The Not-So-Ugly Word: Outsourcing 2.0

It’s one of the most emotionally loaded words in business and politics today — outsourcing. But if you’re a small-business owner with a growing clientele, a small profit margin and few employees, outsourcing functions not essential to your core mission can mean the difference between success and failure in the worst economy since the Great Depression. The typical view of outsourcing — sending jobs offshore and having your IT handled in Calcutta — is a bit outdated, say outsourcing businesses and experts in the 850 region.

The Not-So-Ugly Word In a brutal economy, small businesses are finding the value in outsourcing by Tim Collie Originally published in the Feb/Mar 2010 issue of 850 Business Magazine

It’s one of the most emotionally loaded words in business and politics today — outsourcing.

But if you’re a small-business owner with a growing clientele, a small profit margin and few employees, outsourcing functions not essential to your core mission can mean the difference between success and failure in the worst economy since the Great Depression.

The typical view of outsourcing — sending jobs offshore and having your IT handled in Calcutta — is a bit outdated, say outsourcing businesses and experts in the 850 region.

What’s more likely, especially for small businesses in Northwest Florida, is contracting out services to other small businesses. With the growth of the Internet and new breakthroughs such as “cloud computing” — typically free business software that’s based online — there is less and less of a geographical “there” necessary to do business. The key is determining what you’re good at, then finding someone to do the rest — only better and at a lower cost.

“All the outsourcing that I’ve ever seen has been local — it hasn’t been offshore,” says Jerry Osteryoung, the director of outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University. “And there’s no question there’s a net job loss. But from an entrepreneur’s vantage point, it’s a question of survival. They have to do whatever they can to stay in business.”

What’s Good For One …

Outsourcing experts, advisers and small outsourcing entrepreneurs say that trust, accessibility and the human element are still essential to success. And as the outsourcing businesses themselves grow into an ever-more complex web of micro-contracting, they too are outsourcing functions that aren’t central to their core purpose.

“We absolutely outsource,” says Matt Miley, CEO of PayOutUSA in Tallahassee, a full-service payroll/accounting firm that has customers throughout the Southeast. “We have a network engineer. We have a database administrator. We don’t need them full time. It wouldn’t behoove us to pay somebody on a regular basis to be doing that.

“For us, it’s simple. We have people who come in to do the things we need, but only the things we need, when we need them,” Miley adds. “It’s really no different than a car company that builds the car buying glass, electronic devices, computer chips from another company. You do what you’re good at, outsource the rest.”

In the classic economic model, companies that perform outsource services are growing businesses that also hire as they become more successful. But in the current economy, many are treading very carefully just to stay afloat.

Small and nimble is the key, not only among the outsourcers, but also among the outsourcees. According to the U.S. Small Business Administration, 56 percent of businesses with fewer than 100 employees actually have fewer than five employees. Those five typically focus on doing the business they know — be it landscaping, storage, truck repair or any of the other thousands of jobs undertaken in the region.

The Tipping Point

As a general rule of thumb, trigger points for small businesses to outsource occur at 20 employees and then again at 50, experts say. They are likely looking to experts in accounting, warehouse inventory management or computer technology in ways that will improve productivity, say Osteryoung and others.

“What I’m seeing is more and more firms are trying to outsource the finance function first,” Osteryoung says. “Some firms are trying to outsource the bookkeeping function. Another big one is H.R. (human resources).

“Why H.R.? If I outsource it to a firm, normally that person or firm has got much more experience than I’m going to get typically hiring someone for what many small businesses can afford to pay,” he says. “A lot of firms are moving that way, especially because of the legal liability. You’re reducing the risk of getting sued.”

The challenge for many small-business owners is to manage labor and administrative costs and to stay in compliance with the myriad employment regulations. Many make the mistake of assuming that these issues only affect large, multinational businesses. But one study written by the Small Business Administration, “The Impact of Regulatory Costs on Small Firms,” showed that the United States’ small businesses often are the hardest hit financially.

The study found that businesses with fewer than 20 employees faced a 45 percent greater federal regulatory burden than their larger business counterparts. Small businesses spend $1,304 per employee annually on tax compliance, 67 percent more per employee than companies with 500 employees or more.

“The problem is you do lose control to who you’re outsourcing to,” says Osteryoung, who stresses that no business can outsource its liability for employee issues and other potentially litigious issues inherent in running any business. “You’re giving up something to get something, hopefully, that helps your bottom line. It’s a tradeoff. It isn’t black and white.”

But Dave Fiore, founder of davemail, a Tallahassee-based online e-mail newsletter company with customers throughout the southeastern United States, points out that the division of labor actually allows the best, most talented specialists to prosper in their niche. A professional writer like himself adds value to a task that most companies would place either on an inexperienced staffer or not do at all.

“My entire business is based on the premise of the value of outsourcing,” Fiore says. “The whole concept is you do what you do well and let me handle this small niche because I’m built for it, I’m good at it, and I know how to do it. It’s going to save you time and money, and you’re going to have a better product than you could do on your own. That’s the beauty of outsourcing. You save a lot of money and you get a better product.”

Back to Basics

A lot of small-business failures happen because the person who started the business lost sight of what he or she was good at, experts point out, and didn’t take the time or spend the money to outsource. The business owner then ended up spending way too much time focusing on non-core issues.

Entrepreneurs also should plan for company growth, which may eventually result in outsourcing becoming more expensive than hiring internally. At some point, revenues could justify hiring in-house, Osteryoung says.

Payroll can be a huge risk to take on alone for a business. According to business-outsourcing giant ADP, one in three small businesses typically receives a tax penalty costing more than $800 per year.

“Small companies can use our services and avoid making the costly mistakes that the IRS would love to penalize them for,” says Miley, PayOutUSA’s CEO. “For the cost of what they’re paying us, if they made one mistake, it would more than pay for our services for the year.”

And while many of the companies Miley deals with don’t have full-time bookkeepers or accountants, he does accept the argument that outsourcing can cost jobs, at least in the short term.

“Honestly, it’s really not an issue with the employer,” he says, “because most of them have decided that they have to cut somewhere. And if the business is going to survive, they have to cut the costs. And as we grow, we will be bringing people on, so we will be replacing some of them. But yeah, some people will get displaced.”

Knowing When to Say When

Are you a budding entrepreneur with an exciting business model that is now buried under a ton of paperwork and tasks that you never thought about when you conceived your great idea?

If so, then you might be a candidate for outsourcing. One of the first things experts advise is this: Don’t be afraid. One of the most daunting challenges for any small-business owner is to determine when he or she has reached the threshold for needing outside help.

But it’s all a matter of costs. Many businesses don’t have any idea how much tasks such as bookkeeping are costing them because they’re not adding up the many small fees charged over the course of a year, says Matt Miley, CEO of PayOutUSA in Tallahassee, a full-service payroll/accounting firm.

“They just don’t know what they’re paying out,” he says. “But if they add it up compared to a one-time annual fee, they often realize it’s cheaper to outsource.”

Another challenge is finding the right fit — a company that is well versed in the needs of a business of your size. Many business owners make the mistake of going to large firms accustomed to working with huge companies. They end up lost in the shuffle. Experts including Jerry Osteryoung, of Florida State University, advise owners to ask other people with businesses of the same size. Generally speaking, unless they’re competitors, many entrepreneurs love to meet others who are in the same boat.

One of the best places for advice — although there are literally thousands of them on the Internet — is your local chapter of SCORE, “Counselors to America’s Small Business.” SCORE’s Web site, score.org, quickly puts you in touch with a chapter in your area.

Offloading Opportunities

Nowadays, more companies than ever are specializing in niche tasks that you can easily outsource to lighten your payroll load. Some common services include:

• Medical billing
• Human resources
• IT infrastructure & support
• Accounting
• Recruiting
• Public relations
• Graphic design
• Advertising & marketing
• Newsletters
• Customer contact
• Customer support
• Payroll
• Risk management
• Data services
• Procurement
• Organizational learning
• Security
• Performance improvement
• Legal counsel/services
• Personal & executive assistants
• Maintenance