Who wants to spend money on people or rentals you don’t need?
Creating extra expenses eats up your profit… and clearly we all want to make as much money as possible.
But outside direct expenses like stage hands, sub rentals, supplies, and subcontracts are not always a bad thing. In fact, these “extra charges” can make us even more profitable if we approach them wisely.
Although we often resist them, outside direct expenses can work to our advantage. Here’s how:
Why We (Mistakingly) Avoid Hiring Non-Staff Labor
The resistance to hiring freelancers is rampant in our industry. We assume these expenses negatively affect our gross profit, cash flow, and staff for one reason:
We see the cost.
First, we see the direct impact on our gross profit. If I hire a freelancer for a job rather than handle it with a staff person, I see an itemized expense on job costs that otherwise wouldn’t be there.
Not only does this affect the gross profit of an individual show, but it can also affect commission. Depending on the commission system, this takes away from the earnings of the salesperson who sold the gig, creating even more problems. They’ll resist hiring freelancers because the expense decreases their commission. They’ll likely make up a different reason to avoid hiring outside labor. Maybe they’ll claim staff is better equipped for their job.
But in reality, they’ll make more money if staff can work their job and they can pawn freelancers on someone else’s show.
We also avoid non-staff labor because we see how it impacts cash flow. Owners see freelancers as someone they have to “write a check to” for their services. However, owners don’t always see the payments that occur automatically on payroll for their regular employees. When you look at the bottom line, it’s not that different in actual cost.
We’re either paying people automatically or paying them per job.
To make our hesitations towards hiring freelancers worse, staff often resent outside labor. They see freelancers as people who don’t have to follow all of the rules, and yet make more money than they do. Resentment builds as they think, “I’m not making as much. That’s not fair! He’s not qualified!”
With this combination of resentment and obvious costs, we mistakenly assume it’s best to avoid hiring non-staff labor if at all possible.
How Outsourcing Saves Money and Makes Money
The reality of the usefulness of outside direct expenses is much different. When you outsource intentionally, outside labor and equipment doesn’t just save money — it makes money.
If you run your business wisely, anytime you use outside labor, you pay a fraction of the cost of a full-time employee. That’s one person you do not have to pay for 12 months out of the year. Instead, you’re only paying for what you need.
The same applies to rental equipment. When you rent, you only pay for what you use — not for continuous upkeep and repair.
The need for outsourcing actually indicates growth. If you never move beyond what your full-time staff can handle, that probably means you’re not growing. If we want to make more money and grow our business, we have to stretch our limits.
We need to sell beyond our capacity, which means we have to serve beyond capacity. This requires outsourcing. To move beyond where you were before, you’ll need to hire outside labor and sub-rent equipment.
Growth demands outsourcing.
When To Hire (& Not Hire) Outside Labor
To know if/when outside labor and equipment are warranted, you need a deeper understanding of costs. There are good and bad outside expenses. Outside labor is a bad expense when you over-staff, over-hire, and over-pay. But if it meets the needs of the job and works within your financial framework, it’s good!
To make these decisions…
Understand your true financial picture.
Many managers don’t have enough insight regarding where the money goes in the organization. They only see obvious, incidental, direct costs like outside labor. But they miss the regular, automatic costs.
Scrutinize overhead expenses (the ones you never pay attention to).
Where might you be able to cut back to save money? Which costs are warranted? Which are not?
Consider replacement costs vs. one-time costs.
What would it cost to replace the labor of each staff member? How much are you paying them per gig compared to a freelancer, and is it worth it? If they’re better at their job than the freelancer you could hire, consider that a replacement cost.
Use this information to honestly evaluate Costs of Goods Sold (COGS).
Typical COGS calculations only include outside-direct labor or equipment. They don’t calculate the costs of inside labor, resources, materials, or equipment.
However, if we take an honest look at COGS, everything has a cost. Put these costs into the calculations when you’re deciding who to hire and what to buy. It’ll more accurately reflect your true financial situation.
Measure productivity instead of activity.
People can busy themselves without being productive. Don’t just hire more technicians because the current ones are always busy. Check for productivity. Do you need outside labor because the already productive staff needs support, or could they be using their time more wisely? If you learn to measure productivity, you’ll gain a deeper understanding of costs.
Outside direct expenses aren’t something we need to fear or avoid. If your company is growing, but you’re not ready to hire more full-time staff members, use freelancers to your advantage. If you need more equipment than you can afford to buy, rent it to meet your needs.
When you outsource strategically, you’ll be able to fill jobs you otherwise wouldn’t have and grow your business to new levels of success.