The Pros and Cons of Hiring Contract Workers

John Wilde needed help. He wanted to introduce some new gadgets to his line of Curious Chef products, which are designed to get kids interested in cooking. He knew they’d have to be good. But the chief executive officer of Tailor Made Products, a business with fewer than 100 employees, also knew he didn’t have the budget to put a top-flight product designer on his staff.

“New product development is our lifeblood,” Wilde says, “but we can’t afford that quality of person.”

Instead, Wilde reached out to a designer he met once at a trade show and offered him the job of developing five new products, including kitchen tongs, an apple slicer, and a frosting extruder. The man, who works somewhere in the Southern United States -- Wilde won’t even name the state, for fear that someone will poach him -- “blew us away,” Wilde says. “He has absolutely elevated the design of the products to be as good as anything in the market.”

More and more small businesses are now operating in similar fashion, looking to save money and boost efficiency by relying on remote workers. And a new infrastructure has grown up to support their outsourcing efforts, with companies like oDesk, Elance, Guru, and LiveOps creating a marketplace where employers and freelancers can easily connect.

“Clearly the economy is forcing companies to think about doing more with less,” says Gary Swart, CEO of oDesk. Last year, as unemployment rose, sending thousands of workers into the world of freelancing, oDesk saw phenomenal growth.

Sites like oDesk handle much of the complexity of outsourcing. It has a proprietary system that enables companies to see how much time workers spend on a project. It also helps with the payment and with any tax forms and regulations the companies need to meet.

Even oDesk uses oDesk. “We have this stay-at-home mom in Tennessee who runs support for us and manages a team in the Philippines,” Swart says. “We have a quality-assurance manager in New York who manages a team in Russia.”

Also making the move to remote workers possible is the increasing prevalence of cloud computing, where everything resides on the Internet. Doug Schumacher, founder and creative director of Basement, a new media consultancy, says, “The system works great when combined with efficient Web-based productivity tools and apps like Basecamp and Google Docs.”

Some entrepreneurs have found novel ways to package the new independent workforce. Allison O'Kelly struggled with work-family balance when she was in the corporate world and ultimately started Mom Corps, which connects capable women with employers on an “on-demand” basis.

"Over time I saw many women, mothers just like me, who wanted to stay in the workforce but didn’t know how to find opportunities which would allow them to preserve symmetry in their lives," O’Kelly says. "Because of this obstacle, many mothers leave the workforce altogether. At the same time, I noticed corporations were struggling to find high-caliber employees."

Christopher Hytry Derrington used contractors from India with what he felt were dismal results. So he started Rural America OnShore Sourcing, which offers remote workers in 12 states who are willing to work for a lot less than their counterparts in cities, where the cost of living is much higher. He claims he can save companies 25 percent to 40 percent of their labor costs. Some of his IT workers charge as little as $40 an hour.

Sheila Stewart, who started an ad agency using nothing but freelancers and now counsels other entrepreneurs, sings the praises of contractors. “I highly recommend that entrepreneurs consider outsourcing as the first solution prior to hiring full-time. This gives one maximum flexibility, which is critical in a volatile economic environment.”

Ryan Cheng, founder of Joolwe.com, an online jewelry store, outsources Web design to China, search engine optimization to India, and photo editing to Malaysia. But the key functions of customer service, marketing, product development, inventory control, and order fulfillment are done in-house. “Outsourcing has helped us reduce costs and, more importantly, stay focused on what we do best,” he says.

But outsourcing has also caused Cheng a few headaches. “Quality and reliability is always a concern when you don't see what they are doing,” he says. “Looking for the right person or firm to outsource to is a very time-consuming task. It's very common for contractors to overpromise and underdeliver, and sometimes even not deliver at all, especially when you’re outsourcing to developing nations. Occasionally you will get scammed with people running away with your money.”

Greg Stallkamp, who runs a social networking Web site focused on fitness, HolosFitness.com, uses contractors extensively but notes that “the flexibility associated with contract workers can also be a disadvantage. While I only use contract workers when I need them, this can often mean that they aren't available when I need them. They may be busy on another project.”

Because so many contractors use their gigs to earn money while looking for permanent work, Stallkamp has seen “contract workers quit in the middle of a job because a better (more permanent) position became available.”

His advice? “Have several options regarding contract workers. I am no longer dependent on one programmer or one graphic artist and instead I have several backup plans in case the contract worker is unavailable or they quit in the middle of a job.”

Relying on independent workers eliminates many of the headaches of taking on full-time employees: workers comp, health insurance, paid vacations, and income tax withholding, for example. And, worst of all, the anguish of having to lay off employees when business slows down.

Marc Anderson, who runs a small online English training company, says, “Sometimes we have to scale up in order to meet a new contract quickly and sometimes we need to scale down at the end of the contract.” Because he keeps a team of 21 contractors at the ready, his company, TalkToCanada.com, doesn’t need to pay them when there’s no work and doesn’t need to let them go either.

Dan Fost writes about technology for the Los Angeles Times, The New York Times, and other publications. He is the author of Giants Past and Present, coming in Spring 2010 from MVP Books.