Friday, May 6, 2011

Lesson #30: When to Hire Employees vs. Contractors vs. Crowdsources

Posted By: George Deeb - 5/06/2011


& Comment

Employees are on-staff individuals working for your company, accruing benefits and where the company controls their working hours and how they are paid.  Independent contractors are individuals engaged as a third-party entity, not accruing benefits, setting their own hours and invoicing the company as they complete their work.  There is a good article on the  differences between employees and contractors on the IRS website.  A new category of workers, called crowdsources, are the same as contractors, but you have them in mass, with hundreds of potential workers competiting for work at typically much reduced prices. 

Crowdsources have been built in nearly every type of human work category, including graphic design (Crowdspring, DesignCrowd, Kluster, Fellow Force, 99 Designs, Genius Rocket), search bid management (Trada), banner ad creation (Data Pop), professional writing (Contently) and market research (Crowdtap), just to name a few.  These crowdsources are typically offering companies much more selection to choose from, at a fraction of a price.  As an example, let's say you need a new logo.  You post your need on one of the graphic design crowdsource websites, and you will get 100-200 logos to choose from (designed by 100-200 different designers trying to win your business), and only pay for the one you decide to buy (typically at a fraction of the price a logo design agency would charge for only a couple options to choose from).  Crowdsources are very clever businesses!

Now, when is it best to use employees vs. contractors vs. crowdsources?  The answer typically comes down to: (i) is the position long term in nature, or temporary; and (ii) does the complexity of the work require onsite management or not.  In all cases, you want to avoid adding employees, unless absolutely necessary.  Employees come with expensive payroll taxes and employee benefits, which are typically 20% more monies on top of their base salary.  And, when you terminate them, any unemployment benefit claims, will ultimately get paid by the company in the form of higher unemployment insurance premiums.  And, management level employees may also have big severance packages (which should be avoided, if you can).  Not to mention, the mindset of an employee is that they are a long term team member, and any layoffs will dramatically impact company morale for the remaining staff, if they see their friends cut. 

That said, employees are the way to go for permanent jobs, as employees salaries are typically a lot lower than the hourly rates that can be charged by an independent contractor.  As an example, if the company needs C-level management or an office manager, these are most likely long term jobs that will never go away.  These would be employee hires.

Independent contractors, on the other hand, are better for projects that are more interim in nature.  As an example, if you need a new website design, that is typically a three month project and then the designer is done with their work.  You don't want to take a person on your employee payroll for an interim project like this.  Unless your company has full time design needs (e.g., web site changes throughout the year, marketing materials throughout the year), it is preferred to hire an independent contractor in this example.  It makes your overhead that much more variable in nature, allowing your cost stucture to move up and down as your work needs ebb and flow.  This is much preferred to carrying fixed overhead.

Now, in terms of hiring an independent contractor or using a crowdsource, it comes down to the complexity of the work.  If it is something simple, like designing a logo or website header, that can easily be done by anybody worldwide, and it would be beneficial to get a bunch of different examples to choose from.  Not to mention the dramatic costs savings of the crowdsources, compared to independent contractors.  But, for complex work, like architecting your website backend and making all the database, network, hardware and software decisions, that is most likely best served by an in-house independent contractor working hand-in-hand with your CTO.

So, long story short, keep your long term overhead (e.g., employee base) as low as possible, and structure your human resources in as variable a way as you can.  While at the same time, maximize your selection of options and keep your costs low with crowdsources, when complex work is not involved.  Start researching crowdsources on the web, there is most likely one for most any of your needs.

For future posts, please follow me at:

Red Rocket is a featured contributor on entrepreneurship for many trusted business sites:

Copyright 2011- Red Rocket Partners, LLC