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When to outsource
When do you need to use a freelancer? The answer is: Whenever it benefits your business to do so.
I would advise any new business never to employ anyone without a very good reason. (This depends on employment law and costs from region to region, but our experience is that it's much wiser to outsource than to employ in-house talent.)

It's always good to be aware what you're good at, and where other people can do a job better than you. Even if you can always do something well enough, there are lots of occasions when it may pay to get someone else to do it.

- When someone else can do something better
- When someone else can do something quicker
- When someone else can do something cheaper
- When someone else can do something more reliably

Now, of course, these things aren't always true. To each one you must add - "And when it suits my business to do so."

The question of when and who to use for what always depends on your current business situation. It comes down to the balance between speed, cost and quality.
Speed, cost and quality

As a general rule, you can normally choose to get two out of these three for any given project.
To get something done quickly and high-quality, you may have to spend money (hire extra people or better people, i.e. sacrificing cost)

To get something done cheaply and to a good quality, you may have to take your time, either doing it yourself or outsourcing to someone cheap that you have to manage a lot (i.e. sacrificing time)
To get something done quickly and cheaply, you won't have time to try several designs or do all the quality assurance you'd normally do (i.e. sacrificing quality)

Example contexts
If you need to close a job to get cash in early, outsourcing may help you double up your work streams.
If you need to conserve cash in a tight month, perhaps you should do everything yourself.
If there's other paying work that you need to do, outsourcing can help you deliver all your commitments. Also, if trying to do everything yourself may introduce quality risks, or even mean that you miss all your deadlines!
If a project would tie up a lot of your time, you risk losing out on other work that you could otherwise be getting in (i.e. "opportunity-cost").

If you think your client would be impressed with a really sharp logo, consider hiring a professional graphic designer for a couple of hours, paying a bit more but getting more impact.
If your project has very little budget but no time limits, you may want to do it yourself in spare time, or outsource to another country.
Principles of outsourcing

Know your strengths & weaknesses
The #1 step in outsourcing is to know what you're good at or bad at, what you do quickly or sluggishly, what you do reliably, and what takes up a lot of your time (i.e. cost and opportunity-cost).

You need to be brutally honest about your strengths and weaknesses, so that you can be smart about what holes to plug when. There's no shame in getting other people to do some or all the jobs your project needs! I know some companies that use freelancers for everything! Does that make them bad agencies? Absolutely not - no more than a conductor who conducts an amazing symphony is a bad musician.

Find good people
In order to find good freelancers, you have to try people out. You have to take occasional risks. When you find someone good, hang on to them - they're gold dust!

Manage your people well
Management is not a magical art - it's based on getting some simple things right.
Let people know what's expected of them: Set clear targets for cost, quality and time as your business requirements dictate. Make sure these are totally understood.

Get regular updates, and manage your targets continually. Don't be afraid to ask them to try again, try harder, or communicate more. Everyone appreciates feedback, especially when working from home.

Take responsibility. As a manager, if something goes wrong, it's on your shoulders at the end of the day. If your freelancer is under-performing, it's down to you to decide whether to give help, provide more resources, kick some ass, or pull the guy off the job. This responsibility works both ways. When you'll carry the can, you have the authority and the responsibility to make sure the job is done right. It doesn't have to be personal.
If someone's good, reward them properly and treat them well. Keep on to them.

If someone fails you, don't be afraid to use your leverage to try to get them back on track. That's where clear targets and payment plans is vital. If you lose confidence in a freelancer, make a clean break. Pay them what's due and explain openly and clearly why you won't be using them again. Remember, this is business, and it's your business. There are a lot more people out there. Don't persevere with under-performing freelancers.