NFIB

Time To Hire a New Employee or Outsource?
06/ 26/ 2002

Are you facing the decision of whether to hire a new employee or outsource by using contract workers? In today's Workshop, Jeffrey Moses discusses the four central factors you will need to consider.

1. Type of work

There are certain types of jobs that demand in-house employees, including most positions that interact regularly with other staff (management, reception, on-site production, human resources). Many other types of jobs, however, can be outsourced, depending on the company structure and needs (marketing, some types of sales, Web site design/maintenance, bookkeeping).

The size of a company plays an important role in the decision. A new company with several employees probably should not hire a full-time marketing specialist. But when a certain level of growth has been attained and a company begins allocating a high percentage of its revenue to marketing, hiring an in-house person may be warranted.

2. Actual cost difference between employee and contract worker

This is usually the determining factor for developing companies. A cost analysis shows why small companies usually outsource services until reaching a certain size and level of need. The following example compares the actual yearly cost for hiring an in-house marketing specialist, as opposed to outsourcing marketing needs to a freelancer.

Say that the rate for a freelance public relations/ad writer is $75/hr. That hourly rate may seem high when compared with the $20 you might expect to pay for an in-house employee handling PR duties. But if the freelancer were contracted for 10 hours of work per week, over a year the actual cost would be: $75 x 10 hours per week x 50 weeks = $37,500. There are, of course, no benefits or company overhead to consider for a freelancer.

The salary of an in-house PR person at $20 per hour would be $20 x 40 hours per week x 52 weeks (assuming two weeks of paid vacation) = $41,600. Not much different from $37,500 for the freelancer, right? But to calculate the actual cost of the in-house employee, you need at add benefits (which usually total about 30-40% of salary) and in-house overhead (usually about 35-50% of salary). This brings the actual cost of an in-house employee up to $41,600 salary + $12,480 for benefits + $14,560 overhead = $68,640. And that's on the low side. Benefits and overhead percentages frequently go much higher.

Using these calculations, you'd save more than $30,000 by outsourcing your marketing needs, even at a rate of $75/hr for a skilled freelancer. However, when your company's need for marketing increases, you may end up using the freelancer for 25 hours or more per week. At this level, it begins to make sense to hire a full-time in-house employee.

3. Quality of work needed

Now let's assume that your need for marketing services has risen to the point that it makes financial sense to hire in-house, as shown in the preceding point. Then you have to ask what degree of quality you demand, and can you receive that quality from an in-house employee at $20 per hour? A truly skilled marketing person may not be willing to work at a yearly salary of $41,600, when he or she can make much more working just 30 hours a week at $75/hr. ($75 x 30 hours per week x 50 weeks = $112,500).

However, some skilled marketing individuals prefer the security of a steady paycheck and benefits. The trick for you, as an employer, is to locate such a person and persuade her to work full-time for you. This is often accomplished by first outsourcing services to a skilled individual, then hiring the person at an appropriate salary when your needs rise to a certain level.

4. Duration of need

Clearly, if your need is temporary or sporadic, it's usually better to outsource. The exception would be if the employee's salary could be justified by additional work performed in-house as a full-time employee.

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