Outsourcing: what it can do for you
Be it sales, technology, finance or HR, out-of-house options are increasing for your business
To the casual observer, Ourschool seems like a substantial operation. Launched nationwide earlier this year, the company issues incentive store cards to parents who want to raise money for their children’s schools.
When a cardholder makes a purchase at a participating outlet, a proportion of the purchase price is taken off and diverted into the education system.
Setting this up has involved a national sales drive, the publication of a magazine, active direct marketing to parents and the manufacture of the cards themselves. A substantial operation, then? Well, yes and no. In fact, most of the company’s business functions have been ‘outsourced’, allowing its handful of employees to concentrate on the “relationship building” that lies at the core of the scheme.
“We’re a young company. We wanted to keep our costs to a minimum and we didn’t want to spend a lot of money on offices, computers and staff,” says Dianne Vanderlis, Ourschool’s director of operations and finance. “So we outsourced – and as far as we could, we got our outsource partners to work on a commission basis.”
By outsourcing to specialists, it has also neatly sidestepped the issue of buying in hard-to-come-by skills. For instance, by farming out the sales operation to an experienced third party, it has saved itself the pain of spending a year or more building an effective in-house team. By outsourcing magazine production – after an initial stab at doing it internally – the company has secured a more professional product. “They could also handle things like advertising sales a lot better than we could,” says Vanderlis.
While Ourschool is perhaps an extreme example, its experience does illustrate the appeal of outsourcing. Few companies – and certainly very, very few smaller companies – have the in-house expertise to do everything well.
After all, if your core excellence lies in designing microchips, it doesn’t necessarily mean you have the marketing skills to fully exploit your intellectual property. You may be good at building customer relationships, but a lack of administrative resources might see you struggling to keep up with your HR responsibilities.
Whatever the scenario, outsourcing can provide a means both to save money and tap into third-party expertise. It also offers a low risk way to scale up the business when times are good, while leaving the door open to pain-free retrenchment when the market tightens.
As Mike Sobers, a partner with special responsibility for outsourcing at KPMG’s information risk management practice points out: “Outsourcing turns fixed costs into flexible ones.” As such it can make your company lighter on its feet.
And the outsourcing industry is growing at a frenzied rate. For instance, according to research company Ovum, the UK business process outsourcing market alone is currently expanding by 30% year-on-year, and is set to hit a value of £11.9bn by 2005. So what can outsourcing do for your company? Let’s take a closer look at the benefits.
WHAT CAN OUTSOURCING DO FOR YOU?
The question facing most companies is not whether, but what? After all, unless you employ an in-house window cleaner rather than the friendly man with a bucket and ladder who comes round once a week, then you are already in the market for outsourcing suppliers. Look beyond that admittedly pretty basic service, and there are a lot functions that you could consider moving out of house.
Many firms outsource the management of their payroll system and from there it might be a natural extension to farm out HR administration as well. If there isn’t any in-house IT expertise at your disposal, you might choose to outsource anything from email through to the management and maintenance of key IT systems.
On the customer facing side, why go to the trouble of building your own sales and customer support team when you can draw on the expertise of others? In other words, there are very few business processes you can’t outsource.
WHAT SHOULD BE OUTSOURCED?
As most of you can probably testify, there are any number of resource-hungry jobs not directly related to raising revenue or looking after customers. These are the headaches – not core to the business, but important, nonetheless.
Human resources administration is a case in point. It’s an area that generates a bewildering amount of red tape and, as Chris Batten of Group300 points out, if you get something wrong, the mistake can be costly. “It’s an old scenario. You employ someone, you part company with them after a difference of opinion. You don’t get the process right, so they come back and sue you.”
Group300, which itself supplies services such as audio conferencing to small firms, decided to outsource much of its human resources function to Liquid HR. “We had grown rapidly from two employees to 30 and turnover had risen from £80,000 to £10m. But all firms have strengths and weaknesses, and we had been left behind in the area of employment law.” he says. “We weren’t big enough to employ a dedicated HR person, but we didn’t want to be hauled in front of an employment tribunal because we didn’t have the right paper trail.”
Group300’s outsourcing partner provided online forms – absence, holiday contracts, etc – and equally crucially, advice from a team of lawyers when it was required. Thus, the otherwise onerous business of keeping up with all the latest employment legislation is transferred out of house, which in turn offers savings based on economies of scale.
Liquid HR’s managing director, Derek Kemp, says the price of £10 per employee per month is both transparent and cost-effective. “For a company of 20 people, you’re looking at £2,400 a year,” he says. And in addition to lower costs and specialist expertise, it’s an arrangement that also offers scalability. “The service can grow with us,” says Batten.
The same equation – lower cost/access to specialist skills/scalability – can equally be applied to those parts of the business that have a direct bearing on the bottom line, such as sales, customer support or manufacturing.
WHERE ARE THE RETURNS?
For many of you this will be a tougher call. While a hiccup with your HR services supplier won’t bring the business down, outsource sales or customer support and you’re putting your revenues and brand reputation in the hands of a third party.
On the other hand, that third party might well do a much better job. Any decision should involve a long, cool look at your core competencies in comparison with the skills that an outsourcing partner can bring.
In the case of change management consultancy PAYOA (short for ‘people are your only asset’), director Jeremy White was clear selling was definitely not a core competency. PAYOA advises companies who are installing Enterprise Resource Planning (ERP) systems on how to prepare their personnel for the inevitable changes that the new technology will bring.
Founded by people with IT/change management experience, the business has around 20 consultants on its books. However, what it doesn’t have is a sales team. In order to maintain as tight a ship as possible, a decision was made to outsource the selling side of the business to Inline Sales; a company employing 250 professional sales staff on behalf of its outsourcing clients. “We run a very core operation,” says White. “And yet we needed to reach out beyond our immediate contact base – otherwise our business would erode over time.”
In this case, the driver was the requirement for expertise rather than cost. As White explains, PAYOA’s business is based around major IT projects, which are not necessarily easily visible. “We needed a sales house with knowledge of the IT marketplace – we chose a company with a very good background in that area.”
According to White, the relationship has paid off in terms of delivering customers that PAYOA would not otherwise have reached. “It’s delivering us high level business and it’s also giving us continuity of business beyond the market that we already knew,” he adds.
While cost was not the primary driver for PAYOA, outsourcing sales can reduce your risk by allowing you to substitute the fixed cost of operating a sales department to a more flexible solution. Inline Sales CEO Robert Keonig, says his company charges a set-up fee and clients are then billed on a commission basis.
The balance between upfront payment and commission largely depends on the marketing plan. In the case of fast moving goods that can be sold quickly, the upfront fee will be lower. In the case of products and services where deals can take months to come to fruition, the company will require a bigger payment in advance.
Ultimately, even considering outsourcing should give you a clearer idea of what your business actually is, in terms of its core functions, objectives and values. In some cases, you might decide to outsource a certain process, such as HR administration now, with a view to calling it back in at a later date when rising numbers make the employment of a full-time professional look more viable.
Alternatively, there are areas, such as manufacturing or customer support, where a third-party solution will always be more cost-effective. And finally, the process should identify aspects of the business over which you will never cede control. Reflecting on her own company, Ourschool’s Dianne Vanderlis says that even with most functions performed out of house, there’s one area that’s immutable. “We are a relationships business,” she says. “I would never cede ownership of the key strategic relationships.”
Five things to ask
1) Are the costs transparent? If driving down costs is the primary driver, you need to be sure that the arrangement will work for you on this level and that there are no hidden charges
2) Are references available? Every outsourcing arrangement is to some extent an act of faith that your supplier can provide a better service than you could achieve in-house. References and testimonials can give you some idea of the company?s track record
3) Are the service level agreements negotiable? Most outsourcers will have a range of standard SLAs, but they should also be open to customised arrangements, designed to suit your business
4) Can they provide regular updates? In strategic areas, such as manufacture, logistics and sales, you should have access to reports that contain key performance indicators (KPI)
5) What will they offer in terms of redress if service level agreements are broken or KPI targets missed? Will they upgrade or change your service in response to market conditions?
Questions to ask yourself
1) What aspects of my business is it feasible to outsource?
2) What are my goals and objectives, and how can these be communicated effectively to the outsourcing company?
3) Can the work be done more efficiently or cost-effectively by a third party?
4) Am I prepared to cede control of day-to-day management in key business areas?