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Outsource vs. in-house

In my digital marketing company, we outsource a lot of the tasks in the office.  The following considerations are weighed before we decide outsourcing or hiring:

Is this role a core competency of our business?

If the answer is yes, we will hire if we have enough jobs to keep him/her busy.  If we don't have enough jobs yet, we will outsource until we can get enough jobs to hire one full-time.


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Is there a career path and environment for this role to grow in our company?

We would like all our team members to grow professionally and personally.  We may have enough jobs for a particular role to be more cost effective hiring in-house, but if we know that we can't provide the right environment for this person to grow, we will outsource the jobs.

We outsource our accounting, payroll, systems administration and office boy (despatch) jobs.  There is pretty much no career path for an accountant, a systems administrator and an office boy in our company.  Retaining these team members will also post a big challenge as it is quite hard to convince them to stay in the company that they will not grow in.


Is it cheaper to outsource?

Instead of comparing monthly salary with the outsource cost one to one.  We use a multiplier of 1.7x to cover the following:
  • 13% goes to employer portion of the Employee Provident Fund in Malaysia
  • 17% goes to annual bonus provision, assuming two month bonus
  • 5% goes to employee training
  • RM150 per month (around USD50 per month) goes to mobile phone subscription
  • RM400 per month (around USD133 per month) goes to office space rental (80sf per team member including communal space at RM5, around USD1.60, PSF rental) and utility bills
  • RM200 per month (around USD67 per month) goes to back office support (human resources and systems administration cost)
  • RM200 per month (around USD67 per month) goes to office equipments (laptop, software, desk, chair, etc) depreciation
  • RM200 per month (around USD67 per month) Employee insurance, hiring cost (over average of 24 month service period), training and hand-over period for new-hire
The above items add up to additional 35% on top of the basic salary and fixed RM1,150 (around USD384) per month (assuming a salary of RM3,000, this will be around 38% of the salary).
Using the above calculation, an outsource cost of RM3,000 (around USD960) will be cheaper than an employee of RM2,000 (around USD640) salary, since RM2,000 x 1.7 = RM3,400.

UPDATE (2014-10-15): I have changed some of the above estimates and reduced the multiplier from 2x to 1.7x.


Other benefits of outsourcing includes:

More intimate relationship within smaller team

In my other business, we have, at peak, 180 employees in three offices.  Even in the same office, plenty of time, I couldn't recognize if a person in the office is our team member, a client, or a vendor.  I won't be able to keep track who has left the company and who has joined.  In this new company, I intend to keep the team size below 30 and in order to do that, we need to master this "outsourcing" skill.


Replacement cost

Non-performing and always-fallen-sick employee is no longer our concern for the roles that we outsource.  Not even long annual leave, maternity leave, honeymoon leave, etc.  The vendor will have to provide the replacement.


Clear deliverables

Clear expectation and deliverables will be established since the vendor will need to make sure they don't lose out from this contract.  Even though this is also best practice with in-house personnel but it is always convenient to overlook.


Better monitoring of job performance

I was trained as a software engineer and no one in the management is certified in accounting.  Keeping an accountant in-house will be challenging when it comes to job performance as I will have no idea how much time and resources are needed to perform a particular task and whether the job is done in the best manner.

We also state it in our agreement that our accounting service provider only bill us when previous month financial report is sent.  And now, every month, they are the one chasing me for the statements so that they can close my previous month account.

Lastly, it is easier to switch a vendor than a team member when different need arises as the company grows (or shrinks).

What's your thoughts on outsourcing?

Comments

  1. Expenses of doing a particular back-office operate are higher than normal. Consider outsourcing those features which can be shifted easily.

    ReplyDelete
  2. Possible, but that particular operation may also end up being the key competency of the business since it is so "niche".

    ReplyDelete
  3. Outsourcing is great for small businesses that are in the development phase and trying to make its position in the market. It can outsource the tasks like payroll, salary sacrificing which are not helping the business to grow but are necessary for the smooth running of the business.

    ReplyDelete

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