Got a lot of new billable work coming in but don’t have enough people to handle the work? If you’re confident there’s at least 15-20 hours a week of billable work, it usually makes business sense to hire a new full-time employee.
But what about when the new work is less consistent, or it’s in an area where your agency doesn’t plan to specialize? In that case, you usually need to decide whether to hire freelancers or to hire another agency to do the work. I recently discussed this topic at Inbound.org.
Your outsourcing decision typically comes down to three things: profit margins, management workload, and your agency’s business focus.
Profit Margins: Markup or Commission?
How much do you charge your clients, vs. how much does your subcontractor charge you?
If your agency charges clients US$150/hour and another agency—as a potential subcontractor to you—would be charging you US$125/hour, there’s not enough room for markup. In this case, you might structure things on a partnership or referral basis. That is, you’d recommend the other agency to your clients, either with or without a referral commission. You may or may not manage their work.
In contrast, if your goal is to maximize profit margins, you should hire freelancers directly. For example, a freelancer charging you US$75/hour gives your $150/hour agency more room for markup.
Workload: Quality Control & Recruiting
Once you have a reliable “stable” of freelancers, it’s relatively easy to handle an increase in new work—the odds are good that one of your trustworthy freelancers will be available. But if work fluctuates dramatically, it may make more sense to work with an agency, since they can more easily find people to do the overflow work.
Hiring freelancers is cheaper, but not every agency wants the management overhead involved in that approach. Hiring another agency can be less headache-inducing, since the other agency handles recruiting and quality control.
Business Focus: Core or Non-Core
Your business strategy affects the decision, too. If you see a particular service as a strategic focus for your agency, you’ll probably hire freelancers and/or full-time employees to do the work “in-house” at the agency.
If your agency is focusing somewhere else, you’re more likely to partner with someone else to do the other work.
For instance, one of my clients specializes in marketing automation setup work, but he prefers to outsource all content creation to a partner agency—which he marks up—because he doesn’t want to staff a team of content creators.
I see similar choices with agencies who haven’t provided a particular service before, but who want to upsell their clients on new services. Hiring someone else makes it easier to see what you’re getting into, before you start providing the services in-house.
Question: When do you outsource to another agency instead of hiring people yourself?