The majority of businesses in the United States are now outsourcing at least part of their work–but they’re not always getting the results they want.
They can be called a number of things–contractors, temps, outsourced workers, freelancers, day laborers or, as one damning article suggested, disposable workers. Whatever you want to call them, businesses are taking advantage of their talents more and more.
An massive 90 percent of American companies outsource at least a small portion of their work, according the the Human Capital Institute, a global association of talent management groups. Some outsource more, if not almost all of it, and a growing number of businesses are heading in that direction: Since 1990, the average portion of outsourced work has grown rapidly, from just 6 percent to 27 percent. A third of employers report using more contract employees in the past few years, which is typical behaviour in a recession. They also say they expect to use even more outsourced workers in the future.
Katie Ratkiewicz, a practice leader for the institute, explains: “Outsourcing is no longer considered a temporary fix to a short-term need… Instead, it’s being redefined as a permanent fixture in organizational makeup.”
The founder of men’s clothing company, Blank-Label.com, Danny Wong used the same model when he co-founded his startup. The company’s core team is made up of only eight staffers, but Wong outsources 60 hours as week of live chat, programming and content creation. “Once we’d answered the same customer question for the hundredth time, we knew it was time to outsource customer service, too,” he says. “It increased our quality of life and the quality of our service.”
Outsourcing at its best is a great way to expand your talent pool, as well as save you money, allow you to quickly adjust to changes in demand, attract workers who prefer flexible schedules and keep you technologically current. These are just a few of the reasons why outsourcing is being celebrated by businesses all over, and why there are so many new converts. Fabio Rosati, CEO of Elance, one of the largest freelance job boards with more than 30,000 new projects posted every month, labelled outsourcing “a new, leaner way to start and grow a company with a lot less overhead.”
“Suddenly,” he says, “small businesses are operating like mini multinationals.”
You have to bear in mind the differences between hiring a team of freelancers and hiring a team of in-house workers. Just think about it: Outsourcing exposes your intellectual property, trade secrets and customer information. It means you have to place your trust, corporate memory and business functions with people who work outside the business. And if you don’t manage this correctly, it can spark a series of nightmarish investigations and costly penalties from the IRS, Department of Labor and other government agencies, all of which are increasing their oversight (see “The IRS Is Watching“).
So is outsourcing for you? And how can you get the most out of it? We spoke to HR professionals, outsourcing experts and lawyers from around the country, and their advice was this:
Find the Right Jobs
Management guru Charles Handy predicted in 1989, a “shamrock organization,” with one leaf representing the “core” staff, another the “process” areas such as IT, customer service or financial management, and the third leaf representing “projects” groups, such as graphic design, article writing or search engine optimization.
The role of those core people–the cultural center of your organization–is to drive and direct the process and projects groups. Core workers should not be outsourced.
Hour By Hour
On a strict dollar-per-hour basis, outsourcing may not appear to save you money, but not having a fixed commitment to an employee will almost certainly represent a huge savings in the long run. As an example, government numbers show the following average cost for a salaried graphic artist. –K.L.
It can make sense to outsource in an area of the business that requires skills you don’t often need, an outsider’s expertise, or tools that you don’t have. FreelancersUnion.org represents 140,000 independent workers and shows that graphic designers, writers, information technology professionals, artists, editors, photographers, web developers, and media production and marketing professionals are the top outsourced talent. But whatever you’re considering, don’t expect outsourced workers to function completely independently.
“Employers often outsource because they think it will be cheaper, but there’s a lot involved in establishing processes outside your own organization,” says Sajeel Qureshi, vice president of operations for Computan, a web applications developer in Canada. “If you don’t spend the time to teach an outsider your business, don’t expect them to perform as an employee–who has the benefit of cultural immersion–would.”
For example, a public relations agency may have the contacts, relationships and expertise to deliver your message better than anyone on staff, but the PR agency knows nothing about your business and if you don’t teach it, you’ll be wasting your money. The need is even greater, Qureshi points out, if you’re an international operation working across multiple cultures.
Choose the Right People
Strategic Government Resources is a Texas firm that specializes in training for local government agencies, it has almost 200 client cities in 11 states. Strategic Government Resources trains over 1,000 city workers each month, carries out a twelve executive searches per year, operates the largest public sector job board in America and does consulting for local governments–all with only eight staff employees.
As a former city manager with 2,500 employees, CEO Ron Holifield knew he didn’t want the headache and cash flow strain of a large staff. So his employees provide the central management, and the outsourced talent is mostly baby boomers who have years of experience under their belts.
You have to have an idea of the sort of person you want when outsourcing, just as you do when hiring in-house staffers. Start your search with people you know– Perhaps a trusted advisor, employee, peer or former employee who left on good terms. However, if you wish to look farther afield, you can always look at these options:
Business referrals: See a design you like? Maybe a logo or a website that looks particularly appealing? Ask the owner if he’d recommend the company that produced it.
- Freelance job boards: Elance, vWorker and oDesk are top among the websites where you can list your project for open bidding, or choose who you want to bid based on their portfolios or other criteria.
- Web searches: If you’re looking for a writer, approach a blogger, freelance writer or author you like.
- Want ads: Check ad-based sites such as Craigslist, Careerbuilder or Monster, or Gumtree is good for UK businesses.
- Social networks: There’s a plethora of social networks, have a look on LinkedIn, Facebook and other social networks.
- Cloudsourcing: Websites such as crowdSPRING, 99designs, BootB, MEDIAmobz, IdeaScale, Squadhelp and InnoCentive offer forums where you can post your projects and generate dozens of solutions, in an almost crowd-sourcing manner.
- Staffing agencies: They may be more expensive, but they assume all of the recruiting, hiring, training, management and legal responsibilities.
“Finding the right people is difficult whether you outsource or hire, but with freelance talent, we’re able to test them out,” says Wong, the mens’ clothing manufacturer, who uses oDesk.
As opposed to looking at article’s previously written, Wong sets new contract writers a writing task with a deadline and judges them by what he gets. The entrepreneur says previously written articles are not always a good indication of ability. He also coaches them along the way and doesn’t expect them to understand all the nuances of his business.)
“It’s an easy and inexpensive way to find people who can handle the work,” Wong says. If he finds someone who’s reliable and doesn’t need micromanaging, he’ll pay a higher rate.
But even with careful vetting, Wong has been stung. “There have been many times that we’ve been stuck with truly awful contractors,” he says.
Many freelancers, he warns, see you simply as another paycheck. “You need to find people who really care, who see the potential for a long-term relationship with you, and then nurture them.”
Manage the Right Way
You have to manage outside talent differently to in-house. They often have several clients and you may not even be their most important one. They’re not trying to climb your organizational ladder. They may not even be someone you’d want to work with over the long term. They they’re to do their job, and if you’ve hired the right person they’ll do it well. However, you’re not their boss in the traditional sense of the word.
“If you’re micromanaging, you’ve hired the wrong person,” Wong says. “You need specific measurable goals that define success. The result is what matters, not the process.”
Says Qureshi: “Remember that when you outsource, you become the customer. It’s the contractor’s job to make sure you’re happy. When outsourcing to a large organization, be sure there’s a good account manager between you and the work being done–someone you can call when things aren’t going right.”
Employees can become fearful or resentful of the outsiders, or the freelancers. However, keep some of the desirable work for the employees and it will help. Ensure they understand the benefits of their in-house positions – Job security, steady income.
Consider, too, the risk of information loss or intellectual property issues. Qureshi advises documenting any work as a work-for-hire to give you, not the contractor, ownership of the work.
Also consider including a non-disclosure and/or noncompete agreement. Holifield often requires contractors to sign a non-compete agreement. Though it is wise to bear in mind that a lot of U.S contracts are redundant in other countries.
Thomas Malone, professor of management at MIT Sloan School of Management and author of The Future of Work, says that free online communications services such as Google Docs, Skype and Facebook, make managing a crowd of online talent easier and inexpensive.
“I still see a huge, untapped potential in outsourcing,” Malone says. “Technology is what makes it easy, but the fact that outsourcing offers freedom and flexibility for both employers and employees is what will really drive it forward.”
The IRS is Watching
Government agencies are ramping up their oversight of employers who use freelance workers
It is one of the ironies of outsourcing: You want to find freelancers who function as smoothly and effectively as staffers. But if you treat freelancers too much like employees, you are liable to be penalized by the IRS and other government agencies for “worker misclassification.”
In 2010, the IRS announced a three-year initiative with the aim of cracking down on worker misclassification, meaning employers And employers have never been more vulnerable, with around six thousand businesses having already been targeted.
At the same time, President Obama’s budget proposal for 2011 included $25 million in new Department of Labor spending, including 100 new employees to ramp up enforcement of employee misclassification.
Worker misclassification occurs when a government entity decides that a contractor, freelancer, temp, or 1099 worker is really an employee and entitled to the benefits and protections dictated by employment law. On the financial side, they want the income from the employer’s share of taxes (Social Security, Medicare, unemployment, workers’ compensation).
What can misclassification cost you? According to James Coleman, partner with Constangy, Brooks & Smith, a national labor and employment law firm, the IRS may go after all sums that should have been withheld retroactively, including the employer’s share of Social Security, Medicare, unemployment insurance, interest and penalties.
Misclassification actions brought by the Department of Labor can result in retroactive minimum wage, overtime, liquidated damages equal to the back wages and an award of costs and attorneys’ fees.
Obama’s budget proposal also calls for better collaboration between state and federal efforts to identify misclassified workers. So, once a business has been tagged, it will likely be subject to additional investigations by other agencies.
Certain industries with a history of misclassification are being targeted: trucking, construction, restaurants, grocery stores, janitorial, business services, child care, poultry and meat processing, landscaping and home healthcare. But any company that issues a large number of 1099s or has a relatively large percentage of independent contractors versus zero employees has higher potential for an audit.
Also, many audits are triggered by a claim for workers’ compensation or unemployment benefits from a contractor. Others are brought about when one or more contingent workers decides to sue. In addition, the IRS Whistleblower Program allows a disgruntled worker or competitor to pocket 15 percent to 30 percent of the amount collected if the company is found to be in violation.
Although some federal and state agencies mirror the IRS rules, many do not, so it’s crucial that you seek the advice of an attorney if you have any doubt about worker classification.
The IRS website, irs.gov, explains the criteria for determining whether a worker is an employee or independent contractor. They fall into three categories:
- Behavioral: No-nos include telling contractors where, when or how and in what sequence they’re to perform their job; providing training; requiring them to use or purchase certain tools or supplies; evaluating how work is performed rather than the result.
- Financial: Contractors should have an investment in their own businesses, have an opportunity for profit or loss, not be reimbursed for all expenses, make their services available to the public, and, in most cases, be paid by the project rather than hourly.
- Type of relationship: There should be a contract and, preferably, work should be off-site. Contractors should not receive benefits, be guaranteed a continuing relationship, do work that’s similar to work done by employees (now or in the past) or perform work that’s a key business function. –K.L