Organizations of all sizes often grapple with the question of outsourcing compared to hiring and maintaining employees. This issue mainly arises due to the need to control their expenses as well as the seasonal demand of business. However, many organizations don’t achieve the level of savings that can be made.
When weighing different factors and comparing the pros against the cons, it usually makes sense to outsource most of the work out to reliable “strategic partners” (not just a vendor) rather than maintain employees.
Image courtesy of http://www.highturns.com/staffingcost
Finding a qualified person who aligns to your organizations culture and ethics is time-consuming and costly. You’ll either need to hire an in house recruiter to perform this task or Get SMART and outsource to a contingency or retained recruiter. In addition to the recruiting team, advertising for the position, paying for online tools and Applicant Tracking System (ATS), and time – all cost the company more than just salary. SHRM estimates the average cost of hiring an employee to be $4,129. An expense most businesses don’t take into account.
2. Payroll expenses
Employees typically have a base salary which you’ll pay them every month. This is even though some months will have less work than other months. Additionally, bonuses and overtime pay can even add more to the outflow.
3. Employment taxes
Taxes are as certain as death and when you carry employees, the company also has to pay federal and state taxes in addition to the amount described above. Social security, Unemployment tax, Medicare tax, workplace insurance, and any other tax demanded in your region, all come out of the organizations account. SMART companies don’t worry about paying taxes when they outsource. In fact, the expenses are still a legitimate cost but much less, thereby improving profitability.
4. Employee benefits
To attract and retain top talent – especially in a tight labor market – you’ll need to provide competitive benefits in addition to salary and bonuses. Benefits can include health, life insurance, disability insurance, tuition coverage, entertainment benefits, retirement benefits etc. all add to the total cost of an employee.
For instance, People Keep states that “in 2017, the average cost of insurance per employee for family coverage was $18,764 with workers on average paying $5,714 towards the cost of their coverage. In 2018 that number rose to $19,616, a 5% increase.
In 2018, workers paid 18% of the cost for single employee and 29% for family coverage (source). Although numbers vary by company and provider, the average costs continue to rise.”
5. Paid Time Off (PTO)
As part of the benefits package, employees are entitled to time off for sick days, annual leave, and maternity leave. These are additional expenses which will squeeze an organizations finances.
6. Office space & Equipment
When you maintain employees, you’ll need to provide physical space or let the employees work remotely. Physical space brings additional expense in the form of rent, maintenance, and other costs.
All office space requires furniture and equipment. Items such as computers, furniture, software, telephone, printers, internet, stationery all bring greater cost and also additional employees to handle the supply chain and maintenance.
The larger the workforce, the greater the requirement for more space and equipment.
Additional expenses such as electricity, water, internet, food, cleaning, and security ‘can’t be quantified to a single employee but will count towards the total costs.
Employees require training so they may be proficient in their roles. Training is either conducted by other employees or outsourced to others. In all these scenarios, training costs time and money to on-board a new employee and to continuously develop their knowledge and skills.
9. Employee theft and liability
Its easy to take this for granted but depending on the industry, this is a cost which ‘you’ll have to be prepared for. Employee theft can take many shapes including loss of inventory, loss of work time, loss of equipment.
Also, employers can be held liable for an accident arising out of the general course of employment. In some areas, its even possible for an employee to take legal action against the employer to recover damages for harm caused by the employer’s negligence.
Even if the employer wins a liability related lawsuit, the cost of liability insurance and legal defense are added to the true cost of an employee
Taking into account the salary and taxes, experts contend that the true cost of maintaining an employee is at least 1.4 to 1.5 times the base salary alone. For those organizations located in less tax friendly states or offer better benefits, the true cost can be even higher.
**** So for instance, someone earning a base salary of $50,000 will cost actually cost the company from $70,000 to $80,000.
Outsourcing has gained traction over the last decade and today, many organizations are outsourcing some of their functions for many of the reasons identified in the diagram above. This trend will only continue as technology and and the workforce continues to change. Functions such as sales, marketing, accounting, legal, recruiting and HR have all been major areas where outsourcing has been conducted. SMART employers already know this so contact us to learn how you can “Get SMART”
Even large companies are now either outsourcing some of their tasks or going even further and buying companies overseas in less expensive labor markets. As they do this, they continue to improve their productivity and ROI.
Outsourcing can also be provided to a singled independent contractor or to a firm that’s specialized in that particular function – such as a recruiting firm. However, most of these firms don’t price their services low enough in order to be considered SMART.
Today, talent acquisition is one of the first areas companies outsource.
Outsourcing shouldn’t be seen as just farming work out to a vendor. Selection of the right company to outsource to is an important decision and should be seen more like selecting a strategic partner.
When approached correctly, outsourcing is a powerful tool that any organization can leverage to increase their competitiveness and profitability.
Having looked at the costs associated with employees, now let’s review some of the benefits that come with outsourcing – especially for small businesses.
Plain and simple – outsourcing is more cost-effective than hiring employees. Costs saved can be at a 30% and usually higher.
2. Increased Productivity
Outsourcing increases productivity as the business owner and the lean staff can now focus on their core business. As a business grows, supporting operations grow. You run the risk of utilizing more and more resources and time on them at the expense of your core business.
3. Increased Efficiency
This is closely tied to productivity. When you outsource a particular task, your outsourced partner will do it more efficiently since it’s their area of expertise. It will be done in a shorter amount of time and with higher quality. Many tasks may be highly technical and complicated to the employer but will usually be easier to address for the partner because of their specialty.
Outsourcing increases the flexibility of a business. Business leaders can respond much quicker to changing market conditions and challenges without carrying the burden of maintaining employees. Some activities are seasonal, such as auditing and tax season, outsourcing ensures this additional work is done quickly and efficiently. Once over though, the strategic partner may be disengaged.
In addition, letting an employee go is never an easy decision and can even become more complicated if not done correctly (liability risk). Outsourcing removes this emotional bond and risk since you only engage your strategic outsourcing partner when there is work to be done.
5. Fewer Legal obligations
Once you hire an employee, you are legally obligated to perform certain responsibilities. This requires dependence on an HR team to ensure this area is addressed properly as the company actually enters into a binding contract when it has its own employees. The employee can sue you for any perceived infringement of their labor rights but you don’t t face the same legal obligations when you outsource
Outsourcing gives you access to a broader pool of expertise. You can hire a contractor who is on a different continent rather than restrict yourself to your locality. These freelancers have honed their skills working on a specific field. Working with different clients makes them more versatile than someone who is exposed to just one client.
7. Large projects
Contractors come in handy when you have a large project. Small businesses need not worry about handling large projects. With shrewd planning, your small team of employees, coupled with an army of contractors, can accomplish a project that seemed daunting.
SMART organizations know outsourcing can be highly beneficial when done properly. The benefits far outweigh the risks by far and it makes a lot of sense for any sized businesses to explore outsourcing some of their roles. When choosing a company to outsource your services to, make sure you check out their track record.
Ridgeback Business Solutions helps organizations “Get SMART” so they can do things they can’t normally do in the fields of finding great talent, project management, focused marketing, and to improve the efficiency and profitability of their business.
To learn more about how Ridgeback can help you GET SMART,
Please contact us at:
Phone: (646) 883-2927