The False Economy of “In-House”

A false economy is where a price seems to be better than it really is. Consider the classic example that most people face at some point in their lives: When the car is leaking oil it can seem like a hassle to bring the car in to the shop and the potentially high cost of a new gasket and oil filter can seem prohibitive. So, the vehicle owner instead just tops up with oil every week.

It seems cheaper: A dollar or two for oil versus quite a bit more for a gasket and filter. And yet, that dollar or two adds up fast. And add in the time it takes to buy oil. This is a classic false economy: the idea that something is cheaper simply because it seems cheaper at first glance.

And yet, as you drill down into the real numbers, the true economic picture becomes clearer. 

The car isn’t the only place this happens. It happens in business all the time. Businesses that still operate under the “old school” notion of having in-house staff to do the work are the ones suffering from the false economy. They hire in-house staff because they might pay them $15/hour (to use a nice round number for an example). They think they’re saving money instead of hiring an outsource service provider at $20/hour (again, to use a nice, round number).

But they don’t consider the other costs: Office equipment. Office overhead (like light, heat, power, etc.). Benefits. Bonuses and incentives.

Or the other costs that aren’t quantified but come with the territory: Coffee breaks, washroom breaks, lunch breaks. Limited productivity for the first hour in the morning and the last hour of the afternoon. Limited productivity for the entire Monday morning and the entire Friday afternoon. Office romances. Use of the telephone for personal calls. Who is stealing all the paper clips? And who answers the phones on the weekend (because it’s so hard to find an employee who wants to work Saturday)? And what happens if there isn’t a lot of work one week? They’re paid to twiddle their thumbs just in case the phone rings.

This is the true cost of doing business with in-house employees. But for the same dollar figure (or just a little more), business owners can get an outsource service provider that actually costs much less: They bill for the time they work and nothing more. There are no office or overhead expenses. They scale with your business needs, so if there’s no work, you don’t pay them (and if they phone rings, they’re “on the clock” for the phone call then off the clock after it’s done).

Many businesses have accepted outsourcing in the past for highly specialized work that couldn’t be done in-house; often work that was a one-off project like a website or the design of a new company logo. But more and more businesses are realizing that many of their activities can be delegated outside of the company at a much lower cost than if they were done in-house.

So, if you’re a business owner, it’s time to consider whether your business philosophy is motivated by a false economy that incorrectly quantifies costs, or by a true economy that appreciates the real costs associated with employees and the lower costs associated with outsourced staff.

About the author: Heather Villa, MBA CMA MSM, is a Business Coach and Entrepreneur. She helps business owners achieve success in operations, productivity, project management, and social media. Read her other articles at http://hireheathervilla.com/resources/articles/ and visit http://heathervilla.com for more information.

Disclaimer: © 2009 Heather Villa. Permission is granted to repost this article. Article must be published in its entirety, including author bio, and all links must remain intact.

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