My friend John’s a drywall contractor. He keeps his costs down by outsourcing.
John keeps his employee count low. And he outsources as many functions as he can. A few years ago, this didn’t seem to be fashionable. But times change. And in these tough economic times, where cutting costs is in favor and employee related expenses are on the rise, outsourcing seems to be back in vogue. Most smart business people, like John, use outside contractors to do as much as possible.
And why not? Just about everything in John’s life can be outsourced. His bookkeeping. Payroll. Computer support. Filing. Fixing toilets. Everything.
And nowadays, there are more ways than ever to find contracted help. Two websites I know, Elance.com and Guru.com, are right now matching thousands of companies with contractors. Both sites allow a user to search for and find independent workers anywhere in the world, “interview” them online, as well as accept and manage work and payments to them. Elance, for example, makes money when the work is delivered.
When employers make a payment to their service providers, Elance deducts between 6.75% and 8.75% from the payment to cover its costs and transfers the remaining amount directly to the service provider’s account. They also sell membership plans too. I’ve done some worked with the good people at Elance directly and like their service. If you don’t want to deal with a middleman at all, then there are plenty of independents to be found on Craigslist too and that’s totally for free.
When John finds someone to do a job for him, he rarely worries about where that person’s located. That’s because there are so many remote connection tools available today, like Windows Terminal Services and products from Citrix that he can hire people anywhere he wants and then get them connected to the office. So if he finds a great marketing person in Idaho, or an excellent bookkeeper in Waco, he can have them work right from home. Technology has made outsourcing really easy for him.
But penny pinchers like John have to be careful nowadays. There are pretty strict rules about who’s an employee and who’s a contractor. If you break the rules, you may not only be stuck for that person’s back employment taxes but penalties and interest too. And if the IRS thinks this was less than an “honest” mistake then criminal charges could also happen. Not good.
The IRS has rules to follow and a link to them is here: http://www.irs.gov/pub/irs-pdf/p1779.pdf. The good news is that John has common sense. He makes sure that his contractors have no workspace at his offices. He does the appropriate filings. He also likes to see his contractors do work for other people and to that end he’s in the past referred some of them to his customers and suppliers. The more his outsourced telemarketer can show that she’s an independent business with many of her own clients the less of a case the IRS has saying that John’s her employer.
John keeps a close eye on the people he hires as contractors. He talks to them a few times a week. He looks at the invoices they send him and understands the hours they’re charging. In some cases, like when he sends a sub-contractor out to do a job at a customer, he’ll only pay when the job is done. Even as he keeps a close eye out on his independents he still likes to back off a little and let them operate on their own.
That’s because John allows his independent contractors to be…independent. He gives them the respect of a fellow business owner. That’s because they are. He negotiates with them as if they are an independent business. That’s because they’re supposed to be.
Sure, John’s lazy. He doesn’t like to do things for himself. And he doesn’t like to hire more employees. So he outsources. A lot. Because that’s what smart business people do when times are tight. To cut costs. But also to grow their business.
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