Elance Blog

Small Businesses Were Growing Leaner Before They Had To

Small businesses are launching at roughly the same rate in 2011 as they did in 2001. What’s different today? Startups are significantly leaner than their counterparts were 10 years ago.

By the end of 2010, new small businesses in the United States – firms launched with 500 or fewer employees during the preceding twelve months – employed an average of 4.9 workers. That’s significantly fewer than the 7.5 workers they employed a decade earlier, a detailed report from the U.S. Small Business Administration indicates.

Conversely, The Kauffman Index of Entrepreneurial Activity shows that entrepreneurial activity actually reached a 14-year high in 2009 for new business creation, shortly after global economic turbulence began. But that same year new independent businesses created 700,000 fewer jobs than recent annual averages, reiterating the employee-streamlined model for new small businesses.

So while job growth in the U.S. continues to be driven primarily by the small business community, small business owners are now being driven by the obvious benefits of using contemporary and cost-effective tools, technologies, and, most importantly, online workers wherever possible.

Cutting Back Before the Crash
Although it seems logical to blame the impetus for most cutbacks on lingering economic woes, small business hiring was actually on the decline prior to the downturn, according to Brian Headd, an economist at the Small Business Administration’s Office of Advocacy. Headd asserts that steady declines in startup employment have been observed since 2001, coinciding with the rise of new online tools and digital resources that began allowing business owners to achieve more while spending more effectively.

By 2001, new technologies and the expanding reliance upon freelancers had already begun impacting formerly robust hiring practices. Small firms are renting less office space, sharing or outsourcing more resources, and turning to online services like Elance that help connect business owners with skilled professionals formerly available only through on-site hiring. “This is a significant change and not necessarily tied to business cycles,” Headd notes in The Wall Street Journal.

During the past 10 years, the growing prevalence of sophisticated yet easy-to-use tools — from accounting software to web design platforms — has permanently impacted the operational costs of most small businesses. As a result, highly efficient company management is now being viewed by economists and labor-market researchers as a long-term trend that’s unlikely to reverse course once greater access to capital and credit returns to the small business community.

The Freelance Factor
For contemporary small business owners, faith in freelancers has never been greater. With the Internet providing fast and economical access to remote workers, entrepreneurs have grown remarkably dependent upon freelancers in all aspects of their businesses. On Elance, contractor job earnings saw a 51 percent spike between September 2010 and September 2011, and Monster.com reported similar growth numbers in contract job postings from 2009 to 2010. Overall online job listings, by comparison, increased 32 percent during the same period.

Joe Pastore, professor emeritus of management science at Pace University, believes more companies are using freelancers for the simple reason that their businesses are becoming more "project-based."

"As business models change, you get a lot of organizational upset and that adds to the economic uncertainty," Pastore tells CNN.

Given the growing number of independent contractors available for work in skilled categories and the corresponding economic incentives to hire freelancers, Pastore expects the freelance sector to continue ballooning in the coming years.

Staying Lean
According to the SBA, small businesses represent 99.7 percent of all employer firms. Collectively, they've generated 64 percent of net new jobs over the past 15 years. But as the current trend toward minimalism in small business management continues, the number of small businesses may continue to soar while the number of workers they employ full-time declines just as fast.

Evan Saks, the founder of an online mattress-making company, is a textbook example of this flourishing reality. Saks started his firm in May 2010 with five full-time employees. Today, the business is still growing — but the staff isn’t. Thanks to habitually hiring online and adopting inexpensive online tools, Saks now employs only two part-timers. “I didn’t have visions of building an empire,” Saks tells the WSJ. “I just wanted to create a nice, profitable business.”

Whether the aim of a startup is to simply generate a decent profit or aspire to become the next Apple, small businesses are going leaner at an escalating pace. And as long as this growing reliance upon new technologies and fewer employees can help entrepreneurs reach their diverse array of business goals, the lean way may continue to be the wise way for today's small businesses.

About the Author
Michael Essany, a Null Media author, is a bestselling author who has been featured on Oprah, The Tonight Show, and inside the pages of Time, People , and Entertainment Weekly. He graduated Magna Cum Laude in 2005 from Valparaiso University with a degree in public administration.


Our entire economy is shifting from big box companies to more small direct to consumer products and services. Technology has advanced and because we are a global economy it now makes more sense for a handful of people to create a product or service for another handful of people. I know if it was not for this site my executive coaching company would have not been able to make it in the beginning because the cost of start up would have been too much. But now because we can just hire people for projects rather then full time it really does make a big difference. I also think that with where the economy is going we are just going to see everything be a niche except for major items like cars. But I see this as a good thing because it allows us to serve each others needs much better.