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The Outsourcing Food Chain

Wyck Hay's first entrepreneurial effort was a smashing success: The co-founder of herbal tea maker Celestial Seasonings helped sell the company to Kraft Foods (KFT) for $40 million in 1984. But Hay found managing 300 employees a headache. So when he launched Woodside (Calif.)-based Kaboom Beverages two years ago, he kept a decidedly small payroll: himself. In lieu of a workforce, Hay assembled a team of contractors to perform every task at his $2 million business -- from label design to manufacturing of his "power juice" drinks. Hay says outsourcing saves him at least 30%, while minimizing his daily distractions. "I don't know that I ever plan to hire any employees," he muses.

More and more entrepreneurs like Hay are turning to such outside help at home and abroad these days. While exact numbers are hard to come by, a study released in January by Cutting Edge Information, a Durham (N.C.) consulting firm, found that 90% of all U.S. businesses now outsource some work. While some of that may be temporary -- employers of all sizes have always relied on outside workers as demand picks up following a recession -- most job-watchers now believe small businesses will continue to turn to outsiders even as the economy strengthens. The reason: They face the same relentless pressure to cut prices as their bigger brethren. "This is more than a temporary phenomenon," predicts Brian S. Wesbury, chief economist of the Chicago investment bank Griffin, Kubik, Stephens & Thompson.

"DIRTY WORK." That's a big shift from a decade ago, when larger companies began outsourcing in earnest. Back then, most small businesses didn't even consider the practice. But in recent years, a cottage industry has sprung up to provide outsourcing services to small businesses -- particularly for basic, noncore tasks like payroll and human resources. Many of these services can be found on the Internet. Thanks to firms such as Elance Online,, and, small employers can now find skilled contractors for everything from software programming to graphic design more easily than before.

It's hardly just rote work that's being outsourced -- even such key functions as marketing are now up for bidding. "Some CEOs say they'd rather focus on operations and finance," says Dave Camp, the director of creative services at Bellevue (Wash.)-based Outsource Marketing. The 12-person company originally provided basic marketing support to small clients. Today, it acts as the full marketing department for some clients.

Indian consultants, too, are starting to target smaller companies. Heavyweights such as Wipro (WIT) and Infosys Technologies (INFY) still cater to large corporations, but there are now countless companies like Bombay-based Astute Software, a 20-employee firm that specializes in doing short-term programming jobs for small U.S. clients such as Internet ad agencies -- usually for 30% less than it would cost clients back in the U.S. "We do most of the dirty work and technically challenging work that no one in the U.S. wants to do," says Astute founder Mahesh Kanniah. Back in Silicon Valley, some venture capitalists acknowledge that they're encouraging startups to send as much work offshore as possible to minimize start-up losses -- with some making it a condition of an investment.

UH-OH, CALCUTTA. Beyond the cost savings, small businesses say they like the flexibility outsourcing affords them. One such firm: New York's CallStreet, which transcribes quarterly analyst calls for public companies. When earnings season hits, the firm farms out 60% of its work to part-timers in India, retaining a skeleton staff the rest of the time. "We needed a solution that allowed us to expand quickly," says co-founder Fred Wasch, "and then shrink in the off-season."

Of course, contracting out is hardly a panacea for small businesses. The arm's-length relationship with contractors means quality can't always be assured, and that's especially true when small companies send work overseas. Unlike big businesses, they rarely have on-site managers. Cogent Road, a firm that provides Web software to mortgage companies, says a project outsourced to Calcutta took twice as long as it was supposed to, thanks to the language barrier and 12-hour time difference between India and its San Diego headquarters. Cogent's conclusion: It won't outsource offshore again "unless it's not a 'mission critical' project," says marketing Vice-President William DiPaolo. Still, given the savings and increased flexibility outsourcing offers, ever more small businesses are likely to start making the shift. By Dean Foust, with Michael Eidam, in Atlanta, Spencer E. Ante in New York, and Manjeet Kripalani in Bombay

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