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How Cheap Outsourcing Can Cost You More

After a couple months of trying to solve a productivity problem in one part of my team I have come to the realization that my “cheap” nature has cost me a lot of money recently!

cheap-vs-frugal-outsourcing

The problem was with my domain finding team. The idea with my team set up is that I was to use lower cost labour(Philippines, Bangladesh VA’s with weaker English) to do the main leg work finding domain while my more expensive team member(18$/hr) would complete the final QC checks.

This strategy seemed to work well for awhile however the set up ran into two limitations…

  1. Number of domain they were able to find capped out at 200/month
  2. For “difficult” niches the turnaround time was longer than promised for customers.


Consequence

As a result of several orders taking longer than promised I have had to refund payments and in one case a large order.

Plus, because of the speed of domain finding over the last month I have not been able to accept done of your private blog network customers (yet).

The total cost due to refunds and loss of sales is over $10k!

Changes

Because of my resistance to bring on higher paid help and move work off of my non English speaking VA’s it cost me a few existing customers and new ones!

The changes I have made are relatively straightforward…

  • Promoted my most experienced English speaking domain finding expert to be the team manager responsible for hiring and training similar English speaking VA’s.
  • My VA’s will continue finding domains but will take on the easier orders with the my higher quality domain finding team being responsible for making sure each order is completed.
  • In addition I have added in a bonus system where my VA’s when they find a domain that gets approved by my QC team will receive a bonus but when they find a domain that gets rejected will receive a much small penalty. The balance will never go negative and is being paid out weekly.

NOTE – This bonus will only increase how much a team member gets paid…if someone finds 10 domains and 6 are good while 4 are bad they will receive a bonus of (6x$1 – 4x$0.25) = $5. Even if someone found 10 BAD domains the bonus would be (-10x$0.25 = -$2.5 = $0Bonus) – Bonus will never be negative and is zero’d out each week. (these aren’t the real numbers for the bonus structure)

Learning

“cheap” is not always better…if I had been honest with myself looking at the combined relationship of cost, revenue and profit I should have realized much earlier that domain finding is the core engine of my services business and not the place to try to save a little money.

So far we are about a week and a half into the changes and the results across the board have been great!

About the Author Jon

I am a 33 year old husband, father of 3, engineer and a huge fan of developing systems to build useful and profitable websites. The reason I build online businesses is to provide financial independence for my family and yours AND so I can spend time outside skiing and biking with my family.
Jon Gillham, Online Entrepreneur

Leave a Comment:

17 comments
Joey negros says August 25, 2014

How do you feel about lower cost writers? I feel like for each good writer I have to waste time and but content that is not money site quality. Id really love to see how you manage all of it from sop to production and tracking everything. Are you going to share that content?

Great post – in the end you will pay more but hopefully get more quality and better volume from the highe paid staff… But let’s be honest if you didn’t have clients and were still boot strapping this project you’d more then likely stick to low cost employees.. Right?

If you had to hire American writers for your niche sites your content costs would quadruple quickly and make your business expansion quite difficult.

If anyone has a mastermind on running these businesses I’m in.. Let me pick your brains

Thanks again Jon – good stuff now please share answers to my questions above

Jn

Reply
    Jon says August 25, 2014

    All my writers are native english speakers with a lot from the US.

    They are more expensive but I have not found any writer that isn’t native english that can produce the quality I am after.

    Reply
      Marc says September 2, 2014

      This is my problem with finding outsourcers for content, specifically product reviews. I have a specific template that I have that I want an outsourcer to follow. There is also some research that the outsourcer has to do but not much, such as picking a couple sub headings important to the niche as part of the product review.

      I can find non US English speakers for around $2/article(500 words) using the ‘how to find articles for $2 on Odesk’.

      Reply
Sharon says August 25, 2014

I find it very hard to work out what I should pay outsourced workers and how to get the best productivity. I like the bonus scheme. I don’t like that you are having these problems though as I have been hanging out for the next round of your done for you PBNs to open up lol.

Reply
    Jon says August 25, 2014

    Hi Sharon…don’t worry the PBN will be opening soon…I was waiting to make sure these problems were behind me!

    Reply
Leah says August 25, 2014

Putting a monetary penalty is pretty ridiculous, in my opinion. Sure, bonus out the high performers… but strike to their livelihood for a mistake that might be because of their limited English skills? Pretty low. Won’t be reading this blog anymore because of that.

Maybe you should penalize yourself for not proofing your blog post before it goes live.

Reply
    Jon says August 25, 2014

    Leah

    That would definitely be in very bad form if that is what I was doing…luckily it is not!

    None of my team will make less…this bonus structure can only reward them (their total can not go negative!). They make their hourly rate + whatever their bonus value is assuming it is positive…if their bonus value for a week is negative it gets zero’d out and they start fresh.

    So far NO ONE is negative and the entire team is liking the bonus structure.

    The negative has to be in place since we do not want the team throwing every possible domain on the list for my expensive domain finding manager to review.

    Thanks for the comment…I will edit the post to make sure it is more clear.

    Jon

    Reply
      daveM says September 14, 2014

      I like the idea of incentive and also the penalty aspect. You are offering opportunity., you are willing to pay people quickly and bonus good results.

      I suggest that you increase your staffing a bit so that you have a better selection of sites, you can market the surplus to pay for extra staff. This would ensure that your requirements are met promptly.

      Perhaps increase the lead time when you take deposits to allow for unforeseen difficulties, (two step deposit might work or partially non refundable to allow for your disbursements). People who do not want to risk part of their deposits have the opportunity of dealing with competitors.

      Reply
Priyank says August 25, 2014

Hey Jon,

I agree with you.

We should choose VA’s carefully depending on the difficulty of the task.

Thanks for this post.

Priyank.

Reply
Sean says August 26, 2014

Hey Jon – as a customer, I think you do a pretty good job of communicating where things are at. I got hit with a delay from your team about three or four months back, but that’s kind of the nature of the service you’re offering, if there aren’t any good domains available, it’s better to wait.

On the business side though, I have to say, I’ve noticed your “frugal” nature from afar since I started dealing with you about six months ago. Personally, I think it’s a problem I see in my coaching clients just about as often as I see people who overspend. It’s a balancing act for sure and you have to know the type of person you are too – if you’re a very aggressive “saver” of money then you have to think about that in how you run your business.

I did a podcast episode about being “Penny Wise and Pound Foolish” back in mid-May – basically, the affliction is usually referred to in business as the “High Cost of Low Overheads”. I’ll drop the URL to the episode, but feel free to edit it out if you’re not comfortable with it being in the comments:

http://selfmademarketing.com/high-cost-of-low-overheads/

You are doing a good job though in building your business, so the key is now to react to those discoveries you make about yourself in a positive way.

Reply
    Jon says August 26, 2014

    Appreciate the honest feedback….I definitely agree it is a balancing act and knowing my nature I am sure I tend to the side of “frugal”. Like the saying goes in construction…. Safety/Quality/Cost/Schedule…pick 2…in the online world Safety is not on the table so I have set my priorities as quality, cost, schedule. Ideally I would get all three but it is not possible.

    I will add your podcast to my feed and have a listen, thanks for the share.

    Reply
Joe says August 26, 2014

Glad things are turning around. I can’t imagine what a headache it must be to manage a large virtual team, especially on a budget.

Good luck!

Reply
Miki Vicioso says August 26, 2014

Hi Jon,
I had to learn the hard way myself. Hired over 80+ people to realize the things I was doing wrong. Depending the task, I focus on an specific rate and country that has shown results in the past. Bangladesh is the cheapest but they are also the most irresponsible people.

Reply
    Jon says August 26, 2014

    Hi Miki, I have had great luck with VA’s from Bangladesh.

    Reply
Jeff says August 26, 2014

I totally understand what you mean here jon – sometimes you just have to bite the bullet and shoulder the extra cost to get the quality you are after. You’re services are high quality, so people dont mind paying them.

Reply
    Jon says August 26, 2014

    Thanks Jeff…paying for quality help is often a wise investment. I like to try and keep my costs for customers down so that it is more economical for people to use my services then try and build their own team.

    Reply
Julian says August 29, 2014

Hey, Jon.

Hopefully this doesn’t show as a duplicate comment. I made a comment earlier but my internet crapped out and I lost it right as I tried to post it, so I’ve posted this one!

I think the bonus is definitely a good idea. About being cheap — every single time I’ve tried to be too cheap, as opposed to frugal, I ended up paying for it in some way or another. This has happened to me many times when hiring content writers.

I think it’s great that you’re being very transparent about it on your blog, so current and prospective customers can see that you genuinely care about your customers and the overall quality of your service. I haven’t ordered your PBN service yet, but I’ve read nothing but quality reviews about it.

Reply
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