How to Outsource Yourself Out of Business

A friend of mine just outsourced himself out of business. Not out of work and into more free time. Out of business.

He thought he did everything right. He is (sorry, was) a consultant, and he set his target wage at $95 an hour. That's the amount he wanted to earn for his time.

He was realistic, so he also established his minimum wage at $35 an hour under the assumption that hiring someone else to do tasks for less than $35 an hour made good business sense. Since his time was "worth" $95 an hour, why spend time performing tasks he could pay someone else to do for, say, $20 an hour or less?

Off he went, excited by the thought of maximizing his earning power by focusing only on the "real," high-paying, $95/hour work. Awesome, right?

Anyone who runs a service business knows the reality is much different. Work ebbs and flows; projects come and go; the variety of daily tasks is dizzying. It's nearly impossible to only perform tasks that pay your target rate.

Deciding to outsource can be a great way to maximize your skills and grow your business, but only if you get the logic and math right. There are lots of ways to go wrong, but here are two of the most common outsourcing logic errors.

Opportunity Cost
Opportunity cost is, basically, the cost of what you give up. (Oh, okay: Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.)

In my friend's case, he chose to outsource anything he could pay someone else to do for less than $35/hr. Of course the underlying assumption was he would perform higher-paying work instead.

But he didn't have enough work to fill the time, so he couldn't replace "cheap" work with "expensive" work. Instead of making opportunity cost work for him -- by trading $35/hr work for $95/hour work -- he traded $35/hr for $0/hr. The opportunity he created was enjoyed by someone else.

Whenever you outsource, make sure you can fill the time you save with work that pays more than you spend outsourcing. Otherwise the money you spend just gives you more free time.

Opportunity cost applies to tasks at home, too. If you make $40 and hour and can hire someone to cut your grass for $10 an hour that's a good deal, right? Only if you can actually get paid $40 an hour while your hired help cuts the grass. If not, you're just hiring a landscaper to take care of stuff you don't want to do. Hiring someone to cut your grass so you have more free time still may be a great decision -- just don't fool yourself into thinking you're saving money in the process.

Full-Time Equivalents
Years ago I presented a justification for a project to outsource the production of certain components. I reached the end of my presentation and said, "And best of all, we'll save 2.5 full-time equivalents" (silly project justification lingo for "persons").

"That sounds great," the plant manager said with a noticeable lack of enthusiasm. "So tell me: Which 2.5 people do you plan to take off the payroll?"

Outsourcing intended to save person-hours really only saves person-hours if those individuals are 1) let go, or 2) officially assigned to another productive task. Otherwise no time or money is saved. (Think about process-improvement projects with justifications based on labor savings; how often did you see labor actually taken off the payroll? My guess is rarely.)

Outsourcing to save money or time only works when you validate the logic behind the decision. Make sure you can actually replace the work you were doing with higher-paying work. Make sure you will actually realize the labor savings you estimate.

And create short-term agreements with vendors whenever possible so you can pull work back in-house if your outsourcing math isn't working out like you hoped.

Photo courtesy flickr user Public Domain Photos, CC 2.0