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Making the Most of Freelance Talent

Almost every company in America is outsourcing at least part of its work--but not always getting the results it needs. Here's how to do it right.
July 30, 2010
URL: http://www.entrepreneur.com/article/217195

Call them what you like--contractors, temps, outsourced workers, freelancers, day laborers or, as one recent doomsday article suggested, disposable workers. Whatever the term, businesses are calling them more these days.

An overwhelming 90 percent of U.S. companies outsource at least some of their work, according to a survey by the Human Capital Institute, a global association of talent management groups. Some outsource almost all of it, and more are heading in that direction: The average portion of work outsourced has grown from 6 percent to more than 27 percent since 1990. A third of employers report using more contract employees in the past few years--not typical in a recession--and expect to use even more in the future.

"Outsourcing is no longer considered a temporary fix to a short-term need," says Katie Ratkiewicz, a practice leader for the institute. "Instead, it's being redefined as a permanent fixture in organizational makeup."

Danny Wong used that model when he co-founded his startup, Blank-Label.com, a Wellesley, Mass., maker of custom men's dress shirts. Wong keeps the core team small--eight staffers in total--and outsources about 60 hours a week of e-mails, live chat, programming and content creation. "Once we'd answered the same customer question for the hundredth time, we knew it was time to outsource customer service, too," he says. "It increased our quality of life and the quality of our service."

Indeed, outsourcing at its best can expand your talent pool as well as save you money, allow you to quickly adjust to changes in demand, attract workers who prefer flexible schedules and keep you technologically current. All of these reasons and more are why outsourcing is being touted from most corners of the business world, and why there are so many new converts. Fabio Rosati, CEO of Elance, one of the largest freelance job boards with more than 30,000 new projects posted every month, calls outsourcing "a new, leaner way to start and grow a company with a lot less overhead."

"Suddenly," he says, "small businesses are operating like mini multinationals."

What's discussed less often, though, is how different it is to hire and manage a team of freelance workers versus an in-house staff. Just think about it: Outsourcing exposes your intellectual property, trade secrets and customer information. It places your corporate memory and business functions in the hands of outsiders. And--if it's managed incorrectly--it can trigger a nightmare of investigations and costly penalties from the IRS, Department of Labor and other government agencies, all of which are increasing their oversight (see "The IRS Is Watching").

So is outsourcing for you? And if so, how can you get the most out of it? We consulted human resource experts, outsourcing specialists, lawyers and some of the largest HR associations in the country. Here is their best advice.

Choose the RIght Jobs
Back in 1989, management guru Charles Handy predicted a "shamrock organization," with one leaf representing the "core" staff, another the "process" areas such as IT, customer service or financial management, and the third leaf representing "projects" groups, such as graphic design, article writing or search engine optimization.

The role of those core people--the cultural center of your organization--is to drive and direct the process and projects groups. Core workers should not be outsourced.

Hour By Hour

On a strict dollar-per-hour basis, outsourcing may not appear to save you money, but not having a fixed commitment to an employee will almost certainly represent a huge savings in the long run. As an example, government numbers show the following average cost for a salaried graphic artist. --K.L.

Staffer
Hourly rate based on salary: $20.38
Benefits and taxes (32.85%): $6.70
Office space (230 square feet at $34 per square foot): $3.91
Technology (amortized over life): $1.47
Total hourly cost: $32.46

Contractor
According to PayScale.com, the average self-employed graphic artist charges $16.44 to $46.32 per hour. Rates on the freelance job boards range between $10 and $30 per hour.

It may make sense to outsource in one of the other areas if the job requires skills or expertise you don't often need; tools and technologies you don't need to own; or special cultural, geographic or industry expertise. FreelancersUnion.org, a nonprofit organization that represents 140,000 independent workers, shows that graphic designers, writers, information technology professionals, artists, editors, photographers, web developers, and media production and marketing professionals are the top outsourced talent. But whatever you're considering, don't expect outsourced workers to function completely on their own.

"Employers often outsource because they think it will be cheaper, but there's a lot involved in establishing processes outside your own organization," says Sajeel Qureshi, vice president of operations for Computan, a web applications developer in Canada with more than 1,000 customers worldwide. "If you don't spend the time to teach an outsider your business, don't expect them to perform as an employee--who has the benefit of cultural immersion--would."

For example, a public relations agency may have the contacts, relationships and expertise to deliver your message better than anyone on staff, but the PR agency knows nothing about your business and if you don't teach it, you'll be wasting your money. The need is even greater, Qureshi points out, if you're an international operation working across multiple cultures.

Find the Right People
Ron Holifield, CEO of Strategic Government Resources, a Keller, Texas, firm that specializes in training for local government agencies, has almost 200 client cities in 11 states. The company trains more than 1,000 city workers each month, conducts a dozen executive searches per year, operates the largest public sector job board in the nation and does consulting for local governments--all with only eight staff employees.

As a former city manager with 2,500 employees, Holifield knew he didn't want the headache and cash flow strain of a large staff. So his employees provide the central management, and the outsourced talent is mostly baby boomers who offer years of expertise.

Knowing the kind of person you want is as key in an outsourced job as it is in a staff slot. Start your search with people you know--a trusted advisor, employee, peer or former employee who left on good terms. To expand your search, consider:

Business referrals: See a website, logo or widget you like? Ask the owner if he'd recommend the company that produced it.

"Finding the right people is difficult whether you outsource or hire, but with freelance talent, we're able to test them out," says Wong, the custom shirt maker, who uses oDesk.
Instead of relying on writers' sample articles--not always a good indication of ability--Wong asks new contract writers to set their first deadline and judges them by what he gets. (He also coaches them along the way and doesn't expect them to understand all the nuances of his business.)

"It's an easy and inexpensive way to find people who can handle the work," Wong says. If he finds someone who's reliable and doesn't need micromanaging, he'll pay a higher rate.

But even with careful vetting, Wong has been stung. "There have been many times that we've been stuck with truly awful contractors," he says.

Many freelancers, he warns, see you as just another project, another paycheck. "You need to find people who really care, who see the potential for a long-term relationship with you, and then nurture them."

Manage the Right Way
Managing outside talent requires different techniques. You're not their only client. You may not even be their most important one. They're not trying to climb your organizational ladder. They may not even be someone you'd want to work with over the long term. They have a job to do and, if you've hired right, they want to do it well. But you're not their boss in the traditional sense.

"If you're micromanaging, you've hired the wrong person," Wong says. "You need specific measurable goals that define success. The result is what matters, not the process."

Says Qureshi: "Remember that when you outsource, you become the customer. It's the contractor's job to make sure you're happy. When outsourcing to a large organization, be sure there's a good account manager between you and the work being done--someone you can call when things aren't going right."

Outsourcing can affect staff morale: Employees can become fearful or resentful of the outside workers. But you can avoid the biggest problems by keeping desirable work for your employees. Farm out the undesirable work, and make sure employees understand the reason behind the rate difference between contractors and employees (such as lack of benefits, job security and the employer's share of taxes).

Consider, too, the risk of information loss or intellectual property issues. Qureshi advises documenting any work as a work-for-hire to give you, not the contractor, ownership of the work.

Also consider including a non-disclosure and/or noncompete agreement. Holifield has found it useful to require contractors to sign a non-compete agreement. Keep in mind, though, that many U.S. contracts are invalid or unenforceable in other countries.

Cheap communications and support services such as Google Docs, Skype, Facebook and others make it easy and inexpensive to find and manage a cadre of remote talent, says Thomas Malone, a professor of management at the MIT Sloan School of Management and author of The Future of Work.

"I still see a huge, untapped potential in outsourcing," Malone says. "Technology is what makes it easy, but the fact that outsourcing offers freedom and flexibility for both employers and employees is what will really drive it forward."

The IRS is Watching

Government agencies are ramping up their oversight of employers who use freelance workers

It is one of the ironies of outsourcing: You want to find freelancers who function as smoothly and effectively as staffers. But if you treat freelancers too much like employees, you are liable to be penalized by the IRS and other government agencies for “worker misclassification.”

And employers have never been more vulnerable. In February, the IRS began a three-year initiative to crack down on worker misclassification. Six thousand businesses have already been targeted for audit.

At the same time, President Obama's budget proposal for 2011 includes $25 million in new Department of Labor spending, including 100 new employees to ramp up enforcement of employee misclassification.

Worker misclassification occurs when a government entity decides that a contractor, freelancer, temp, or 1099 worker is really an employee and entitled to the benefits and protections dictated by employment law. On the financial side, they want the income from the employer's share of taxes (Social Security, Medicare, unemployment, workers' compensation).

What can misclassification cost you? According to James Coleman, partner with Constangy, Brooks & Smith, a national labor and employment law firm, the IRS may go after all sums that should have been withheld retroactively, including the employer's share of Social Security, Medicare, unemployment insurance, interest and penalties.

Misclassification actions brought by the Department of Labor can result in retroactive minimum wage, overtime, liquidated damages equal to the back wages and an award of costs and attorneys' fees.

Obama's budget proposal also calls for better collaboration between state and federal efforts to identify misclassified workers. So, once a business has been tagged, it will likely be subject to additional investigations by other agencies.

Certain industries with a history of misclassification are being targeted: trucking, construction, restaurants, grocery stores, janitorial, business services, child care, poultry and meat processing, landscaping and home healthcare. But any company that issues a large number of 1099s or has a relatively large percentage of independent contractors versus zero employees has higher potential for an audit.

Also, many audits are triggered by a claim for workers' compensation or unemployment benefits from a contractor. Others are brought about when one or more contingent workers decides to sue. In addition, the IRS Whistleblower Program allows a disgruntled worker or competitor to pocket 15 percent to 30 percent of the amount collected if the company is found to be in violation.

Although some federal and state agencies mirror the IRS rules, many do not, so it's crucial that you seek the advice of an attorney if you have any doubt about worker classification.

The IRS website, irs.gov, explains the criteria for determining whether a worker is an employee or independent contractor. They fall into three categories: