May 2010

Todd Herman

Jim, a financial executive friend of mine, shared this conversation he had with Bill, the CEO of his previous employer (all names have been changed).

Bill – "Jim, have you ever thought about the perfect company size?"
Jim – "No, I haven't – what are your thoughts?"
Bill – "The perfect company size is one employee – and that employee would be me."

Is Outsourcing Right For You?

Bill's goal? To conduct a "thought experiment" – an exercise to explore the limits and implications of outsourcing in this company, a publicly-traded firm with several thousand employees. Could a large company actually outsource every job except one?

My client Andy has chosen to have "a company of one" and to provide specialized services to a niche clientele. He has an idea, vets its potential with the relevant independent contractor, and then works hard to sell good ideas. Once his clients say "yes," Andy hands off the actual work to the contractor. Nearly all supporting functions are outsourced by Andy. Andy does the billing and accounting himself – then turns the records over to his financial advisers to handle tax returns and benefit plans. One W-2, and a small number of 1099's – very straightforward.

Deb heads a multi-location professional services company, whose headquarters and sales personnel are employees, and whose service providers are independent contractors. This seems an ideal business arrangement for project-based work – secure a project, review your stable of contractors, and turn it over.

Contractor Based Work Force

Business writers frequently tout the benefits of the economy's move toward a work force of contractors rather than employees. Their rationale? It allows an entrepreneur to have an idea, bolt together a network of contractors to create and fulfill the envisioned product or service, and then quickly see whether the idea makes money.

I can certainly see the benefits of this business model, but I have also seen some subtle lessons play out through Bill, Andy, and Deb and their firms:

  • Andy's services are very specialized, so he treats his contractors as de facto joint venture partners, because they produce the results for Andy's clients.
  • Deb's firm provides services to a large market, so its contractors seem less relational and more transactional – there is some uniqueness among the individuals, but not much.
  • Bill's company designs, makes, and sells products for the mass market, so contractors are largely indistinguishable and thus transactional rather than relational.

My takeaway? The more specialized or unique the services of the contractor, the more the contractor is respected and treated like part of the company. Otherwise, there is little loyalty between the parties, because the relationship will never be more than one of "company-vendor." Such a relationship is neither good nor bad – it is either a snug fit or a poor fit with the company's business model, which itself may vary by the size of the "virtual company" and the market being served.

When I first went out on my own over 20 years ago, I had Bill's "perfect company size" – it was just me. Things felt a little awkward – I was working out of my home and had to develop day-to-day rituals to create a "company" atmosphere. I soon got used to being a firm of one and remained that way, until I was too busy to handle everything. So, three years and three months after I started my firm, I hired my first full-time employee, and re-discovered the benefit of a colleague to mutually provide:

  • Creativity, if stuck.
  • Motivation, if down.
  • A "kick in the pants," if apathetic.

What lessons do these observations hold?

  • Being an independent contractor breaks social bonds, and requires adjusting expectations about work and developing compensating social bonds.
  • Company personnel need to be very clear about the rationale for dividing functions between employees and contractors, and communicating appropriate expectations and commitments to everyone.
  • Contractors serving a "virtual company" will need to constantly maintain their marketing and networking skills, should the relationship end.

Like beauty, the "perfect company size" is in the eye of the beholder. And just as beauty is judgmental, so is this measure of perfection.


Todd L. Herman

Todd L. Herman

Client Project Update:

I am pleased to provide you with an update on our client projects. Projects we have completed over this period are...

Producing Accurate Costs

Worked with this manufacturing client to assess options for producing an accurate composite cost across various plant locations and manufacturing configurations, devising a cost-effective approach for system-assisted creation of composite costs.

System Modifications for New Offshore Plant

Overseen the business system and integration system modifications affected by a change in routing goods between domestic and offshore plants, and conducted extensive review and testing of these changes, allowing this apparel manufacturer to quickly adapt its production flow to respond to changed business priorities.

EDI Processing Automation

Created the SQL Server scripts and triggers to automatically convert over twelve different EDI documents to XML records, and vice-versa, and performed extensive testing of these items, automating inbound and outbound processing between our client and one of its major customers.

Creating EDI Document Definitions

Used XML technology to create the definitions for over 75 different EDI document types, based on in process and incomplete EDI specifications unique to the Federal government, and extensively tested the document definitions, allowing our client to meet a tight timeframe and retain a major contract.

Validating Reporting Definitions

Validated and, as needed, reconstructed the Access- and Excel-based queries and analyses used by several former employees for month-end reporting, enabling the new employees to quickly learn these processes and produce needed management reports, and laying the groundwork to develop robust reporting through SQL Server.

Assisting with Building Move

Worked with our client to plan and manage the acquisition and installation of new servers, phone and data services, and other technology infrastructure upgrades coordinated with a physical building move, minimizing downtime during the move and freeing company personnel for day-to-day operations.

Survey Analytics & Information for a Data Warehouse Project

Began identifying the analytics needs of line-of-business users, and surveying available information to satisfy these needs, helping this client move forward on a high-visibility business dashboard project, while strategic goals are still evolving.

Future projects we are planning include...

Business Analytics Increase Government Revenues

Develop sophisticated screening, matching, and cross-referencing routines to simultaneously analyze multiple data sources, allowing governmental entities to comprehensively search for additional revenue opportunities.

Resolving EDI Implementation Issues

Support the implementation of numerous EDI documents aggressively resolving issues on daily and weekly inventory reconciliation transactions required to retain a major contract, and improving processes to achieve faster order fulfillment.

Business Process Improvement Assessment

Work with this rapidly growing services company to assess key business processes and review related technology usage, recommending changes to reduce costs, cut cycle time, or improve quality, thereby improving operating efficiency and effectiveness.

Extending EDI Documents to Commercial Contracts

Extend the XML technologies used to create EDI documents for the Federal government to commercial contracts, achieving full inbound and outbound handling of sale and purchase transactions, improving the accuracy and reducing the costs of transaction processing.

Evaluating Outsourcing & Cloud-Based Computing Options

Advise this professional services firm on various technology options, helping them understand the costs, benefits, and trade-offs of extensively using outsourced IT support and cloud-based computing, to help simplify IT management, increase system availability, and improve the user experience.

Reengineering Report Methodology & Deliver

Work with this fast-growing firm to upgrade its management reports to SQL Server reports deployed through the corporate intranet, improving the data consistency, presentation flexibility, and information delivery for daily, weekly, and monthly reports to the entire executive and management team.

Design, Develop & Deploy a Data Warehouse and Dashboard

Select the On-Line Analytical Processing (OLAP) and Dashboard tools, design the detailed data schemas, train client developers on preparing Extract-Transform-Load (ETL) routines, and oversee all development and deployment of a data warehouse and summary dashboard, giving executives and managers tools to ensure day-to-day decisions fit within the overall strategic plans.