Here is a recent article from Inc Magazine contributors Karl Stark and Bill Stewart. They demonstrate through a handy formula how outsourcing is almost always the better way to go.
How Much is Your Time Worth?
Inc.com, By Karl Stark and Bill Stewart | @karlstark | Dec 15, 2011
A few weeks ago we posted an article that outlined four steps to super-sizing your growth. One of our readers, Karl Walinskas, commented, “Along the lines of restructuring high cost operations that don’t yield enough profit, I always try to outsource anything that takes me more time than it is worth profit wise.”
This is an excellent point. As entrepreneurs, our most valuable commodity is time. We are most definitely not highly-qualified travel agents, lawyers, accountants, human resource managers or executive assistants, so why waste our valuable time pretending we are? If you are spending a lot of time on those types of activities–most of which do not directly contribute to your bottom line–then you cannot afford not to outsource them.
Your time is likely more valuable than you think. How much more valuable? Try this calculation:
- Annual revenue: $3 million
- Gross margin: 33 percent
- Gross profit: $3 million x 33 percent = $1 million
- Annual hours worked: 50 hours per week x 50 weeks per year = 2,500
- Gross profit per hour: $400
By this measure, your incremental time is worth $400 an hour to your business. This means that if you can hire someone else to take a task off your hands for less than this $400 “hurdle rate,” then outsourcing the task is a no-brainer.
And guess what: At those rates you can afford to outsource almost everything that does not contribute to your bottom line!
After outsourcing those non-critical tasks, you can redirect the time savings toward projects that have the revenue and gross profit potential to meet or exceed your personal hurdle rate. Here’s another calculation to determine the potential revenue impact of re-allocating your time:
- Hurdle rate: $400/hour
- Free hours per quarter: 120
- New projects to fill your free hours:
- Gross Profit Impact: $400/hour x $120 hours = $48,000
- Revenue Impact: $48,000 gross profit / 33 percent gross margin = $132,000
Bringing in an additional $132,000 in new revenue each quarter should be more than enough to cover all the tasks you have outsourced.
One particularly inspirational example of the value of free time is Google “Engineer’s Life” policy:
“We offer our engineers ’20-percent time’ so that they’re free to work on what they’re really passionate about. Google Suggest, AdSense for Content, and Orkut are among the many products of this perk.”
Note that this logic scales well. Let’s say you are running a $100 million business. Using similar math to the above, you might find it very profitable to invest a few million each year in outsourcing and productivity improvements so that all your people are (a) raising their game and providing more leverage to their manager; and/or (b) getting closer to current and prospective customers and creating more revenue growth.
Good growth opportunities are all around you; don’t hold onto the mundane tasks that prevent you from pursuing them.
