Contractor Management Outsourcing (CMO) is on the rise in the global expansion industry. This expansion solution allows companies to delegate the tasks of managing a contingent workforce to a trusted partner. Here we define contractor management outsourcing, explain why you should consider a CMO solution, and set out the usual process employed by a CMO provider.
Key Takeaways
1. Independent contractors are a useful source of talent for expanding businesses.
2. While it is possible to manage independent contractors in-house, there are significant savings and efficiencies that can be made by outsourcing the task to a specialist Contractor Management Outsourcing (CMO) company or provider.
3. Any business considering a CMO solution should seek advice from professionals as to whether other expansion solutions, such as Employer of Record solutions, would be more appropriate.
What Is Contractor Management Outsourcing?
Contractor Management Outsourcing (CMO) transfers a business’ contractor management to another provider outside of the company.
CMO, sometimes called, contractor management services, is a form of Business Process Outsourcing (BPO): A business can outsource a range of processes, such as recruitment, payroll and human resources. When contractor management is outsourced, the contractor management service provider takes over the contractual discussions and sets up the relationship with the contractors. The contractor management service provider acts as an intermediary between contractors, contingent workers and the client business.
Contractor management services may also include management of payments to the business’ partners.
Contractor Management Outsourcing is related to, but separate from, payroll outsourcing, which involves outsourcing payment processing for employees rather than contractors. You can read more about payroll outsourcing at Top 5 Benefits of Outsourcing Payroll.
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Why Do Companies Use Independent Contractors?
In a range of industries, such as the tech industry, hiring contractors has become the most common form of engaging workers. Contractor management outsourcing will only be of interest to businesses that choose to use independent contractors (in the US, commonly known as ‘1099 employees‘), so why would a business choose to engage workers in this way? Benefits of using independent contractors include:
- Business Flexibility
- Employment and labor laws around unfair dismissal, termination and redundancy do not apply to independent contractors. With independent contractors, the legal relationship is governed purely by contract law and whatever the two parties agree to.
- This makes it easy for businesses to engage or disengage individuals as the circumstances require.
- Access to Niche Talent
- Some contractors or freelancers are simply not available as regular employees: They find it more profitable, or otherwise enjoy the flexibility of being an independent contractor.
- This means that, in some areas, such as hiring remote graphic designers, hiring a contractor may be the only way to source that talent.
- Reduce Compliance Costs
- Hiring employees means withholding income taxes, payroll taxes (where applicable), and processing employee benefits: As an independent contractor is responsible for their own taxes, tax allowances (e.g., the UK trading allowance), insurances and pension contributions, businesses can save by engaging independent contractors.
- Scaling Opportunities
- Independent contractors can, as long as their contract permits, have their hours increased and decreased depending on business need.
- This can be beneficial for growing companies unsure of their future resource need.
For more information on the benefits of using independent contractors see What’s the Difference between Employees and Independent Contractors?
Why Should Companies Use Contractor Management Outsourcing Services?
Contractor Management Outsourcing is a strategic model that was developed to keep up with the expanding market of independent contractors. What are the advantages of outsourcing contractor management, as opposed to carrying it out in-house?
- Simplify Engagement of International Contractors
- Often, international businesses have contractors located in multiple overseas locations. Managing this in-house may mean managing payments in multiple currencies under multiple invoicing systems.
- Read more about international contractors at What are the Advantages and Disadvantages of Using International Contractors?
- A CMO provider usually already has an established presence in each international location, and understands the local rules, so they can easily take over contractor management across all locations.
- Separate Contractors and Employees
- It is important that businesses treat their employees and their independent contractors differently to mitigate the risk of ‘employee misclassification‘.
- Outsourcing contractor management services to a third party ensures that contractors are treated distinctly from any in-house employees: Contracts are drafted, payments are made, and workflow arranged so that there is no confusion between the role of the employee and the contractor.
- Greater Visibility
- 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 company manages outsourced workers and can check in with these workers to ensure that work is being completed properly and on time.
- Improve Quality of Contractor Management
- Contractor management requires an excellent understanding of the legal and compliance requirements specific to contractors. For example, in countries that have Value-Added Tax (VAT) or Goods & Services Tax (GST), contractors must generally pay this amount. This is not the case for employees.
- A specialist CMO provider will understand all applicable legal requirements for independent contractors.
- Global Mobility
Independent contractors are usually still performing ‘work’ under the tax laws of a country. This means that they may need specialist visas or work permits;
CMOs may offer assistance with Global Mobility and immigration consulting. These services can allow you to tap into a global pool of talent while delegating tedious tasks like visa and work permit applications to a company with expertise in this area.
- Improve Contractor Recruitment
- A specialist contrator management services company will know where to source the best independent contractors or freelancers. This means understanding which online marketplaces are best for certain types of talent, as well as understanding how to source contractors locally within a country.
- Consolidate Workforce Administration
- A CMO solution can often be combined with a Global PEO solution in the very same provider.
- This means one third party takes on responsibility for employees and contractors alike. This reduces the overall costs of workforce management, as well as giving the client enterprise space to focus on its core business.
- Mitigate ‘Permanent Establishment’ Risk
- Permanent establishment risk (also known as ‘PE risk’), is the risk that an international enterprise will become liable to pay corporate income tax in a country. Generally speaking, a business becomes liable to pay this tax where it has a ‘fixed place of business’ where ‘business is carried out’ in that country.
- Independent contractors may in some cases be interpreted as ‘dependent agent PE’, making the company liable to pay corporate income tax.
- A CMO provider can advise on whether existing or future contracts may constitute a PE risk and advise accordingly.
What are the Potential Cost Savings from Contractor Management Outsourcing?
Aside from the benefits listed above, as with all BPO services, cost is a major consideration. There are many ways that using contractor management services can save your business money, including:
- Save on Legal Fees
- Contracts for service must align with the contract law of the country in which you are operating. This generally means engaging lawyers in-country to draft contracts.
- CMO providers, by contrast, have legally-compliant contracts in each country or state you wish to operate in which can be altered for the circumstances of your particular business.
- Save on Ongoing Contract Management Costs
- Instead of managing contractual payments, invoices and any VAT yourself, this is outsourced to a specialist firm.
- As the CMO provider specializes in contractor management, they can usually achieve cost efficiencies which are impossible to achieve in-house.
- Reduce Compliance Complexity
- While hiring independent contractors, rather than employees, can reduce compliance costs in many cases, it does not eliminate compliance costs altogether.
- In countries where VAT or GST apply, a tax audit trail is essential. In addition, records need to be available to demonstrate that any contractors have been correctly classified.
- Maintain Central Business Focus
- Managing independent contractors and their payments is not the main focus of your business. Outsourcing this task to a third party gives you the space to concentrate more squarely on revenue-generating activities.
- Read more about the general process of managing contractors in-house at 8 Tips for Managing Contractors.
What are the Challenges of Contractor Management Outsourcing?
With the benefits of contractor management outsourcing in mind, it is still important for businesses to consider whether there are any potential downsides to outsourcing this function:
- Loss of Control
- In CMO, a business assigns some responsibility to another firm and in return that third party takes responsibility for that task. However, at the same time, there is a degree of control over the task that is lost. This is a risk inherent to oustourcing and significant academic discussion has been devoted to mitigating this risk (See, for example, Outsourcing contracts as instruments of risk management: Insights from two successful public contracts).
- This risk is best mitigated by the language used in the engagement contract between the CMO provider and the client business. It should carefully set out who is responsible for what. In some cases, a ‘tri-partite agreement‘ — an agreement between the contractor, the CMO provider and the client business, might be the best way of dealing with this risk.
- CMO is the Wrong Solution
- In some cases, there are better ways for a third party to manage a workforce than CMO solutions.
- For example, where the nature of the relationship between the client business and the contractor is ‘employment-like‘, it will usually better to engage an Employer of Record solution, rather than CMO. Through this solution, the contractors would be ‘re-classified’ as employees. This avoids employee misclassification risk.
What Does the Contractor Management Outsourcing Process Look Like?
When you engage a CMO provider, the process used by the provider will usually proceed as follows:
- CMO Engagement Agreement
- The client business will enter into a written agreement with the CMO provider setting out the responsibilities of the CMO provider as well as payment terms.
- CMO Provider Sources Contractors
- Where the client business does not already have contractors or freelancers in mind, the CMO provider can seek out appropriately skilled contractors.
- CMO Provider Drafts Contracts
- The CMO provider drafts contracts (‘independent contractor agreeements‘) for the client’s new contingent workforce. In some cases, these will be tri-partite agreements: Agreements setting out the responsibilities of three parties: The CMO provider, the client business and the contractor.
- These contracts will be compliant with local laws and provide an audit trail for any regulator inquiries.
- CMO Provider Manages Administration for Ongoing Contracts
- The CMO provider will manage all ongoing administration with respect to independent contractors. This means managing payment, invoicing and any necessary tax issues (such as VAT reconciliation).
- Contract Termination
- Where the contract needs to be terminated, the CMO provider will manage any issues for winding up the contract, such as any early cancellation payments.
What Needs to be Considered Before Using a Contractor Management Outsourcing Company?
If you are contemplating using contractor management outsourcing services, it is important to perform a stocktake of your existing contractor arrangements. This will help you establish the type of CMO services that you need. Some things you should consider include:
- How many contractors do you have?
- The larger the number, the more you might benefit from contractor management outsourcing.
- What is the total number of casual or part-time employees, independent contractors and freelancers engaged?
- It is important to distinguish between workers that are employees and workers that are not. This impacts the kind of outsourcing solution you need.
- How many different suppliers are you currently using internationally for managing your global workforce?
- An international CMO company operates in most countries, so may be able to replace many of your existing suppliers.
- How many different types of contracts do you use for contractors?
- A CMO company may be able to standardize your contracts.
- Are your existing contractors correctly classified?
- Employee misclassification is a major risk that needs to be avoided.
- Do you have appropriate insurance to cover the work of your contractors, including if they have an accident?
- Some businesses are only insured for the activities of their employees, which means independent contractors can constitute an additional risk.
Looking for Support with Global Contractors? Reach out to Horizons for More Information
Engaging a CMO provider has many benefits for any business that uses independent contractors or freelancers. The CMO provider provides contract management expertise, cost savings, flexibility and greater efficiency.
CMO provider can help businesses scale their companies in a way that minimizes hassle and makes the most out of outsourced work. This is especially true when a business is expanding internationally.
If you would like more information about Horizons and our CMO solutions, contact us today.
Frequently Asked Questions
Contractor management outsourcing (CMO) means using a specialist third party company to recruit, hire and manage independent contractors or freelancers.
Contractor management means having a systematic business process in place for dealing with independent contractors. Good contractor management is important for cost-efficiency and legal compliance.
