Back April 7, 2017

Hire or Outsource? Ask the Cash Flow

Growth is often regarded as the moving force behind small businesses. Even from the very start, entrepreneurs dream of growing their company, working with an extended team, offices buzzing with people and the sound of many fingers tapping into many keyboards. Do you remember the saying ”be careful what you wish for”? That big project, that great opportunity you’ve been hoping for may be just around the corner. All of a sudden business growth becomes reality and can get surprisingly difficult. Why? Because it brings owners and managers to face difficult decisions: How many people to hire? Better to outsource? How will it impact the business finances?

There is no right or wrong answer here. The truth is that it depends. It depends on a lot of factors. We’ve faced the same dilemma at ThinkOut and as exciting as it felt, it wasn’t easy to figure it out.

Here are the criteria that we used to support our decision; we hope they will help you, too:

Type of activity

What we knew for sure was that we needed more people for the various activities that would bring ThinkOut to the next level. Knowing this, we needed to define which were the core activities that couldn’t be externalized. For us, development had to be an in-house job. So was customer care. We needed people to be around full time, know the product inside-out and watch its every day making. We needed to react promptly to user feedback and changes. But this is us. For other businesses, it may be different. Also, it depends very much on the Intellectual Property matters involved; what information and know how do you feel safe to let others handle?

Level of engagement

This has more to do with the organizational culture; it is known that employees are more engaged than third party service providers. The first are more likely to bond and develop a certain attachment to your product or service, being more motivated to strive for it. The latter work with multiple clients, which may set your business on a lower rank on their priorities list. On the other hand, service providers have more reasons to get things done as soon as possible and to deliver quality, so they can get more orders. That doesn’t exactly answer your question, does it? The truth is that you can’t exactly tell which is better. So after you decided the type of service you’d outsource, search for offers, compare portfolios and level of expertise and decide if you can get the value you expect. If nothing is satisfying enough, hire and train your own people to match the expectations.

Cash flow

This is probably the clearest criterion and you should begin with it. Then, based on the conclusion, you can add the above filters and see which way is more convenient to the business on the long run. How does this work? Growth is driven by expected revenue from a larger project, a round of investment or more clients. However, for project-based companies, especially in the creative industries, fluctuating revenue is mere routine. In this case, deciding upon growth involves a lot of thinking and analyzing. The answer lies in the cash flow scenarios. Forecast income and expenses for both the hiring and outsourcing cases. Hiring means fixed costs including additional taxes, regardless the revenue. You need to be able (as in having the cash) to pay salaries monthly, on the same dates. If you can afford that and your forecasted cash flow stays positive for long enough, then take into account the other reasons for choosing employees over service providers. If you run out of cash pretty fast and you don’t anticipate any new income soon, then you should consider outsourcing. In case things don’t go as planned, it is easier to end an outsourcing contract then to fire people.

By the way, consider trying ThinkOut for cash flow forecasting and for comparing the hire versus outsource hypothesis. The graphs will instantly show you the evolution of each scenario, giving you more time to analyze the “soft” reasons: task control, motivation, engagement.