Outsource (nearly) everything

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Small company, big profit

How do lean businesses outperform rivals with fatter payrolls? A look at four entrepreneurs who cracked the code.

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Carpenter's tips on how to be an outstanding outsourcer

1. Do your homework: Talk to each prospective vendor's clients and request samples of its work.

2. Stagger payments: Pay no more than 50% up-front, and devise a cash-flow-friendly payment plan, such as paying the balance 30 days after delivery.

3. Be a location scout: Before signing on with a vendor across the country - or the world - factor in the logistical costs to determine whether an option closer to home might be better.

4. Start small: Even though it costs a bit more, order small quantities at first. That way you can be sure of your needs before committing to larger orders.

When less means more

Gallery: Outsized profits from tiny firms

Find your niche

Choose the right clients

Form strategic partnerships

Outsource (nearly) everything

When a large staff can work

(Fortune Small Business) -- Outsourcing might seem like a necessary evil - a cost-cutting strategy that guts quality control and invites theft of both intellectual and physical property. But outsourcing makes Paul Carpenter's business work.

"There's no reason we should do it all," he says. "We do what we're best at - and have other firms handle the rest."

Carpenter runs Sinol USA, a small alternative-medicine company based in Newtown, Conn. Sinol sells a sinus spray made from capsaicin oil. Derived from cayenne peppers, it's supposed to cure headaches and sinus infections. Carpenter, 45, says he adopted the idea from his grandfather: "He suffered from chronic headaches, which he treated by taking cayenne with shots of bourbon."

After running a disposable-camera business for 15 years, Carpenter launched Sinol in 2005. He sold nearly $2 million worth of the spray in 2007 and has already surpassed that figure this year with the help of heavyweight distributors such as Rite Aid (RAD, Fortune 500) and Whole Foods (WFMI, Fortune 500). The business is breaking big, but the staff remains tiny. Amazingly, Carpenter employs two full-timers: a bookkeeper and a receptionist.

How does he get the job done? By outsourcing most business functions to a network of partner firms scattered all over North America. Manufacturing and warehousing happen in Hazleton, Pa. The spray is packaged in Oxford, Conn. The bottles come from a Canadian manufacturer. Carpenter contracts with sales representatives in New Jersey and California, and works with national trucking brokers to find the best rates for drivers. A San Diego business handles his order fulfillment, and a New Haven company manages shipping to individuals. Recently Sinol signed a deal with a marketing and consulting firm based in Washington, D.C.

Outsourcing certainly keeps Carpenter's overhead low. But it often creates new challenges, says Traci Entel of Katzenbach Partners. "Sometimes it's harder to outsource than to do it yourself," she says.

Small-business owners often find it tough to impose standards on partners, notes Entel. The result? They feel controlled by - not in control of - those outside firms.

Carpenter admits that he's faced problems. For example, a recent shipment of 2,000 smudged labels gave him a headache that couldn't be cured with capsaicin. But by choosing nearby partners that uphold high quality-control standards, he can usually correct errors as they arise (the labels were redone at the printer's expense). The rare pitfalls, he says, are far outweighed by the benefits of outsourcing.

"My business model simply makes me more profitable," Carpenter says.

He should know. Carpenter and a partner used a similar outsourcing strategy to build their former camera company into a $12-million-a-year business. He predicts exponential growth and fat margins for his new endeavor.

"Thanks to outsourcing," he says, "I have a strong bottom line."