In With the Out(sourcing) Small businesses are hiring more independent contractors, but be aware of the pros and cons.

Ron Vigdor is co-founder of BornFree, a 3-year-old company that makes BPA-free bottles, sippy cups and other baby products sold at retailers such as Whole Foods, Walgreen's and CVS.

Vigdor, however, isn't taking any baby steps when it comes to outsourcing. BornFree offloads its logistics, accounting, payroll, taxes, and public relations to third party outsource providers. Even the company's sales team is outsourced.

"It's cost effective," says Vigdor, 40. "Especially for small companies, I think that outsourcing is the way to go."

Chicago-based payroll company SurePayroll, which releases a monthly "scorecard" based on data from more than 25,000 U.S. small businesses, calculates small business contracting grew 19 percent last year while staff hiring grew only 3.4 percent. "There was a much greater percentage growth in contractors than there was in the overall small businesses," says SurePayroll President Michael Alter.

20 years ago, companies viewed contractors with derision and suspicion. But outsourcing is no longer a dirty word. Entrepreneurs in particular see definite benefits to outsourcing, such as lower production costs, being able to focus on core competencies, and eliminating fixed costs such as salaries and benefit packages. "There's a lot more efficiency in going to a specialist," Alter says.

Outsourcing to Drive New Revenue
Small companies are hiring outside expertise to drive revenue in a down market. Online marketing, lead generation, and brochure writing are hot services, but small companies are also handing off what Alter calls the "backend plumbing": The basic tasks like payroll and accounting that free up time to generate new revenue. Business plan writing, website design, search engine optimization and financial modeling are all up and coming outsourcing services as well, says Chaitanya Sagar, CEO of p2w2, a San Jose, California firm that matches contractors with companies and conducts 90 percent of its work internationally.

"Outsourcing" and "offshoring" tend be used interchangeably, but there's a difference. Outsourcing means contracting with a supplier to provide a service, while "offshoring" is a subset of outsourcing in which a company task or department is sent to another country. Sagar prefers the generic term "sourcing." "Buyers don't see it as outsourcing or offshoring. They see it as sourcing, which is 'Hey, I want to get this stuff done and who's the best person to do it?'" he says. "It doesn't matter where the person is located."

The semantics are up to debate, but one thing is certain: Any small business owner who has outsourced has a horror story to tell. Maybe it's a project that arrived late, lackluster or riddled with errors. Maybe the independent contractor flaked out mid-project, leaving the company hanging. Many small business owners, meanwhile, have found it hard to manage and trust independent contractors, who by definition work remotely and only know enough about the company to complete the project.

BornFree, which employs 8 people full-time in Boca Raton, Florida and over 100 internationally, has its own horror stories, like the time it used FedEx to deliver a termination letter to an outsourcing firm only to learn weeks later that the fine print in the contract required termination letters to be mailed through the U.S. Postal Service. Vigdor says BornFree shelled out "thousands of dollars" before the contract was finally severed three months later. "Read the fine print," he warns. "I've been burned enough times to learn what I should and should not be signing."

In this economy you can hire a freelance contract attorney to read it for you, and at a cheaper rate. The Great Recession has pushed contractor rates down across the spectrum. Companies are able to outsource on the cheap, but the best contractors are avoiding projects that could make them lose money. They're running the numbers, too. "Contractors are entrepreneurs no different from somebody running a business with 40 employees," Alter says. "It's a question of how best to use their time."

BornFree has renegotiated contract terms to its advantage in this recession, but Vigdor sees risks in getting too lean and mean with contractors. "You get what you pay for," he says. "If people tell you they can do it for half the price, it's not necessarily true that you'll get the same quality of work." BornFree keeps customer service, receivables and some logistics work in house so it knows what's going with customers and cash flow. "We try to excel at customer service," Vigdor says. BornFree's sales exceed $10 million.

SurePayroll's data show small businesses hired more full time people than contractors between November and December, but it doesn't mean small businesses are turning their backs on contractors.

"I don't think you'll see a decline in the percentage of contractors," Alter says. "You've seen a shift in mindset of small business owners toward the idea of using contractors for particular projects, and I think that's here to stay."

Chris Penttila is a freelance journalist in the Chapel Hill, NC, area who covers workplace issues on her blog, Workplacediva.blogspot.com.