I sat with a lady this morning that said something that made absolute sense to me but on a very basic level. She said “I’m going to have to feed another mouth”. We had been discussing her new business venture – an events company – and what she would need to get started, including staff. At the very least she was going to need someone to answer her phone whilst she was out to securing business or managing an event.
Now in the context of the current squeeze in the South African (and global) economy, with interest rates uncertain, the oil price in flux, Eskom imposing unprecedented increases on the unsuspecting tax public AND – if you live in Durban, recent hefty rates increases – another mouth to feed is a VERY BIG DEAL. If she chose to take this route the question is how much consideration has she given to the actual cost she will incur to employ her receptionist/assistant for one year? Answer R42 000 – R60 000?
Doing it yourself
Sadly not true. In fact the actual costs to hire someone and run a small office set-up (cost to company) are way higher than most people budget for. Let’s consider the following scenario; she decides to recruit this person through a recruitment agency, the minimum fee will be in the region of 15% of the annual income + VAT. And if we assume the lower end of the scale with an income say of R3500 per month, the placement fee would equate to R7182. Great, that’s that! She’s hired. we’ll call our hypothetical employee Friday.
Now what? Now she has to find somewhere for Friday to work from, like an office, with a desk and chair etc (basic set R3000). For the sake of our scenario we will assume that she wants to make a good impression for her clients and decides she needs to rent a small office in a good location. In all likely-hood she would find herself in a converted house or a multi-tenanted building but either way she will be in for a gross rental of around R100/m2. Any self respecting property agent will advise that for 2 people she will need at least 30m2. Thus her base rent is R3000 + VAT. Rates etc are conservatively around 15% so add another R450 and parking would be anywhere from R400 – R800 but we’ll say R500 to be safe. Moreover she will have to sign a lease (for at least 12 months) which if things, heaven forbid, don’t work out the way she’d planned, will become a noose around her neck. Still she’s full of positive energy and with failure not an option, she signs. That’ll be a deposit of R11 970 thank you madam and don’t forget to secure and clean your space please – an outsourced cleaner for 2 days a week R960 per month.
Assuming there is no work to be done to the space (which can run into thousands of Rands) she’s now going to need to provide Friday with the tools for the job, a computer (basic desktop R5500 + R2500 for the operating system) and a phone (standard handset R200). The handset will have to connect to the outside world and she will have to secure a number. Telkom will oblige for about R170/month with a once off connection fee. Furthermore to run a business today internet and email is a must, which means a further cost of around R400/month plus connection fee and hardware (Circa R1500) not taking into account Skype, Facebook and Twitter which would increase the broadband usage significantly.
Consider Opportunity Costs
At this point there will need to be some level of training for Friday. No matter how basic it still means time out of her day. Conservatively she would probably need to spend in the region of about 28-30 (not necessarily all at once) hours with Friday getting him/her up to speed. Why is this relevant you ask? Well for every hour that she spends training Friday she could be focusing on generating business. The opportunity cost here is almost indeterminable but at the very least if she paid herself R20 000 per month her hourly rate would be R125 which means the opportunity cost is R3500 in training time.
In any event she now has a trained, housed and operational Friday. Cost? Start-up about R15 500 and monthly operating R9000.
“Sliding Door” Outcomes
Costs aside as they are a reality of doing business I’d like the reader to consider the following ‘sliding door’ outcomes;
1) Friday doesn’t do well and they don’t get along, tough because she’s stuck with him/her until they are able to amicably part ways and Friday moves on to greener pastures. She will then have to go through the whole recruitment and training process again resulting in more time spent and lost income. Wouldn’t she have been better off out sourcing her HR?
2) Friday does well and is now running the office. Finally she (our entrepreneur) can get on with business as usual and that she does, so successfully that she’s going to have to hire more staff to keep up. She hires Monday and Tuesday but realizes that there is now nowhere for her to sit whilst she at the office, ‘we need more space she declares’! Ah now what? She’s bound to her lease and the landlord is not keen to let her go – ‘good tenants are hard to find these days’. Without the desired expansion her income is restricted and her business will suffer.
3) Friday does all right but our entrepreneur doesn’t, not only has she just spent a few thousand rand on start up costs, hemorrhaged a few more on running costs but she’s stuck in that lease we spoke about and liable for the balance of the contract, not to mention the other minor agreements with Telkom etc.
Without trying to sound alarmist, the above scenarios are all possible and depending on the business owner’s ability to run a business (and an office), in some form or other most likely. Had she considered outsourcing some or all of these functions our entrepreneur would have ultimately been insulated from a downside and in the case of the upside, been in a better position to respond to the positive change.
Outsourcing 1 Do it yourself 0
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By Brad Porter