Anew business typically does not have the resources to pay for all the management staff that may be necessary to keep it running. In fact, most entrepreneurs try to avoid hiring employees as long as possible, because employees are the single biggest expense in the business. But how does a new venture survive with a few employees as possible and still grow?
The solution lies in outsourcing, which means using independent contractors. Independent contractors (ICs) own their own businesses and are hired by the entrepreneur to do a specific job. They are under the control of the entrepreneur only for the results of the work they do, not for the means by which those results are accomplished.
The independent contractor s that entrepreneurs use on a regular basis include consultants, manufacturers, distributors, and employee leasing firms (note that professional advisers are also independent contractors). The popularity of outsourcing can be seen in the fact that companies outsource about one-third of their information technology, human resources, and marketing and sales, and one-fifth of their financial activities.
One area most often outsourced is information technology because e of its expense. It is hard for most companies to keep up with change in technology, and the vendors to which they outsource can provide the same service and better performance at a lower cost.
Entrepreneurs seek out independent contractors for their expertise in specific areas. Using an independent contractor means that the new venture doesn’t have to supply medical and retirement benefits, provide unemployment insurance, or withhold income and social security tax. These are costly benefits that can amount to more than 32 percent of an employee’s base salary.
Bu there are hidden costs to outsourcing that entrepreneurs should be aware of:
- The cost of searching for and contracting with an independent contractor
The best way to reduce this cost is for entrepreneurs to get referrals from people they know who have had a successful experience with the independent contractor.
- Transferring activities to the IC.
Getting the IC “up to speed” on the business takes time and human resources. Transfer costs can be reduced if entrepreneurs identify up front what they want the IC to handle.
- Managing the independent contractor
This is one of those cases where experience counts. The first IC contract takes the longest and costs the most. The best IC relationships occur when communication is an ongoing process so that the IC becomes a real part of the business.
- Bringing the activity in-house
Many companies eventually bring in-house activities that they once outsourced. This may occur because the company has grown to the point where it needs and can afford in-house staff for the activity or because the company wants more control over the activity. One way to reduce the transition cost is to have the person who manages the IC relationship learn enough about the activity to be able to ease the company through the transition.
Here are some ways to reduce the hidden costs of using independent contractors”
- Avoid outsourcing critical activities or those that are idiosyncratic or unique to the business.
- Research vendors carefully and get referrals.
- Work with legal advisors who have experience in independent contractor law to draft well-written contracts.