by Michael Evans
A 2014 Brookings Institution report concluded that business dynamism (the number of new U.S. businesses formed versus the number closed) has slowed dramatically over the last few decades, despite the record amount of money held by venture capital and banks for investments and loans to emerging growth business.
There are many reasons for this, but clearly one of the significant issues is cost: the money and time needed to set up a new business, including regulatory and compliance costs, labor, infrastructure, and more.
Costs for a startup business can generally be classified into six major categories:
- Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing. A substantial amount of upfront money is needed to fund your initial product inventory for sale.
- Professional fees: Setting up a legal structure for your business (e.g., LLC, corporation), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, attorney and accountant fees for ongoing consultation.
- Technology costs: Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance, high-speed Internet access, servers, security measures, IT consulting.
- Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets—anything else you need on a daily basis to operate a business.
- Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists.
- Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation.
Depending on the type of business (manufacturing, services, or retail), these costs can amount to hundreds of thousands and even millions of dollars just to start a new business.
But there is a better way
Virtually every internal business function can be outsourced to a firm that will provide the service to your company, in many instances at a lower cost and higher quality than you could replicate yourself.
Every business uses outsourced services. Many businesses don’t deliver products directly to the customer or do their own audits or taxes, or self-insure the business. They outsource those functions that are not strategic but which must be performed to manage the business operations.
Consider outsourcing everything that is not strategic to your business. This includes your Human Resource (HR) support functions, accounting, manufacturing, transportation, and even your executive staff. Do you need a full-time CFO or controller, or would a “fractional” CFO or controller who is a shared resource with other companies work for you? The concept of “pay as you go” billing and generally no upfront investment costs make outsourcing nonstrategic functions a compelling solution for new and emerging growth businesses.
Six Key Outsourcing Solutions
1. Manufacturing: Outsourcing and Onshoring
Building your own manufacturing plant and process is a significant endeavor. Purchasing a plant facility, manufacturing equipment, and hiring workers are costly. For most U.S. companies, the trend to outsource and offshore manufacturing and assembly work to companies in China and other parts of Asia make significant economic sense. Your company’s product can be up and running in no time due to the extensive expertise and facilities at the disposal of global manufacturing outsourcers.
Things have began to change in the last few years, however, as the economic recession has reduced labor rates at home while labor rates in developing Asian countries have increased, leveling the playing field somewhat. Evaluate outsourcing your manufacturing but don’t rule out the United States.
2. Finance and Accounting: The Concept of the Fractional CFO
Many small businesses use very simple accounting packages or even QuickBooks, an effective accounting software package for small and mid-sized companies. But the biggest cost of your finance and accounting is the people cost, including hiring and retaining qualified people.
Also, unless you are a larger middle-market business, your company may not need a full-time CFO. Consider outsourcing all of your accounting and finance function, which could include using a “fractional” CFO who would spend a few hours a week as your company’s finance executive. There are many highly qualified finance and “back office” accounting organizations in the market. The cost savings can be significant, and time savings for management to focus on growth issues can be invaluable.
3. Technology: It’s in the Cloud
Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the Internet) thereby obviating the need for capital investment in technology, and which offers use-based pricing similar to electricity usage. End users access cloud-based applications through a web browser or a lightweight desktop or mobile app while the business software and users’ data are stored on servers at a remote location.
Key advantages include:
- Achieve greater scale with fewer employees and little capital investment; cost is “by the drink.”
- Go global at an earlier stage by deploying Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) technology not previously available to mid-sized companies.
- Deploy online CRM and customer care to “re-personalize” your customers’ experience and make relationships more “sticky.”
4. Administrative Costs: The Office
Another significant cost category for any business are the fixed costs such as office rent, administrative and support costs, utilities, security, phones, and office equipment. Many companies are moving to a shared location and shared administrative service concept in the form of executive office suites.
These suites have full administrative support, do not require a long-term lease, have offices already built out, are generally found in several locations in a city, have facilities worldwide, and are very cost efficient for new and emerging businesses. Your business could be up and running overnight with multiple city locations.
5. Human Resources: The Role of Professional Employer Organizations
Professional Employee Organization (PEOs) are companies that can manage and run most of the human resource functions of a business. Most small and mid-sized companies should consider outsourcing HR, including hiring, benefits, management, HR compliance, and a concept of “co-employment,” in which your employees are essentially employed by the PEO and you. A PEO can help process your payroll and offer your employees better benefits. In addition, by pooling with other companies through a PEO, you can get significant discounts on the cost of benefits.
6. Sales and Marketing: Using Social Marketing
Your website and social media accounts can save you significant marketing dollars. Look at the outbound marketing costs and see what you can substitute. Advertising budgets, trade show involvements, and general events are prime areas for trimming or eliminating while effectively using enhanced inbound marketing approaches.
In addition to the very low cost of sales outsourcing using social media, there are many sales outsourcing companies that will run the entire sales process for your company, including prospect contact, customer order, product fulfillment, and Customer Relationship Management (CRM).
So the natural question is, What is left if I outsource everything? The answer is your company’s intellectual capital. Successful companies have always focused on what they do best. Companies such as Apple do not manufacture their products—they outsource that process and focus on design and innovation. By not outsourcing everything that does not foster creativity and growth, you may be creating an insurmountable barrier to starting a new business or growing your existing one. Outsource it!