Is there such thing as a big startup? Can you be a one man band, with an entire orchestra? An Army of one?
Yes, you can.
If you follow suit of the big boys it’s very possible to be massive without being big. Look at Apple for example: with 80,000 employees they are actually pretty small when it comes to multinational companies. Walmart has 2.2M, McDonald’s 440K, Target 360K and Costco 128K. Apple doesn’t make the top 50, but for valuation they are number one by over double to the next closest, Exxon Mobil. The way they to do that is to only control key components of the entire company such as software, branding and R&D. Everything else is outsourced; Apple makes no tangible product, they outsource all of that to Foxconn. It’s actually a fairly popular business model and quite a bunch of companies do it or are moving to it because it provides a competitive edge that is becoming a requirement in the modern market.
Okay, so you are not a multinational company, I get that. It doesn’t mean you can’t learn from them.
The single advantage is bigger is better, the more people you have in your raft all rowing in the same direction the better. How they get there is really not an issue as long as they are rowing in the same direction.
Let’s discuss when and what to outsource.
The value of time.
The value of your time is the value of the next best thing you can be doing. You can only do one thing at a time, so you are always making a choice about how to use that limited resource of time itself.
If I’ve got one hour I can: Work and make $10 or watch TV for 1 hour. If you chose TV, the cost of that time is $10, because that’s what work would have paid you. It’s the exchange of time for a monetary equivalent.
Other people exchange their time for a monetary equivalent as well. Depending on the level of commitment in the working relationship, we can call them a spouse, employee, or contractor. No matter the title, they are exchanging time for money.
If I’ve got one hour I can: Work and make $10 or clean the house for one hour. I can get a cleaning person for $9 an hour. Maybe I should work and hire somebody to clean, and I am now $1 richer.
This only works IF I have something else to do, which converts time to money (a paying job). If it does not convert time to money I should do the cleaning myself.
If I’ve got one hour I can: Watch TV or clean the house for one hour. I can get a cleaning person for $9 an hour, but I didn’t make any money with my time, so now I am out $9 to pay for the cleaning person.
It’s that exchange of time for the highest monetary equivalent that makes outsourcing a viable option, but only if you have something better to do.
So my friend Bob, who is a computer guy, makes $90 an hour and can bill a maximum of 20 hours a week. Scheduling (five hours), travel (five hours), calling customers (five hours), ordering parts (five hours), staying current on computers (10 hours), eats 30 hours a week, for a total of 50 hours.
Bob looks online and finds Sue, a virtual assistant. Sue is really good at this, much better than Bob ever thought of being. Bob hires her for 10 hours a week at $20/hr, which is plenty of time for her to do the scheduling, customers and ordering. Sue then got Bob hooked up on Uber and uses that technology to handle his travel, so Bob now reads instead of driving, which now counts against his study time, so really they saved 20 hours (1/2 the reading time).
Bob went from working 50 hours a week to 30 hours a week just because he did a little outsourcing. Should he have done it? We’re just talking money here, not life choices. In pure economic terms no, he should not have done it. He has made no additional income and actually he loses $200 a week.
But, if he knows for sure he can bill another 10 hours a week, then yes, $90 * 10hrs = $900 (potential) – Sue’s fee $200 = $700. So in reality Sue doesn’t cost anything, she makes Bob $700 a week. Net out Sue’s costs to get the opportunity costs, so the opportunity costs of NOT having Sue is $700 a week.
Since Bob can work 50 hours a week, he could technically bill another 20 hours a week which could net him $90 * 20hrs = $1800 (potential) – Sue’s fee $200 = $1600. So, not having Sue and working 50 hours a week costs Bob $1600 a week (opportunity).
To convert Sue’s fees to apples to apples with Bob, we need to look at what she does, since she supports all of Bob’s customers, her time gets dilutes against everything Bob bills. Bob bills 20 hours a week, Sue costs dilute to $10 an hour. Bill 40 hours a week, $200/40hrs = $5 per hour. This is Sue’s equivalent rate and is used when doing calculation on whether it is profitable to continue outsourcing.
The only things Bob did not outsource were his core competencies and his enhancement to his core competencies. From the customer’s point of view Bob’s Computer Consulting just grew by 100%, it’s now Bob and Sue, which makes Bob’s company look twice as big. It gained scale without mass.
You can play this game all day long, as long as Bob continues to outsource what is not his core competency, and continues to bill at a higher rate than the equivalent, Bob will continue to grow in scale without mass and be more profitable than he was before the deal.
This only works because Bob has something better to do. If Bob cannot fill the time with something that pays, then he stops outsourcing. This is when he gets to a point of equilibrium.
Bob is a smart guy. He’s billing 30 hours a week now, but he figures if he could bill 40 hours a week and travel between jobs 10 hours a week, he can do all of his studying in the car, it nets out to 50 hours a week and he thinks that will be great. Bob just can’t get the time to market his services, so he calls around and find a service that will do it for $1,000 a week. That will get him fully loaded, with 40 hours billed each week. Bob does the equivalent math. If he bills 40 hours a week, it will be $1000/40hrs = $25 per hour.
Sounds like a good deal, but there is something that feels wrong.
But in this case the Bob can do 30 hours by himself, so the charge is for the incremental gain, not everything. Forty hours a week minus the 30 Bob can find on your own, $1000/10hrs = $100 per hour.
That’s not such a good deal for Bob. But, he knows there is more potential out there and he is bound to find it.
The marketing firm will find 40 hours of billable work for $1,000/wk. Bob has Sue find two part-time employees with computer skill, but not as good as Bob, so they only bill at $60 an hour. The marketing firm takes $25/hr, the part time computer guys are $20/hr loaded, the employees drive in their own cars. Sue takes a little extra time, which is negligible. Bob is making $15 for every hour they work. Bob is making money from a proposition that didn’t benefit him originally, but he changes the circumstances and made it profitable.
Bob made good economic decisions, converted everything applies to apples and brought in additional revenue. Bob made a few extra bucks.
What did Bob REALLY do?
Bob was alone when we started; Bob now has himself, Sue, a marketing firm, and the part timers, he grew from one to four people. Bob isn’t done yet.
Bob keeps the part timers as employees because they are part of his core competency; he hired them as temp to perm, with a 90-day evaluation period, which Sue monitors when she contacts customers. The part timers have been trained to escalate big problems to Bob, who bills $90/hr, which gets Bob the last 10 he wanted, without paying for it directly. If one of the part time guys offers promise as a higher level computer guy, he gets additional training and moves into a $90/hr full time slot. A new candidate refills the $60 slot. If someone just doesn’t work out, it’s okay. He will just bring the remaining part time guy to full time until the empty position gets filled.
Bob has created a tiered value chain and a sustainable structure.
He has created a way to bring in new employees and have them create value, while giving himself a method to evaluate their performance to determine opportunities.
Created a medium and high level position, to capture higher value work
Bob has outsourced everything not core (admin and marketing) and created increased value through specialization. Bob can always add a few virtual support people as well and capture value there. Since the marketing firm only charges to acquire the customer it will further dilute their cost and make the overall proposition better.
Yes, I did simplify this to some extent, but it’s a tried and true business model. Some might question the marketing at $1,000 a week, but you could change that term to a pure commission sales person (eat what you kill) and there you go. The point is the company can be relatively large without incurring a substantial amount of mass.
You can play with the idea here quite a bit and the business model gives quite a bit of flexibility. If for example you want to increase to four part-time positions. You would have to increase the marketing, but it would give more flex. If the things slow down, you can eliminate a part time position or two, and have your mid-level tech do lower level work until things pick back up. If things pick up rapidly, you can add a few hours to each of the part time employees providing a lot of expandability without incurring the possibility of overtime.
Next time you go to just about any retailer, look around. You’ll find about 10 part timers who don’t know very much for every assistant manager, and 10 assistant managers for the store manager. Now you know why they do it, it gives them a lot of scale or scalability without a lot of mass, and of course, everything else is outsourced.