Contractor Management Outsourcing (CMO) is a trending solution in the global expansion industry. It allows international companies to delegate the tasks of managing a contingent workforce to a trusted partner.
In this guide, we set out the benefits and risks of engaging independent contractors, how to implement a CMO solution, and describe the benefits of doing so.
The ultimate goal is to leave you to focus on core revenue-generating activities, rather than time-consuming local administrative tasks.
What is Contractor Management Outsourcing?
Contractor Management Outsourcing (CMO) transfers a business’ contractor management to another provider outside of the company.
It is a form of Business Process Outsourcing (BPO): That is, contracting a business function or process to a third party who operates on behalf of the business. The contractor management service provider organizes contracts and sets up the foreign workforce on behalf of a client company. The contractor management service provider then acts as an ongoing intermediary between contractors and the business. Often, this includes ongoing management of payments to the business’ partners.
Why Do Companies Use Independent Contractors?
Using independent contractors can provide greater flexibility to companies and contractors alike, making it a viable option for many businesses. The benefits include:
- Talent acquisition. You may need specialized talent for particular projects, or on a purely ad hoc basis. In these cases, it will often make much more sense to contract an individual for that project, rather than hiring an employee. Relatedly, some specialized skills may only be available from contractors (who are free to work for other clients), rather than fulltime employees. Similarly, these arrangements can benefit contractors as many of them prefer the flexibility and potential financial advantages associated with contracting;
- Using contractors may reduce compliance risk associated with employees. Hiring employees means that your business takes on a range of employer and tax compliance obligations. Many of these may be able to be avoided by hiring independent contractors;
- Enhancing your ‘burst’ capacity. Businesses can engage contractors to scale up their operations in times of need, and scale down when a smaller workforce will suffice.
Note, however, that as well as benefits, there are also risks of engaging international contractors, particularly the risks of ’employee misclassification’ and ‘permanent establishment’. We consider these in more detail further below.
How Can CMO be Combined With Other Global Expansion Solutions?
While using independent contractors should be an important part of your human resources strategy, it should not be the only component. Especially where a business is expanding internationally, CMO should sit alongside other expansion solutions. Often, it is a good idea to have several employees as well as contractors. In this case, CMO needs to be combined with a Professional Employer Organization (PEO) solution.
Using New Horizons’ Employer of Record services, means you pass on the employer obligations and liability to us, while the employees still work under your direction and at the disposal of your business. By utilizing our CMO services at the same time, you can effectively oversee both your contractors and employees.
Using these options allows you to reduce costs associated with administration of employees and independent contractors. We manage all compliance issues and are responsible for payment to your employees and contractors.
We also take all of the administrative duties off of your hands so that your employees can focus on core business activities.
You gain better visibility of your managed workforce and the peace of mind knowing that all of your contracts conform to statutory requirements.
What Is the Contract Management Procedure?
When you engage in CMO services, a CMO provider takes over the management of the relationship with independent contractors through the following procedure:
- You have a written agreement with the CMO, clearly outlining its duties and responsibilities towards your business;
- The CMO provider then establishes contracts with your independent contractors and contingent workforce;
- These contracts are compliant in the country where the contractors are sourced;
- The CMO provider acts as an ongoing intermediary between you and the contractor;
- The CMO provider ensures that the contractors are paid in accordance with the applicable laws and regulations;
- You are remitted a bill once a month for all CMO services provided to your business.
What Needs to Be Considered Before Using a Contractor Management Outsourcing Company?
Before you engage contractor management outsourcing services, and in working out whether CMO is right for you, we recommend you consider some of the following factors:
- How many contractors do you have and how does this contrast with your number of employees? Do you have the right mix? For example, Upwork, the world’s biggest freelancing platform, finds that 450 full-time employees to 1,100 contractors, is the right ratio of employer to contractor. You need to consider what the best mix would be for your business;
- Are contractors clearly distinguished from employees in your payroll and human resources processes?
- How many different types of contracts do you use for contractors?
- Are your current contracting arrangements legally compliant? How do you know?
- Do your contracting arrangements pose a possible ‘permanent establishment’ risk? This is the risk that the presence of an independent contractor of yours in another country will mean you have a ‘permanent establishment’ in that other country for corporate tax purposes. How do you know?
- Are you appropriately insured for the actions of your contractors?
A CMO provider can help you out with answering these questions and implementing a CMO solution for you.
How Does Using Contractor Management Outsourcing Save Valuable Resources?
Like all aspects of BPO services, cost is a major consideration. There are many ways that using contractor management services can save your business money, including:
Spend Less Time Drafting Contracts
For all businesses, time is money. When you spend ample time on non-core activities like preparing contracts, you have less time available to implement innovative ideas into your business or generate revenue.
Writing a compliant agreement with a contractor can take considerable time, especially if you have to create a unique contract every time you hire an independent contractor.
Additionally, it can take even more time to negotiate these contracts with your contractors and modifying the contract accordingly. Your CMO service provider can handle all of these responsibilities.
Spend Less on Legal Fees
You may have decided that foreign countries’ laws regarding independent contractors is too complex for you to handle on your own. As a result, you may have decided to hire an attorney to write these contracts.
Using contracts in different countries may have required you to hire a different attorney for each country. This can cost considerable money.
Using a CMO allows you to tap into that provider’s expertise. CMOs have relationships with the country’s labor agencies. This means they use proven contracts that are accepted by the country’s regulatory agencies.
Focus on More Important Tasks
By passing off non-essential tasks to a company that provides contractor management services, you also pass off time-consuming and inefficient tasks to another company.
This allows your actual employees to focus on generating revenue for your business and adding value to your business.
Combine CMO Services with other Services
It is often possible to use one firm for all your international outsourcing needs. With a global PEO, you can outsource CMO, PEO, recruitment, and global mobility services (e.g. visas and work permits), with that partner providing an entire end-to-end service.
What Benefits Does Using a Contractor Management Service Provider Offer?
Using a CMO offers a number of key benefits to your business, including:
Many companies cannot and do not actively monitor contractors’ work.
However, by being lax in this regard, a company may wind up not fulfilling a project when depending on a third party that does not complete the job properly or does not submit the work on time.
This can expose the business to greater risk with its own partners or clients. A CMO provider manages outsourced workers and can check in with these workers to ensure that work is being completed properly and on time.
Regulations pertaining to contractors may be much different than employees, so it may take considerable time to set up these processes and routinely deal with them. CMOs can take over these tasks, reducing the direct administrative responsibilities of your business, including on-boarding activities, payroll and tax compliance.
Additionally, if a business is using multiple services to recruit employees or various temporary staffing agencies, the methods in place may not be efficient and money may be wasted in the process.
It is complicated to manage for yourself the full array of full-time, part-time, short-term, long-term, job share and satellite workers simultaneously. If using overseas contractors this is even more complicated and it is difficult for businesses to devote sufficient attention to contracting to ensure that all their overseas processes are fully compliant.
Contractor management outsourcing service providers utilize standardized and proven methodologies and processes that make the business run more efficiently. They can also provide consolidated reporting that makes it easier for the business to analyze the business function.
Using contractors and CMO providers, the business can improve its speed and accuracy. CMOs can customize solutions that meet the specific needs of the business, further enhancing the quality of the services provided. CMO providers deal directly with contractors, so they have greater control over influencing the final product.
One Point of Contact
The one-stop CMO service can be used for all of your temporary workers, contractors, consultants, and specialists. You will receive one invoice from a sole supplier for your managed workforce
Managing Employee Misclassification Risk
Contractors must be managed in a very different manner than permanent employees, so it makes sense to delegate this responsibility to another company. For example, there is a major risk of ‘employee misclassification’ with contracting. This is the risk that employees have been misclassified as contractors, and could leave you liable for back paying payroll tax and benefits, as well as stiff penalties. Contracting arrangements, and the contracts themselves, need to be carefully drafted and managed to mitigate that risk. CMO providers are likely to have the expertise and experience to mitigate these risks better than you could yourself.
Managing Data and Information Risks
Contractors may deal with customer personal data, confidential information, and company intellectual property. Contracting arrangements need to ensure that this information is accessed and processed consistently, compliantly, and in protection of the company’s interests. For example, all personal data of EU customers needs to be processed in accordance with the General Data Protection Regulation (GDPR).
Looking for Support with Global Contractors? Reach out to New Horizons Global Partners for More Information
CMO can provide expertise, cost savings, flexibility, efficiency and ensure compliance. If you are considering using contractors based overseas it is recommended that you consult a global expansion partner like New Horizons Global Partners to find the expansion solution that is right for you.