Written by Rei Llazan co-founder at 50Pros. He writes about the future of work, artificial intelligence, and art.
By the end of 2024, the global spend on outsourcing and shared services will exceed $1 trillion for the first time ever. In 2023, this number was $971 billion, so this presents a 3% increase, a seemingly low figure but quite a large nominal jump given the massive scale of the overall market.
In 2019, or the year before the infamous year that jolted the landscape of work, the global spend was approximately $910 billion, so we are seeing a nearly 10% increase of outsourced services to other companies, partners, or contractors compared to five years ago.
There are several factors that prompt companies to opt for agencies, freelancers, and fractional employees. In the past 16 months, we have thoroughly researched and spoken to experts, including small business owners, Fortune 500 executives, top-rated freelancers, venture-backed startups, and agency owners from prominent firms in order to better understand the changes into the future of work. These discussions, and quantitative analyses that followed, have uncovered the five core factors that likely explains the reason for leaders making an increasing shift from ‘hiring employees’ to ‘hiring firms’ (i.e. agencies or contracted external work).
Note that in this article, we will focus solely on the demand side of the market (the hiring companies). What is happening on the supply side (agencies, freelancers, etc.) is a fascinating phenomena too – so we will dedicate a separate piece on this topic in the future.
5 core factors why companies are increasingly choosing to outsource to agencies or freelancers (instead of hiring in-house employees):
If you ask an agency for 40 hours of work and if you ask an employee for 40 hours of work, the agency route will be a more expensive option. This quick comparison leads many strategists and executives to conclude that hiring employees is cheaper (which, it is, on short face value).
But, the main issue here is the framework in which the question or idea is being looked at: the nature and contractual obligation between an outside/outside agency you hire versus an internal/in-house employee are fundamentally different.
You should recognize this nuance because it presents a massive point of leverage for long-term cost efficiency.
A cold, raw truth:
When you hire an employee, you are required to compensate him or her for 40 hours this week. 40 hours a week next, and 40 hours a week; and eventually they quit, or get fired, or the company shuts down entirely, etc. In most salaried jobs, you are paying an employee regardless of whether or not any results were produced. In effect, the company assumes the risk or consequences of low productivity or results.
Is there an issue here? There is, but we should be careful to not blame any employee, but rather focus our attention on the structure of what I’ll call the ‘contractual environment’ which creates low optimization for productivity.
Let’s look at an example.
If you have a customer support representative, there will invariably be some “slow and easy” weeks somewhere in the calendar year with very few (or even nonexistent, particularly for small businesses) customer tickets or inquiries. For this representative, this probably means more time browsing TikTok, taking a nap, or something else - on your company dime.
Now, let’s compare this to hiring an agency that provides services in customer support; for example, call centers or customer service agents. With this route, you have a special benefit: you can hire on 1) an ad hoc basis; and 2) “metered usage”, which means you pay the agents whenever work is required and based on how much work was performed, respectively.
For instance, if there were only 4 customer support tickets in a slow week, then you might pay something like $25 per ticket for a total of $100 for the entire week (plus maybe a monthly retainer that the agency requires).
Ultimately, although the nominal amount per compensated service is higher for agencies than employees, you have the massive benefit of paying based only on performance: pay only when it is needed and how much was needed, without paying for ‘unused hours’ that is happening with the in-house employee.
As a company owner, executive, or manager, this cost efficiency point provides deep downside protection that offsets low productivity or ‘unused hours’.
Here is a list of hidden costs associated with hiring employees (those marked with ** asterisks are unique to hiring employees only, not agencies, freelancers, or outsourced work):
When a company hires an agency or freelancer, those items marked with asterisks are already included responsibilities for the agencies, not their own, which saves them time and money (in exchange for a premium that comes with external work).
Additionally, dealing with contracts, taxes, and other administrative tasks is typically the responsibility of the agency, reducing a company’s own administrative burden.
Those without an asterisk are required when a company goes down the agency route, as a degree of management and involvement is required (like employees, agencies are not a magical pill).
However, this cost efficiency directly leads us to a point of greater effectiveness in terms of work produced, which we explore now.
To sum up a recent study, the three biggest problems CEOs and leaders face with their subordinates and employees are: inadequate time management & productivity, lack of initiative and proactivity, and lack of accountability.
Take a look at what I said recently:
What we learned is that managers wish their employees would act as generals or captains, and not mercenaries or soldiers.
In hiring an agency to handle a project (or even an entire department, such as advertising) you get the aforementioned captain or general.
As an entrepreneur, when you hire an agency, you are literally hiring another entrepreneur because that person decided to create their own entity and brand, putting their identity on the line to produce something great.
Everyone gets pleasure from saying "I built that." If you hire them, they of course care about what they produce for you, but what really drives them is the satisfaction of seeing themselves & their team produce real results.
What is the #1 thing that drives A-players? Meaningful work and accomplishment.
In effect, you send off the project and it is in good hands because the element of care exists wholly.
As a result, it is no surprise that entrepreneurs and leaders are increasingly working with agencies who they know and trust to create terrific results. The biggest, pleasant surprise that many companies find when hiring an agency is that it is not transactional, but an extension of a healthy balance within their own team. Agencies care about the work they produce and stand by as captains of their own ship.
It should be noted that agency owners are constantly fighting to retain current business and/or acquire new business, so there is a sense of urgency and seriousness in serving clients to total satisfaction. Their head is in the game. For example, the people who actually want to be in conferences (and not there because they have to be) to learn about new technologies to stay up to date and network are the ones who usually have skin in the game: these are business owners, specifically agency owners who need to be on top of it.
When a company hires an agency, the ROI creates a beautifully juxtaposed mixture:
You cannot get this benefit with employees because they can only be employed with one company and one company only: yours. There are of course benefits to this, but employees cannot reach into other fields to find new opportunities and apply those synergies to your own company. Since an agency has so much exposure to different companies and industries, they can connect the dots and deliver this value to you.
A company also gets an objective “outside” perspective (that companies pay consultants a lot of money for!).
If you question the effectiveness of cross-industry pollination, consider this: the success of 50Pros (connecting companies with agencies) is largely a result of what the author of this article learned in the art industry (connecting clients with artists). Another example of this is an investor who has large deal flow and can advise many different companies based on their cumulative expertise.
Finally, many times leaders, managers, and executives “do not know what they do not know”. This includes not knowing which specific talent and teammates are needed to accomplish a project. When a company hires an agency, they gain access to a team of professionals with specialized skills and knowledge assembled by experts with the “know how” in various areas relevant to your project or business needs (i.e. designers, developers, marketers, and content creators) that are beneficial for overall project perfection.
If you are a successful leader, you know that things rarely go as planned. There are downsides and unexpected occurrences in just about any initiative or project. You screw up. Someone else screws up. A customer gets angry. A project fails.
It is normal, but companies are reducing risk by choosing to hire agencies from a risk-reduction standpoint, including:
Like we said, there is no such thing as a magic pill, so we encourage you to read one final article today: How much should I pay for an agency so you can fully maximize the juice you extract when going down the agency route.
P.S. Our platform, 50Pros, offers a trusted & neutral place to discover & find agencies. If you are thinking about starting an upcoming project, we hope you can think of the agencies on 50Pros because they are 100% vetted and we know will produce terrific results for you.
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