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Should I Hire a Contractor or an Employee?

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Hiring the right person for the right job, whether a contractor or an employee, is a task that all employers will find themselves doing again and again.

Here are some typical questions that might arise in handling staffing issues at professional services businesses, with my answers, based on my experience:

Related: 3 Major Pitfalls for Professional-Services Firms to Navigate

1. What is a scalable workforce and how can it help my business?

Scalability, by definition, is the ability to change in size. Services companies and other knowledge-based businesses are unique from other firms in that they scale by adding people. With a services business, the fundamental revenue driver is payment for the delivery of services by people at the firm. Thus, when the ability to scale depends on the number of people offering services, it begs the question, Does the company hire a contractor or bring on a new employee?

The business probably falls into one of two categories: The workforce is scaled for growth, fluctuating depending on how many projects are acquired. Or the workforce remains steady, regardless of the number of projects in the pipeline.

If the company can scale its business for growth, it becomes more flexible in being able to accept a large opportunity that comes along by quickly adding more resources (such as independent contractors). This solves the problem of having to turn away work due to limited resources. If the company has a slow month, then managers can easily slim down the workforce and scale back costs.

2. Can an owner truly grow a business with independent contractors?

Tapping into a network of providers is a really strong strategy for growing a business. Then it's always possible to say yes to more work. Keeping a reliable, trustworthy, solid base of contractors who can be hired on an ad-hoc basis is a good idea.

Small business owners should also focus on empowering their managers to oversee the delivery of projects, keep an ear to the ground for additional projects and continually look for opportunities to provide fresh services to clients. Managers need to have a keen sense of providing value and keeping client needs in mind to provide exceptional service.

Related: 3 Legal Precautions in Hiring Freelancer

3. When is it time to hire a contractor?

Keep a budget for hiring contractors as needed. Here are some indications that a project might be better suited for a contractor:

a) The business does not have employees available to perform the tasks.

b) Demand is uncertain.

c) The job requires a specialized skill that the company lacks or the business owner doesn't plan to specialize in.

4. When is it time to hire a full-time employee? Is there a tipping point when it makes the most sense?

The decision to hire full-time employees doesn't have anything to do with the size of the organization as much as its profit margins. If the billable time of current full-time employees is at or above 85 percent and the profit margins are at least 50 percent, those are good indicators that the company is ready to add another full-time employee. A company makes less of a profit margin on contractors, so it's important to factor in their workload.

If these numbers aren't being reached, the company is better off keeping its costs variable (by using contractors) until the firm can reach these margins.

5. What's a good mix between employees and contractors?

The answer will depend on each company's unique circumstances, but a 30 percent contractor base is generally a good number for a small services business. The 85 percent chargeability is the magic number to hit before bringing on additional employees. If the company is not there yet, work on increasing the profit margins and use the network of contractors to take on more work.

6. Do clients care if the work is contracted out?

It's OK to scale the business by tapping into contractors and customers won't care as long as the company owns the quality of the work. This is why it's so important to develop a network of trustworthy contractors. Sourcing quality talent is a skill on its own and there's great value in knowing where the best talent is and how to manage it.

Related: 5 Things You Never Should Say to a Client

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