Can You Save Money by Outsourcing?

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

Advertiser Disclosure ▾

This page contains affiliate links from which we receive a compensation. Like many publications Wise Bread is supported by affiliate commission from partner companies whose products appear on our site. This may influence which products we write about and the location and order in which products appear. We aren't able to cover every product in the marketplace.

Wise Bread Picks

• Travel Rewards Credit Cards
• Cash Back Credit Cards
• 0% Balance Transfer Credit Cards

If the recession has taught companies anything, it's that cost-containment is key to survival. A survey conducted by Veritude in 2009 showed that only 3 percent of companies with more than 2,000 employees planned to return to their pre-recession staffing matrix.

Staffing companies, freelance job boards, and temporary help agencies are experiencing record growth as companies turn to outsourcing for a pay-as-you-go workforce.

When managed properly, outsourcing can:

• Lower costs by saving on benefits, employer share of taxes, offices, and other organizational overhead
   
• Reduce operating leverage by trading the fixed cost of an employee for the variable cost of a contractor
   
• Expand the labor pool
   
• Help keep pace with rapidly changing technology
   
• Provide access to new ideas and perspectives
   
• Increase accountability

Managed improperly, outsourcing can trigger a nightmare of investigations, costs, and penalties. This is particularly true if contract labor is used purely as a way to avoid paying employee taxes and providing benefits. Uncle Sam estimates that over 30 percent of companies are guilty of misclassifying employees as independent contractors. That's why the IRS, the Department of Labor and equivalent state agencies — all desperate for money — have kicked enforcement into high gear. [For more on worker misclassification see: IRS Wants its $7 Billion from Independent Contractor Misclassifications and visit IRS.gov.]

Estimates of the size of the contingent workforce vary, but according to Freelancers Union, one-third of workers — 42.6 million people — now work independently as freelancers, consultants, independent contractors, temps, part-timers, and self-employed entrepreneurs — and their numbers continue to rise.

"Cash-strapped American companies are taking advantage of the situation," said senior CNBC editor Marc Koba in an article titled Freelance Nation: Slump Spurs Growth of Contract Workers. "More than 90 percent of US firms use contract talent, with spending on them doubling in the past six years, to more than $120 billion."

"The trend toward outsourcing is here to stay," say Allison O'Kelly, CEO of Mom Corps. "Coming out of a recession, you typically see an increase in temporary labor. That said, even prior to the recession, companies were already shifting to more of a skeleton generalist staff augmented by outsourced specialists. The recession helped to accelerate this change."

Driving the other side of the equation, workers are being drawn to non-traditional employment because it offers them more flexibility and control over their lives.

Displaced workers have found a new home as self-employed freelancers — making the old joke that "consultant" is a synonym for "unemployed" no longer true. Recent surveys by vWorker and Upwork, two of the nation's largest freelance job boards, show that the majority of contractors — many of whom have joined those ranks after being downsized — don't intend to go back to the cubicle. Only 9 percent of freelancers surveyed by vWorker who started doing so because they were laid off say they want to return to a traditional job. They like their new-found freedom.

So, can you save money with contractors? Contrary to popular belief, in spite of the 30-40 percent you save on employer taxes and employee overhead, outsourcing won't typically save money on a straight dollar per hour basis unless you're willing go offshore. That's because unless a contractor's rate includes that overhead plus the cost of running their business, they won't be around very long.

But remember, outsourcing is about more than just saving money. vWorker's recent survey of its 140,000+ buyers (the companies that hire their 300,000+ freelance members) shows why they outsource:

• 50 percent do so because it's economical
• 45 percent say it allows them to better focus in-house staff on higher priority tasks
• 48 percent lack the skills to perform the outsourced functions in-house
• 36 percent say it's quicker than the traditional hiring route
• 34 percent indicate all of above are factors

So the next time you're faced with the decision of whether to hire someone as an employee or a contractor, ask yourself:

• Can I afford and do I have enough work to justify a full time person doing this kind of work?
   
• Do I want the additional burden of having to hire, train, and manage an employee?
   
• Can I afford to risk a poor hiring decision?

Finally, make sure your decision to hire someone as a contractor passes muster with the IRS and all the federal and state employment laws. You're not paranoid if they really are out to get you.