Should I Hire a Contractor or an Employee?

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.