The promise of saving time and money by exploiting technology and inexpensive labor overseas is an old headline. Forrester Research expects the total value of outsourced information-technology services by companies in North America to cross $100 billion--some 960,000 white-collar jobs--by the end of 2006. By 2015, the number of jobs shipped overseas could hit 3.3 million.

Behemoths with sprawling back offices like General Electric and American Express are responsible for much of the shift, but more small businesses are jumping on the outsourcing bandwagon every day. "If other companies are doing it and cutting costs, you have to do that or you'll be out of business," says Vineet Katial, co-founder and chief operating officer of Janeeva, a software services company that manages outsourcing relationships.

Which is not to say that most entrepreneurs who outsource do it well--especially small fries with limited resources to manage the process and ensure quality control.

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Confusing matters further, the roster of countries looking for work is expanding, thanks to new players like Argentina, Ghana and Vietnam. While large companies may be able to extract efficiencies from these more exotic locales, small companies at this point are better off sticking with more established hubs, especially India.

How to navigate thorny outsourcing issues? Follow these steps.

Decide what functions to outsource.

Begin by defining, in clear terms, the strengths and weaknesses of your business. Keep your strengths in-house, and farm out your weaknesses. Next, break down business projects into sub-projects, says Atul Vashishtha, chief executive officer of NeoIT, a San Ramon, Calif., outsourcing consulting company.

One of his clients, for example, had to build a new Web site. The client knew it was good at design but probably needed some help with programming. By divvying up what it did well and what its Indian vendor could do better and more efficiently, the client managed to save 60% on the cost of the project, says Vashishtha.

Choose a vender--carefully.

Selecting a vendor is hard enough for large companies with fat travel and research budgets, let alone entrepreneurs on a shoestring. Consider India: About 20 outsourcing firms make up 55 per cent of the outsourcing activity there, while about 3,000 up-and-comers account for the other 45 per cent, according to India's National Association for Software and Services Companies.

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How to find a reliable partner? Matchmaker Web sites like Elance, iFreelance.com, ScriptLance.com, RentACoder.com and GetAFreelancer.com pair outsourcers with vendors. Elance chief Fabio Rosati says his company posts, on average, about 1,800 new projects on its site each week, up from 1,400 last year.

Other helpful sources include consultancies like Vashishtha's NeoIT, TPI and EquaTerra. And small-business advocacy groups and publications like OOBP.org and SourcingMag.com offer links and certified vendor directories for outsourcers.

Craft a sound contract

All vendors--no matter how capable or trustworthy--should sign a snag-proof contract. Agree, in writing, on an arbiter (say, a law firm) before disagreements crop up (and they will). "Plan now or you pay later," says Janeeva's Katial.

When drafting a contract, clarify not only the specific services you expect to receive, but the quality of the delivery as well. For example, if you are outsourcing your in-house call center, make sure the vendor knows you expect, say, 98 per cent of the call center's incoming calls to be answered within five rings. Or, if your vendor has taken on server maintenance for your company, state in the contract that your servers should be up and running 99 per cent of the time.

"The small-business guy should look out for the fact that vendors make a lot of their money on charging for services you might otherwise have thought were included," warns Stuart Levi, a lawyer at Skadden, Arps, Slate, Meagher & Flom who specializes in information technology and e-commerce.

Finally, be strategic about how to pay for the service--be it at a fixed rate per employee per hour, a rate tied to performance, or a lump-sum cost. For example, a small airline might outsource its customer-service unit at a rate per phone operator, while a bank might farm out its loan-processing operation and pay per loan. However you hammer out payment terms, be sure to explore all the options relative to your company's cash position.

Tempting as it is to save money by going offshore, the fact is that without the right planning, outsourcing can suck profits--not supercharge them. "Don't skimp on the transition," says Simon Bell, director of A.T. Kearney's Global Business Policy Council, which publishes an annual index of countries best suited to handle outsourced work. "Spend time and processing to communicate on both ends to make sure there's a smooth transition."

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