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When Outsourcing Makes Sense for Small Business

It’s just smart business to seek easier, better, and more cost-effective methods of running your company. And in an economic down cycle, streamlining and cutting the fat is more important than ever.

For decades, the following age-old words of wisdom have been passed down to future generations of entrepreneurs and business owners: A penny saved is a penny earned. But an even smarter lesson may sound something like this, “If you own a small business and you aren’t outsourcing, you’re going to struggle during a recession.”

Outsourcing is considered controversial for a number of reasons, but primarily because it has a notorious reputation for transferring jobs from American soil to other countries. But the more pressing issue, for small business, is whether it can afford to compete with big business — and carry on the country’s entrepreneurial spirit — using only home turf, especially when the cost of American talent is so expensive.

The sad truth is, unlike the all-American game of baseball, home turf is rarely an advantage when you’re running a small business.

Rules of thumb for beginners

Victor Cheng, a former McKinsey consultant and the current president of Bookmercial Productions, has outsourced more than 100 projects, including clerical work, Web site development, Web research, data entry, telephone duties, basic-level writing, and customer service. “Anything a big guy can outsource, a little guy can, too,” says Cheng, who has sent projects to India, Romania, Poland, Argentina, Mexico, Russia, and the Philippines.

Cheng’s first experience with outsourcing began just five years ago, when he posted an ad for a part-time assistant to
do clerical work. Because his business was in San Francisco, all the local candidates wanted between $25 and
$35 an hour. “So I hired a team in India,” he says. “They offered to do it for $2 an hour. They were thrilled, and so was I.”

Since that initial foray into outsourcing, Cheng has concluded there are four specific types of job a small business can outsource successfully:

1.Tasks performed on a computer, especially those that are repetitive, easy to learn, and boring.
2.Tasks conducted via telephone,
which aren’t business-critical, such as customer service and simple telemarketing.
3. Jobs that don’t require face time with
a customer or a physical presence.
4. Any activity that isn’t the primary reason customers buy from you.
In other words, jobs where a “B” performance is good enough.

The case for outsourcing

For the small-business owner who outsources effectively, the benefits can be numerous. For example, “the No. 1 advantage is the ability to free your time to concentrate on more important aspects of business ownership,” says Michael Corbett, chairman of the International Association of Outsourcing Professionals. There are so many tasks that can steal your attention, and though they may seem small and easily managed as individual jobs, as a whole they likely require more
time and money than you realize.

While you’re completing these menial tasks, you’re losing growth potential, clients, and sales. Progressive management involves running a team of professionals who excel at certain functions, which builds on your business efficiency.

But when you hire one American professional, you place a drain on your net income. Instead, you can purchase overseas labor for around $4 an hour, free and clear of benefits, health insurance, and unemployment taxes. You get an entire staff for the price of one in-house American employee.

“Most Americans don’t like typing data into spreadsheets all day,” says FiscalDoctor’s Gary Patterson, a consultant for hundreds of small businesses. On the other hand, overseas workers “worship low-value work because they can make more money and buy American goods.” From this standpoint, it could be said that outsourcing leads to a win-win situation for the small-business owner and the American economy.

Another benefit: “Outsourcing allows the small-business owner to offer competitive employee benefits plans at a low cost that will also help with the recruiting and retention of employees,” says Rob Wilson, president of Employco, an HR outsourcing company. According to Wilson, all the top-ranked employees were once absorbed instantly into large Fortune 1000 corporations, in part because of the benefits packages. But with outsourcing, that is no longer
the rule.

When outsourcing doesn’t work

As beneficial as outsourcing is for helping you compete in the big leagues of business, it is certainly not for everyone. There are challenges to consider.

Good help is hard to find, whether you’re hiring an in-house employee or an outsourcing agency. Making the right selection will be one of your greatest challenges. “Sometimes it takes a considerable amount of time to find someone who is not only reasonably priced, but who also has the skill set to do the job to your level of expectation,” says Jeff Rivera, an author who uses outsourcing in his business and personal life.

Patrick Clements, CEO of BigWebApps, uses outsourcing in areas throughout his business. But he says he’s grown to expect a loss of time, lack of ethics, and “flakiness” that comes from using outside sources. Sometimes, he says, it isn’t so much a lack of comprehension as a language and cultural barrier.

“There is sometimes a serious language barrier,” agrees Rivera. “There are references and pop culture expressions that some [non-U.S. citizens] are unaware of, and you just can’t explain it to them.” Because one out of every three outsourcing projects that fail can be blamed on misunderstandings or an inability to complete the entire job, Cheng hires three different outsourcing companies and then picks the best performer. “Even by doing this,” he says, “the cost is still less than hiring in the U.S.”

The recent escalation of fuel and transportation costs can also impede outsourcing. “In some cases, the cost differential in favor of outsourcing has been canceled by the current cost of overseas transportation,” says Patterson, who adds yet another drawback.

“What do you do if you’ve outsourced something for years and need to bring it back into your company?” he asks. Many businesses are not capable of handling the function internally because they haven’t implemented proper contingency plans.

Finally, one of the greatest dangers in outsourcing a new and innovative idea is that it can be stolen. “Your intellectual property has almost no value in areas such as China,” says Patterson. A copycat manufacturer can mimic your product, “and within a matter of 30 to 60 days, it will no longer be just yours.”

Although most winning products are eventually copied, you usually have several months’ lead-time to establish first-to-market dominance.

Outstanding potential

Outsourcing is no longer for big businesses only. Certain specialty areas can be outsourced by companies of any size, shape, and income level. With outsourcing, playing with the BIG boys can be easier for the little guy — just make sure you plan for any potential drawbacks.

Outsourcing Companies That Make the Grade

There are many ways to minimize your risks and costs associated with outsourcing. Maybe the easiest solution is by working with a number of recently launched Web sites that rate outsourcing companies. “It’s kind of like an eBay for outsourcers,” says Victor Cheng. “Their rating systems are pretty accurate, so if a company is not rated, I just won’t hire them.”

Here are five grade-reporting Web sites and the specialty categories they represent:

Specific Outsourcing Categories

Now that you have a general idea of the tasks that outside companies can perform for you, here are 13 specific job categories that can be outsourced by any business entity:

Bookkeeping, accounting, payroll processing, and taxes

You have to do it, says Victor Cheng, a former McKinsey consultant and the current president of Bookmercial Productions. “Your customers don’t care how you fill out your tax forms, so for most smaller businesses, just get someone else to do it for you.”

Web research and language translation

Jeff Rivera, author of Forever My Lady, uses outsourcing services to extract e-mail addresses from specific Web sites and determine the contact information of the people with whom he needs to speak. “I also use them for translation, not only for printing but also speaking.”

Human resources, employee benefits, workers’ compensation, medical insurance

“I’m a big fan of PEO (professional employer organization) for any business with more than a small handful of employees,” says Cheng. “It’s basically 400 small businesses combining their purchasing power to buy a medical insurance and 401(k) plan designed for a Fortune 500 company.” For a small fee, you save money, have fewer hassles, less paperwork, and better benefits. “And the whole service is essentially free, because it can be paid out of cost savings,” he adds.

Customer service

But only if your business is telephone- or e-mail-based and customer service isn’t core to your success, says Cheng.

Ghost receptionist

“Your first point of contact at your office can literally be anywhere in the world,” says Michael Corbett, chairman of the International Association of Outsourcing Professionals.

Invoicing, receivables, payables, and fulfillment

According to Cheng, if you own a business that ships products to customers, all of these tasks can and should be outsourced.

Telemarketing

“One of my clients, a commercial real estate agent, has hired
a full-time overseas telemarketer at $1,000 a month to call businesses in his area and ask when their commercial leases expire,” says Cheng. “Then he can personally call on prospects whose leases will expire in six months or less.”

Web-based technology

This refers to outsourcing a Web site, its hosting and design. “Don’t buy software,” says Cheng, “buy software as an outsourced service. Buy QuickBooks online versus the QuickBooks software. Don’t buy backup hard drives, buy outsource backup storage from a company such as carbonite.com.”

General technology

Corbett, who helps his association members outsource effectively and uses outsourcing to perform many of his own daily business tasks, says, “Technology is not just the Web, but the equipment, phone systems, location, and remote hosting of much of a small business’s infrastructure.”

Manufacturing

“Big companies like Nike don’t manufacture anything anymore, they outsource it,” says Cheng. “I have multiple clients that outsource manufacturing for as little as $10,000 per order, which is well within reach of most small businesses.”

Marketing and sales

“If you’re a manufacturer that doesn’t know how to sell, you can outsource,” says Cheng. “Manufacturer reps are nothing more than freelance sales professionals who will sell your products to their clientele.”

Public relations and media relations

“A lot of public relations are run through outsourcing,” says Jim Meadows, a partner in the Global Technology and Outsourcing Practice Group at Hunton & Williams. “If you look at the Fortune 1000 companies, they all maintain in-house media relations or PR departments to help spread their corporate message.” But small organizations should not be spending their internal dollars on these projects, advises Meadows, who has made a business of counseling clients on the outsourcing.

Miscellaneous personal tasks

“I definitely outsource having my home office cleaned and organized,” says Rivera. “Who has time or interest to do all the menial things, such as making your bed or brushing your teeth when you can have someone do it for you? OK, that may be a little extreme. But it’s not too far from the truth.”

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