It's Time to Sub It Out

You should turn to subcontractors for as many day-to-day processes as you can.
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by Ira Friedman, Bay Audio

I'm not a CPA, and I don't profess to understand the ins and outs of employee tax law, but it seems to me that you should subcontract as much of your labor as possible. That's right. Turn to subcontractors for as many day-to-day processes as you can.

Who should remain on staff? Only those individuals whose talents are an intrinsic part of your operation. Only those people who add value above and beyond what you could hire elsewhere. Let's take a look at a typical CI business to see how subcontracting makes sense.

Breakdown of a Business.

A typical $1m CI business has six employees. There's the owner/salesperson. There are three installers and an office manager/bookkeeper person who runs the day-to-day. Then there is the project manager. He's the guy who takes the hand-off from the owner and gets the projects going. For some odd reason, everybody's busy, busy, busy. All day long. But what are they really doing?

Here are some numbers for a $1m business with which I'm familiar. An average project is $30k. That means the company completes, on average, about 33 projects per year, or about three per month. Because the average job lasts six weeks from signed proposal to final payment, that means there are about five active jobs at any one time, overlapping at various stages of completion. These numbers are relatively universal, but of course, yours may be different if you sell higher ticket theaters and automation.

A Look at Labor Efficiency.

A typical $30k project includes about 20 percent labor. On a yearly basis, that gives you $200k of billable labor. If you bill $75/hour for labor, then you've accounted for 2,667 hours. A full-time installer works 2,000 hours/year, and yet the typical $1m company has three guys in the field. The company billed $200,000 for labor (2,667 hours) while paying its installers for 6,000 hours. That's an effective billable hourly rate of $33. Scary, but true.

Why are installers so darn inefficient? Could it be that they don't drive fast enough? And what's wrong with management? Don't they punish these guys hard enough? Alas, the trouble with labor is two-fold. First, most companies don't look at their projects as a manufacturing process with strict repeatability and control. Instead, each project is a new and wonderful adventure. It's so fun! But with every new adventure comes a learning curve, and the installers are the ones doing all the learning. That slows them down.

The second reason is not inefficiency, but utilization. It's just too hard to keep three installers busy 40 hours every week. There are some days they're done early. There are some days they don't put in any billable hours at all. Between the inefficiency of non-standardized work and the sketchy nature of labor scheduling, most companies only achieve 30-40 percent labor efficiency with their install team.

A Look at Office Management.

Our typical $1m company has five active jobs per month. Each active job requires a few purchase orders, a few progress invoices. No big deal. A company with six employees has a small payroll and a few assorted bills on a monthly basis. Add up all the time required to complete these few tasks and you've got fewer than five working hours per week.

So what's that office manager doing the other 35 hours? Certainly nothing interesting. Mostly, they spend their days satisfying the whims of the owner and project manager, and tracking down new and exciting information for each new and wonderful adventure.

A Look at Project Management.

Human nature shows that mid-level managers like to "manage up." That means they spend lots of hours managing their boss. Most project managers spend their days filling in the gaping holes in the owner's proposals. They take care of the details the owner feels compelled to ignore. As far as installation goes, the average project manager stays out of the attic and refuses to rack a job. That's an installer's job, and he's got three of them with time on their hands.

So what's worth keeping in-house and what should you outsource? Sales, for one, should stay in-house. It's the lifeblood of the operation. In the perfect world, the owner (or a profit sharing employee) manages all the sales, and keeps the relationships close.

In most cases, however, it makes more sense to subcontract most of the installation labor. Electricians on the job site can pull the wire. Contract programmers can write control code. And you can even find qualified installers for finish work. You might want to keep one tech on staff to handle service calls and quick turn-around jobs.

Subcontracting office management tasks also has become easier in the past few years. Many bookkeeping companies offer complete accounting services on an hourly basis. And it's not hard to find a semi-retired worker who only wants to put in a few hours per week. Most office managers can be replaced with a subcontractor working one day per week.

Engineering drawings, labor management, getting the right products at the right time. These are the skills of the project manager, and should be kept in-house. And with installation and bookkeeping subcontracted, the project manager must now spend a few hours each week ordering products, invoicing and doing in-field finish work. Having the project manager control inventory and final installation is an improvement in the process, and worth doing. Plus, a project tuned and calibrated by a project manager has got to be better than one finished off by an installer.

Justifying Subcontractors: The Math.

Subcontracted labor has a higher degree of efficiency for several reasons. First, the subcontractor is motivated to finish quickly and move on to the next billable job. Second, the subcontractor has a higher degree of pride of workmanship than a typical employee and tends to put in extra effort to make things right, at his own expense. And third, you get full utilization from the subcontractor, only paying them when you need them. And the hidden benefit is that every time you pay a subcontractor to re-work a problem you caused, you will become acutely aware how wasteful your errors are. You will fix those process problems quickly.

Many companies using subcontracted labor reach labor efficiency rates greater than 80 percent. When labor is billed at $75 hour, $30/hour subcontracted labor at 80 percent efficiency returns a 50-point margin to the business. Compare this to the margins that the typical $1m company achieves with three installers, and there's no reason to keep those employees on staff.

There's no reason to discuss the savings from outsourcing bookkeeping. Just do it.

In the process of subcontracting services, project managers become more focused, making them a greater asset to the company. Using subcontractors doesn't diminish the clout of a company. No longer are successful companies gauged by the number of employees that they have buzzing through the hallways. Instead, using subcontractors has become a method for companies to balance their workforce needs with the cyclical nature of the business.

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