Where to Outsource vs. Hire as an Early-Stage Company

In short:

• As the leader of a young, growing business, you’ll want to consider outsourcing most functions.
• You’ll know it’s time to move on and hire for these functions when your company reaches a given stage or revenue bracket.
• There’s one area, however, in which you should never outsource and always hire from the get-go.

As an entrepreneur or leader of an early-stage company, you’re an absolute expert in something — likely your product itself. But, as we all know, a wonderful product — or wonderful sales skills, or whatever your expertise may be — does not a successful company make.

You’re going to need expertise from others in order to make your company fly. For many, this prompts a question: When should I outsource vs. hire this expertise?

The answer varies by business function — so really, there are multiple answers. And they’ll change as your company moves through its life stages — assuming you expert fairly steady growth for your company. Think of a brand-new services company that you hope to grow vs. a 5-year-old products distributor with steady income which you hope to maintain. The below advice applies to the former.

In general, experts suggest mostly outsourcing in your company’s early stages. Outsourcing functions like accounting, legal, information technology (IT), sales and marketing allows you to get the “basics” of business done well without spending your valuable time, say, becoming an amateur (and probably bad) lawyer. It also allows you to access top-notch expertise for a lower cost than a hire.

However, there’s one critical area in which you should never outsource and always hire, no matter how young your company may be.

Where to Hire

Product development/core competencies

Don’t outsource product development. The same goes for any function that’s core to your business: If you’re a graphic design firm, for example, then keep all of your graphic designers in-house. Failing to do so takes away your company’s ability to provide something that customers can’t get anywhere else — and gives that power to someone else. It’s also a turnoff for investors, who consider it risky to invest in a company that doesn’t truly own its product, says entrepreneurial advisor Josh Burwick.

As a technology entrepreneur, for example, “one of your first hires is an engineer,” said Laura Del Beccaro, CEO of software startup Sora.

If product development is your expertise as a founder, then of course you could do all of it yourself — but for many, that’d simply take too long.

“Alone, I can’t develop new features fast enough [to grow my business],” said Del Beccaro, who closed a $5 million seed round last year. “So as soon as we got money from VCs, we hired engineers. It would’ve taken me a year by myself [to stand up a product that was ready for sale].”

Where to Outsource

Bookkeeping/accounting

Many folks agree that as an entrepreneur, a bookkeeper is the first external person you’ll work with. Outsourcing a bookkeeper is preferable to hiring because you won’t need full-time services, and you’ll want access to the diverse set of skills found in an accounting firm with multiple members, vs. relying on the skills of a single in-house accountant.

In your business’s early stages, an outsourced bookkeeper will:

• “Do your books,” tracking expenses, assets and liabilities
• Close your books at month-end (or whenever your financial period closes)
• Prepare a monthly income statement, balance sheet and cash flow statement
• Prepare and file your taxes
• Balance your budget
• Run payroll
• Help manage cash flow

A third-party bookkeeper can also dip into strategy and business development. They’ll often advise you in using technology to be more efficient. Outsourced accountant Nayo Carter-Gray, for example, often aids her entrepreneurial clients in choosing a software to make accounting processes run faster in the earliest days of their businesses. She also helps them determine how much they’ll need in bank loans, then gather the financial paperwork necessary to apply. She advises on tax write-offs and budgeting for capital projects, based on her prior experience with countless small businesses.

Welcome to the beauty of outsourcing: Someone who’s “been there, done that” with many, many other businesses can help you avoid common pitfalls that you might otherwise miss when revving up a business for the first — or even second or third — time. And, having someone with accounting know-how in your corner allows you to focus on the aforementioned product development, or making customer connections, or whatever expertise comprises your company’s “core competency.”

You can expect to pay $500-2,500 per month for an outsourced bookkeeper.

Legal

As with bookkeeping help, your growing business will likely need legal help some but not all of the time. For that reason, it’s preferable to outsource legal expertise vs. hire a legal expert in-house.

In the earliest stages, legal process outsourcing providers (LPOs) can help structure your business so that you have and understand legal protections as a founder. They can also help you file for a business license. Later, they’ll help you:

• Ensure your company’s intellectual property (IP) is protected
• Negotiate contracts with your co-founder(s), employees, service providers and more
• Divide equity between your co-founder(s) and employees
• Lease office space
• Review other contracts such as those in your supply chain or with other service providers

If you plan to seek outside investment, you’ll need a lawyer in order to close venture capital funding rounds. An outsourced lawyer can also help you manage your cap table, and down the road, they can guide you through mergers and acquisitions.

Working with an LPO gives you access to the wide-ranging expertise of an entire legal team, which you can tap into if specific situations arise. For example, even large companies with in-house lawyers often engage LPOs to get litigation support, or help in handling the data and documents needed for legal proceedings.

You can easily ramp up your use of outsourced legal professionals when you’ve got a big project on the horizon — say, leasing your first office space — and save your money in months when legal expertise isn’t needed. In general, the lawyers that startups work with charge $350-800 per hour, The Muse reports. They can charge as little as $150 and as much as $1,000, depending on location.

Information Technology (IT)

It may not come as a surprise that you can and should outsource IT as an entrepreneur. Of course, there’s a time early in your company’s life when you, as the founder, are the IT person. Or perhaps the responsibility falls to the next-savviest member of your team. In some cases, you might rely on the service provider — like the service department at the company from which you bought your hardware/server — to handle fixes as problems come up.

Eventually, though, you need to stop fixing things yourself — or waiting hours for your service provider to show up at your door. You should start outsourcing IT whenever you’re experiencing one of these three problems, said Jennifer Sabino, who runs “outsourced IT department” SabinoCompTech.

1. When you have data to protect. Maybe your business has intellectual property or a growing trove of customer data that you’d like to safeguard but aren’t sure how.
2. You simply can’t wait for an IT problem to be fixed. Perhaps you’re simply spending too much time Googling “VPN not working” when you could be improving the design for your next product or service. Or maybe your salesperson helplessly waits for a fix — and gets paid to do so — when they forget their password for your CRM.
3. There are too many employees and systems to handle on your own. At some point, even the best self-taught IT pros run out of hours in the day with which to handle flare-ups.

The antidote to the three problems above is a firm like Sabino’s, which is called a managed service provider (MSP). An MSP will typically have a collection of 10-20 apps they routinely work with to provide backup, antivirus and connectivity functions to your company. Smaller MSPs mostly conduct desktop support: They keep your desktop operating system and productivity apps current. Bigger MSPs will do integration work and help you fully set up your back-office environment, from data storage to virtual meeting tools.

Most businesses start experiencing the problems above when they have more than five employees or $500,000 in annual revenue, said Sabino. Her Texas-based firm works with companies — in industries including private healthcare, law and oil and gas — with an average 10 employees or more, as her approach is more “hands-on” than some MSPs, she said.

When you start working with an MSP like Sabino’s, you can expect to get more than just your standard, day-to-day support from a helpdesk. When working with small companies, her team also:

• Installs antivirus software.
• Remotely monitors and maintains the startup’s systems.
• Delivers monthly reports on which of the company’s systems are healthy vs. in need of an upgrade (e.g., if the hard drive is running out of space).
• Meets with executives to talk about planning and budgeting, strategy and software purchases. For example, Sabino’s team helps executives evaluate whether a new software might pay off in terms of boosting efficiency or lowering costs at the company. (A change she’ll likely suggest: switching from on-premises systems to the cloud.)

As far as cost, firms like Sabino’s usually charge per user. Compare that to an in-house IT professional (someone who’s not you + Google), who will demand a salary that far exceeds the cost of, say, 15 folks using Sabino’s service.

Sales

Ness recommends that businesses first bring in a part-time, or fractional, sales executive, so they can take advantage of the leader’s network and contacts.

This partner can help you build out a sales team and adjust your “sales story” — or develop a “sales story” for the first time. Ness cited a client, for example, whose 5-year-old “sales story” simply wasn’t working with high-potential channel partners: After watching the client’s sales presentation, potential partners were left strangely unconvinced that the product would be a hit with their customers. Six weeks later, after working with a fractional sales executive, the client pitched the same potential partner and struck a deal. The executive had helped the team tailor its “sales story” to focus on the problem the product solved, vs. its nifty technology features and capabilities.

Marketing

Next, Ness recommends bringing in a part-time marketing executive.

It’s an entrepreneurial adage: You can have the coolest product of all time, but people won’t buy that product unless they understand why they need it. For this reason, it’s wise to bring in an expert who can “market the problem” that your product solves. This type of marketing is cheaper than running giant ad campaigns or buying hundreds of SEO keywords. But it works better, because it highlights your potential customers (“Does your inventory keep getting mispicked?”) vs. the nifty product features you’ve built (“My software can track 4,000 SKUs simultaneously with IoT trackers!”). Try as you might, it’s likely that you as the product-developer will struggle to clearly communicate the problem — and instead default to pontificating on your beloved app’s exquisite code.

An outsourced CMO like Ness can cut short such navel-gazing and translate your founderly brilliance into digestible takeaways tailored to an internet-obsessed audience’s short attention span. You, meanwhile, get to focus on adoring and further developing your product.

After messaging comes market research. As previously mentioned, Ness surveys his clients’ potential customers to learn about their dissatisfaction with competing products. For example, he and the team at former application performance boosting vendor Redline Networks developed a survey and hired an offshore firm to deliver it to potential customers by phone. After 1,000 surveys, the team had pinpointed a specific area of deep dissatisfaction with a competing product and was ready to market its own with winning precision.

The project cost $25,000, vs. the minimum $50,000 of hiring an analyst firm to conduct market research at the time. An even worse alternative today, Ness said, is “throwing $5,000-10,000 checks at the market” — through ad campaigns, buying keywords, whatever — and not getting results because you haven’t done market research to reveal that, perhaps, there isn’t “a problem to be solved” or dissatisfaction with competitors in that particular market.

When to ‘Graduate’ From Outsourcing to Hiring

As mentioned, the guidelines vary by function, and, of course, depend on your company’s specific situation and goals. A technology services company that must constantly hunt for new clients, for example, might prioritize and spend more on marketing hires than a direct-to-consumer toothbrush retailer with steady demand.

The general guidelines also don’t account for your personal expertise as a founder. If you’re a marketing whiz, then there’s obviously not as much need for a marketing hire as for a finance hire. Prioritize hiring for areas in which you lack expertise.

Some general advice:

From an outsourced bookkeeper:

Move on once annual revenue hits $1-2 million and “you want to dig into the numbers deeper and be able to call your accountant anytime,” says outsourced bookkeeper Carter-Gray.

Before making a hire, make a list of the tasks you want this person to perform, and ensure it won’t be cheaper to automate those tasks, she added. If and when the answer is “no,” or when you need someone to manage that automation tool, then it’s time to build out your finance team. Your first hire should be a lead accountant, who will prepare audited financial statements and oversee financial records, as well as manage any accounting software you’re using.

Finance pros agree there isn’t a hard-and-fast rule regarding how much to spend on your finance team as a business with less than $5 million in annual revenue. Many businesses in that bucket spend about 3-5% of annual revenue on the finance function, though it could require as much as 8%.

From an outsourced lawyer:

In-house lawyers might come years down the line — or never. Keep a lawyer on retainer unless your bill pushes past 150 hours a month. And even then, consider whether your legal tasks will require seeking counsel beyond that in-house lawyer. As mentioned before, legal work can be wide-ranging: You might be safeguarding IP one month and processing visas for international employees the next. Unless your in-house lawyer has the expertise to handle such disparate tasks, you’re going to need to outsource on top of paying their salary. For that reason, it makes sense to bring on an in-house lawyer if your existing legal needs exceed 150 hours per month and your future needs fall within one person’s scope of expertise.

From an outsourced IT department:

In the not-too-distant past, companies tended to “graduate” from outsourced IT much earlier in their lifespans than they do now, said Sabino. That’s because MSPs like hers are now able to handle more.

In general, the lower-tech your business model (e.g., a grocery chain vs. a software company), the longer you'll do without outsourcing your IT. However, it’s worth noting there are specialist MSPs out there that can be indispensable — like ones that cater to retail or healthcare and can help you navigate all the "special stuff" your business might need in those industries. Specialized MSPs for hair salons, for example, will set up WiFi, security cameras and music in your space, as well as handle data protection.

The next step beyond MSPs? Your own in-house IT team. An IT “team” usually consists of at least three people, said Sabino: a network/security engineer, an applications engineer and a helpdesk professional. In her experience, that doesn’t usually make sense financially until firms reach about 100 employees.

IT costs as a percentage of annual revenue can vary greatly, given the massively varied levels of need among industries. Very generally, you can expect to spend about 3-10% of revenue on IT as a growing business.

From fractional sales and marketing executives:

Sales and marketing together run about 10-15% of revenue, depending on the type of company, so you need to be north of $1 million in annual revenue to justify full-time people.

If your “founderly expertise” includes sales know-how, then you might make it beyond that without a sales hire. When it’s time, bring in one or two full-time, inside salespeople. If you're going strong, a single salesperson should be able to manage $3-4 million in revenue annually. Then will come a full-time head of sales.

Overall, look to spend 5-8% of revenue on marketing. The Small Business Administration suggests 7-8%, specifically, for growing companies with margins in the 10-12% range. Stick with your fractional CMO for a while, then bring on some entry-level folks to handle execution — updating the website, writing whitepapers and the like — and monitor programs.