), and you’re looking at $300,000-$400,000 per year, sometimes more. Compare this to a fractional CFO, where an ongoing relationship runs an average of $7,500 per month, and you save roughly 75 percent! Check out our full-time vs fractional CFO calculator to do the math for yourself.
2. Accelerate Revenue Growth
One of the other reasons why companies choose to outsource work is to tap into new revenue streams. After all, if you wish to experiment with strategies that may or may not work, you might be reluctant to commit to a full-time employee. Fortunately, the talent pool is rich with skilled freelancers, including marketing and sales professionals.
Although you can certainly find generalists, I prefer to look for specialists. For instance, you can find contractors who have spent years mastering specific marketing channels, such as SEO, social media, email marketing, or paid search. Or writers with the skills and knowledge to produce blog posts, white papers, and lead magnets. Salespeople, on the other hand, are more likely to have deep connections within a particular industry.
The point is, if you find an expert, you won’t need to train them, and you’ll gain the freedom to experiment with confidence.
3. Improved Internal Focus
When you have the right people in place, you will find it easier to focus on the day-to-day requirements of running your core business and driving results. And this is true not just for the executives in your organization but for others on your team who were at risk of burning out.
Take your marketing manager, for instance, who may juggle every marketing channel while crafting new content and fielding inquiries from the press. No one can excel under that kind of pressure. If you hire a part-time resource, who specializes in areas where they lack, it will reduce their stress level and allow them to redirect energy (and any cost savings) toward strategies where they have more confidence.
4. Gain Expertise and Fresh Ideas
Anytime you hire someone into a part-time or full-time role, you gain expertise and expose your team to new ideas. That can be a great help to an internal team that has become too invested to be objective. In addition, since contractors continue to work with other organizations, they will also continue to pick up new skills and insights.
Some contractors develop long-term relationships with multiple clients, essentially “owning” certain functions. Such individuals can often see the whole picture (financial, strategic, operational) and implement changes on your behalf. Other times, companies hire contractors for one-off projects. In either case, the contractor’s knowledge grows with each experience, and you reap the rewards.
5. Increased Productivity and Flexibility
Outsourcing work allows you to hire when you need to and gives you the flexibility to scale up or down quickly. That means you can save time or increase capacity by adding resources to your team for big projects (like an event or product launch) or periods of rapid growth. However, since there’s no long-term commitment, outsourcing can be a great way to manage your cash flow because it gives you the freedom to redirect cash to other areas of your business.
Do keep in mind, though, good contractors (just like good employees) aren’t always easy to find. If you let someone go, they will find other work and may not be available later. So, be honest with your providers about what they can expect in the way of ongoing work so they can enter the relationship with realistic expectations. Then, if you come across someone you can’t afford to lose, consider setting up a retainer so you can keep them engaged.
6. Enhance the Customer Experience
You can hire contractors to improve the customer experience with all aspects of your business. For example, if you expect an influx of customer inquiries, you might hire extra staff to avoid slow response times. Or you might hire website developers and content marketers to improve your website. They can freshen up your look, fix technical problems, clarify your messaging, and optimize your site for conversions.
So, outsourcing is an excellent way for small companies to level the playing field. When you can’t afford a full-time team, outsourcing work to a service or individual contractors can help you achieve some of the economies of scale larger companies enjoy.
7. Risk Management
When a company chooses to outsource work, sometimes the motivation is to minimize risk. Outsourcing partners, especially those with access to sensitive data, like CFOs or accountants, can help you catch mistakes, identify fraudulent activity, and add a layer of checks and balances to your business processes. Although you cannot eliminate risk entirely, these controls provide additional protection.
Outsourcing also gives you access to a bigger (sometimes global) talent pool and reduces the burden of employment, which comes with administrative and legal challenges. That depends, of course, on your capacity for dealing with varying time zones, language barriers, and cultural differences. If you are open to working with people remotely, however, it will expand your options for finding suitable help.
Types of Outsourcing
It is worth noting that there are different types of outsourcing. Sometimes, you can delegate an entire process to an external provider. Then, if you like the results, you won’t need to manage that process at all. This is sometimes referred to as “turnkey outsourcing.” Turnkey outsourcing examples include:
- Janitorial services
- Technology maintenance services
Other times, a company should be more involved. In this case, you partially outsource, meaning you hire a person or service to perform a function, but someone internally stays engaged and available to coordinate work. This is typical when a high level of communication is necessary. For instance, partial outsourcing examples include:
- C-suite roles
- Financial services
- Marketing services
- Human resources
- Product development
- Customer service
Pros and Cons of Outsourcing
As I was answering the question “why do companies choose to outsource work,” you may have noticed that I included a few cautionary tips. This is because, in addition to the benefits of outsourcing, you must be mindful of the potential challenges. For your convenience, below is a chart that expands upon those tips and summarizes the pros and cons:
The Pros and Cons of Outsourcing
Pros of Outsourcing
Cons of Outsourcing
Reduce or Control Costs – by hiring part-time contractors or outsourcing work to less expensive parts of the world.
Cost Savings Can Shrink as You Grow – due to inefficiencies or higher hourly rates for contractors. As your needs ramp up you may need to adjust.
Accelerate Revenue Growth – Tap into new revenue streams by hiring marketing and salespeople who specialize.
A Potential Lack of Responsiveness – Since contractors work with several clients, they must compartmentalize and may not be readily available.
Improved Internal Focus – Let others own certain processes so you and your team can focus on your core competencies.
Outsourcing Is Not for Micromanagers – This option requires that you hire people you trust, set expectations for quality, and allow them to work autonomously.
Gain Expertise and Fresh Ideas – External providers work with a mix of companies and can bring a constant flow of new ideas.
The Potential for Internal Resistance – Your employees may feel threatened by external providers. Make it clear that they are there to help, not replace current staff.
Increased Productivity and Flexibility – Hire for what you need, when you need it, and scale up or down as necessary.
An Efficient Process is Essential – It is not easy to find and manage people. Develop a reliable process or hire a service to do it for you.
Enhance the Customer Experience – Get extra help when you expect a surge in customer inquiries or need to improve the customer experience in other ways.
Communications Can Break Down – Be sure to develop a good system for regular check-ins and sharing of important data, files, etc.
Risk Management – Create a better system of checks and balances and expand your potential talent pool.
Time Zone, Language, and Cultural Differences – Every business is different. Working with people from across the world is not a viable option for everyone.
How to Outsource Successfully
If you have decided that outsourcing is a viable path for your business, you may be wondering what successful outsourcing requires. Initially, you can jump right in, posting a job or two on LinkedIn or to a service like Upwork. But, if outsourcing becomes a key source of talent, you will need an outsourcing process. It will be much like your hiring process, except there are fewer legal obligations.
Here are some tips to get you started:
- Compare your company’s goals to your available resources.
Anything that strays from your core competencies is an opportunity for outsourcing. Review your goals and use this knowledge to identify gaps in your team. For example, if you plan to raise capital and the only financial resource you have is a bookkeeper, you may need a specialist to guide you through that process.
- Clarify the job requirements and set a budget.
Just as you would for a full-time role, document what each person will do and how you will measure their success. This will help you set expectations and attract the right person for the job. It will also help you establish a realistic budget. Although external providers will typically submit a proposal, you should have a price range in mind.
- Screen candidates carefully.
The goal of outsourcing is to provide some relief to your team. So, it is crucial to give the screening process the attention it deserves. Naturally, you will seek candidates with the right skills and experience, but they should also have good chemistry with your team and be trustworthy.
- Expect some onboarding time.
Like hiring an employee, expect some negotiations and to sign a contract. The difference is that most providers have a contract of their own. Read it carefully before signing to ensure that it protects your mutual interests. Then, take the time to welcome the contractor to your team. Introduce them to anyone they will work with and make yourself available for regular check-in meetings.
- Show your appreciation.
When you find a good provider, it never hurts to show them how much you appreciate them. Write a glowing review on LinkedIn, give them a bonus when they go above and beyond, and pass their name along when your network is looking for recommendations. Just like your employees, contractors stick around if they feel valued.
Key Takeaways: Why do Companies Outsource?
Outsourcing is a viable option for large and small businesses in every industry, and while the decision to do so is often financially motivated, there are plenty of other benefits. For example, outsourcing allows you to fill in gaps on your team so you can boost the value of your company. It also provides fresh ideas, expertise, and the ability to focus on your core business.
When working with clients, I often encourage them to stop thinking of outsourcing purely for discrete tasks. Instead, hire contractors to own entire strategic functions anytime you don’t need (or can’t afford) full-time help.