Q: Is outsourcing really a good way to grow my business?

A: Outsourcing has become a big deal in our economy. There are articles and books written on it all the time, and you can attend countless seminars and speeches on the subject. I just did a Google search on "outsourcing" and got 1,130,000 links. You can find a lot of information on this subject, and a lot of opinions on how to do it right or screw it up!

One popular way this is described is that you should decide what you are good at and outsource everything else--i.e., focus your company on your core competency, and let someone else do the rest. That logic is sound in theory, and to a certain degree in practice, but like everything else you can take it too far. The key is to understand your business and its goals and decide how outsourcing might help you attain them.

When deciding what to outsource, some things (legal services, printing, health insurance, etc.) are fairly obvious, and most businesses outsource them. Some functions are a bit less obvious, and people opt to outsource these task depending on their personal expertise. For example, if you have an accounting background, you probably keep your own books and file your own taxes. There are other things many people could--but probably shouldn't--do themselves. For example, most people could create a basic website or design their own logo, but the differences in the end result between doing it yourself and hiring a professional can be significant.

There are some crucial aspects of your business you should probably not outsource. You need to keep an eye (your eye!) on them at all times. These include cash-flow management and, in many cases, customer interaction.

Some tasks make sense to outsource initially and bring in-house later. If, for example, you aren't very experienced at hiring a receptionist, you could turn to a temp agency to hire one for you. They will charge you a premium, but for that you get significant value--they will understand your requirements, advertise for people, screen them and place them at your site with no risk to you. If they don't work out for whatever reason, you just call the temp agency and tell them to send someone else. When you find the right person and decide you want them long term, you can pay the temp agency a fee and make them a regular employee (i.e., transition from outsourced to in-house).

While the above scenario is common, you don't have to consider outsourcing until you have enough work for an employee. One advantage of outsourcing is flexibility--it can be a lot easier to cut back on a vendor than an employee. Think of how you would feel if you had to tell an employee who is dependent on her job that you only need her half-time now. Another advantage is that you don't have to become an expert in a particular area--you can depend on the outsourced company to be the expert, as in the above website/logo example.

Perhaps the biggest benefit of outsourcing is its ability to save you money. This will, of course, depend on the size of your company and what specific tasks you outsource, but in general, if you think it through, you can save money. For example, my company outsources its IT services (help desk, computer support and maintenance), and we pay significantly less than we'd pay for a full-time IT person to give us the same level of support. We also outsource our bookkeeping and office administration, with similar savings. As we grow, we'll continue to reevaluate these decisions--it may be that the business case for the IT outsourcing remains good as we grow but that we might eventually hire someone to offload other work from our current people, and since we would be paying them anyway, we could get them to do the bookkeeping as well.

One disadvantage to outsourcing is that you are putting part of your company in someone else's hands. You have to ask yourself if you can trust them, if you think they'll stay in business and if they can adapt to your growing and changing needs.

The best advice I have is to carefully think through each function in your business and figure out which tasks make sense to outsource.then just try it! In most cases, common sense will see you through.

                                    

   

Outsourcing, offshoring: The good, bad and ugly!

President Barack Obama wants to make it less attractive for U.S. companies to ship jobs overseas. "We have a huge opportunity, at this moment, to bring manufacturing back (to the U.S.)," Obama said in his State of the Union address last week. "We should start with our tax code. Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it. So let's change it."

Under Obama's proposal, U.S. companies that move business abroad to take advantage of favorable tax rates would no longer get a tax break to do so and would have to pay a minimum tax on their overseas profits. Obama also proposes tax credits to help U.S. companies move production back to the States and aims to reduce their tax rates, especially for high-tech manufacturers.

William Henson, partner in the International Tax Services Group at Chicago-based Plante Moran, said Obama's proposal offers "quite a few incentives for business operations in the U.S., many of which are a continuation or expansion of familiar tax incentives." But Henson added that he is not sure Obama's proposal to discontinue giving companies tax deductions for closing U.S. factories and moving them overseas will effectively change taxpayer behavior.

"The reality is that there are a number of non-tax reasons a business would look at locating outside the U.S.," Henson said. "A taxpayer incurring moving costs is already paying a price. Denial of a deduction will increase the after tax cost of the move but it's not clear that would be sufficient to change a taxpayer's decision when there are other factors compelling the move in the first place."

But without such tax breaks, some companies turn to outsourcing — farming out a specific task — or offshoring — moving a plant or operation to save money or gain efficiencies — processes that have grown gradually in the last 30 years.

                                                 

                                               

So what is out sourcing?

Outsourcing has become a major trend in human resources over the past decade. It's the practice of sending certain job functions outside a company instead of handling them in house. More and more companies, large and small, are turning to outsourcing as a way to grow while restraining payroll and overhead costs. How can you make it work for your business?

First, make sure the company you're hiring can really do the job. That means getting (and checking) references. Ask former or current clients about their satisfaction with the client. Find out what industries and what type of workload the firm or individual is accustomed to handling. Can you expect your deadlines to be met, or will your small business's projects be pushed aside if a bigger client has an emergency?

Also, make sure you feel comfortable with who will be doing the work and that you can discuss your concerns and needs openly. Ask to see samples of work if appropriate (if you're using a graphic design firm, for example).

One outsourcing option is to hire independent contractors. Instead of hiring an in-house bookkeeper, for example, you might outsource the job to an independent accountant who comes in once a month or does all the work off-site. Independent contractors can be more flexible and lower in cost than outsourcing firms. As with outsourcing firms, however, before hiring an independent contractor, make sure the individual you use can do the job.

If your outsourcing needs are handled by an individual, you're dealing with an independent contractor. The IRS has stringent rules regulating exactly who is and is not considered an independent contractor. The risk: If you consider a person an independent contractor and the IRS later reclassifies him or her as an employee, you could be liable for that person's Social Security taxes and a wide range of other costs and penalties.