Gloom and doom seem to be the operative adjectives as the U.S.’s longest running economic boom ends. In this seemingly bottomless free fall, outsourcing is becoming an important option for businesses determined to shore up their bottom lines by cutting costs as demand for their products and services slows.
That is good news for outsourcing providers, who are proving it is possible to experience fast growth in hard times. Here are the success stories of four outsourcing providers who doubled their growth in the last 12 months.
In 2000 EDS, a global information technology provider, reported income of $19.2 billion. During that time the Plano, Texas publicly traded company reported revenue growth of 19 percent per share.
Information Solutions, EDS’ outsourcing group, represents 77 percent of EDS’ overall revenue, according to spokesman Peter Rowe. Divisions within that group experienced the kind of exponential growth small companies typically enjoy. The Managed Hosting group reported a 200 percent increase over the year previous, according to Rowe. Distributed Systems Services grew nearly 40 percent during 2000. This division manages workspace areas for EDS customers.
Outsourcing appeals to both large and small buyers, reports Rowe. Large corporations want to turn fixed costs into variable costs. “They don’t want to buy computers for everyone and worry about software,” says Rowe. “They’d rather outsource the entire function to EDS.” Last summer EDS won contracts in this area from Weyerhaeuser as well as from the Navy Marine Corps to build their global Intranet.
Small companies, on the other hand, are turning to EDS to provide needed infrastructure they can’t afford to purchase due to capital constraints. Rowe points out eCommerce requires significant amounts of data storage. “Small companies operating on a tight budget prefer to rent that capacity from us,” he says.
Salience has been doubling its growth every year since 1997, according to Alan Gonsenhauser, chief marketing officer for the Andover, Massachusetts professional sales outsourcing provider. From 1999 to 2000, Salience grew 124 percent.
Salience, which promises to plan, mobilize and execute dedicated field sales forces for its buyers in 45 days, has been able to capitalize on companies’ need for speed to enter new markets during the boom. Outsourcing sales is a new category of outsourcing, which helped fuel its growth. But the company has also enjoyed success by preaching the gospel according to traditional outsourcing providers: companies can restrain their fixed overhead by not building a costly infrastructure that may be tough to shed in difficult times. This also magnifies the buyer’s flexibility.
Today, Gonsenhauser says the idea of not building head count has become another important reason companies outsource their sales forces to Salience. In the current economic downturn, “outsourcing now makes sense both to increase top line revenue and reduce risk. There’s more reluctance to building internal staff,” he says.
The Salience executive points out that 100 percent of the provider’s growth has been organic; Salience has not acquired any of its competitors. The company grew by developing its existing client base and acquiring new clients. “We often take an existing client and deepen the relationship,” says Gonsenhauser.
Gonsenhauser tells of one client that needed sales teams of 10 in three U.S. markets. The telecommunications client was pleased with this pilot program and later expanded into another 44 markets using Salience’s services.
The company has relied on its technology and sales process infrastructure to cope with its heady growth. Salience can mobilize a sales force in 45 days because it maintains a database of 200,000 professional sales people it has already screened. “We’ve been able to leverage our assets by developing a scalable infrastructure,” he explains. The company began to build the database in 1993; its technology updates it hourly.
Just as the Internet death march was beginning in March 2000, Ledgent, a back office outsourcing provider in Torrance, California, was opening its doors. Ledgent has become an Internet statistic of the best kind: it’s a start up that has enjoyed 1000 percent growth its first year and is on target to rack up a 200 percent growth rate during its second year, according to Dave Schnitt, founder and CEO.
Starting from scratch had a lot to do with Ledgent’s success, according to Schnitt. “We didn’t have to try to turnaround something that wasn’t working,” he says. For example, the company built its own shared services center according to its specs. And it was able to employ to a Web-based solution from the outset. Its customers, for example, can view download all their management reports from the company’s Web portal. “They don’t have to touch the ERP system,” the founder continues.
Like most start-ups, Ledgent discovered “getting customers was harder than we figured,” according to Schnitt. Since its first two clients were its guinea pigs, Ledgent outsourced their human resources (HR) and finance and accounting work gratis. Once these clients were satisfied, Ledgent’s sales force used their combined networks “to get a warm introduction to potential clients.”
The company decided to focus solely on the middle market; it has never wavered from that target. “We didn’t try to be all things to all people,” the founder notes.
Schnitt credits his seasoned management team for modulating the company’s growth. His department heads had already created service centers from the ground up before they joined Ledgent. “They have managed fast growth before and know how to deal with complex situations,” he says.
The executives at Ledgent realized outsourcing providers generate profit through leveraging their solution by employing economies of scale. From the beginning, Ledgent shied away from unnecessary customization. “Our solution works for every client – it is mass customization,” Schnitt reports.
The company also has been extremely cost conscious, unlike its dot com cousins. “We raised a fraction of the dollars others raised and we are still around,” he says proudly. Instead of fancy offices, he says Ledgent chose to invest in infrastructure and people.
Finally, Ledgent staffers and customers believe in the company’s mission. “Our people have had to deal with all the nonsense that surrounds a back office. They truly believe outsourcing the back office is the thing to do,” says Schnitt.
MarketFitz is a marketing services company based in Seattle, Washington. Although the company has five service lines, its outsourcing business is outpacing the others. In the last year, it grew from a small portion of the company’s business — just 10 percent — to 50 percent of the company’s total revenue, according to COO Ray Rasmussen. The employee roster has grown from three to 140.
MarketFitz grew its outsourcing business by convincing its current clients that outsourcing their marketing needs was a superior business model. “We had already established a trusted relationship. The clients felt confident in our service capabilities. So it was easier to demonstrate we could save them money and provide more services if they outsourced,” says Rasmussen.
The outsourcing provider replaces its buyers’ internal marketing department plus their advertising agency relationships. It applies just in time resourcing to the professional services arena. “Marketing is episodic. It fluctuates in both the amount of work and the spectrum of talent required,” the COO explains. For example, sometimes companies need event planning and at other times they need crisis planning. “Those aren’t the same people. With outsourcing, you offer access to a set of disciplines on an ‘as needed’ basis. Since companies can never hire everybody they need, outsourcing becomes a compelling proposition,” he continues.
Rasmussen says the company has avoided cash flow problems that accompany fast growth by offering discounts for prepayment. When it signs an outsourcing contract, MarketFitz often hires the buyer”s marketing staff. A prepayment option is one way to the company has avoided cash flow problems. Most of the company’s outsourcing clients have selected this payment method, he reports.
The company’s technology “matters to our clients.” MarketFitz uses ServicePort from Portera, which allows clients to watch the deliverables as they are created via the Web.
Finally, the company’s outsourcing team cut its teeth doing outsourcing deals elsewhere. Its head of outsourcing, for example, worked for Accenture before joining the Seattle company.
“Outsourcing is about leveraging processes that work,” says Michel Janssen, COO of the Outsourcing Center in Dallas, Texas. Each of these companies perfected their processes before they entered the outsourcing world.
Then, the challenge is to attract competent management. “The management team at an outsourcing provider is critical because they need both expertise and process knowledge,” says Janssen. Each of these companies selected key players who were already experienced outsourcing players.
Finally, growth requires capital. New outsourcing customers expect an immediate benefit. The provider must invest in people or infrastructure or both. “Suppliers have to have enough cash to hold on until the expected leverage play begins,” Janssen continues. MarketFitz came up with a creative solution to this problem.
Lessons from the Outsourcing Primer:
- Typically, companies grow in four ways. They:
- Acquire new customers.
- Develop new business from existing customers.
- Recapture former customers who return to the fold.
- Buy another company.