Spinouts often have a difficult time transforming themselves from an in-house division to a BPO provider. Understanding the location of dangerous shoals helps prevent shipwrecks and increases the odds of survival.
The best way to birth a BPO is to seek outside equity capital. "If you can't get private companies investing in you, you are doing something wrong," says Mark Hodges. Hodges, who has experience in the venture capital field, is now vice president of strategy and marketing for Exult, a BPO provider based in Irvine, California. Exult provides comprehensive human resources (HR) process management services for global 500 corporations.
Searching for a cash infusion solves one of biggest threats to a spinout's survival: not enough working capital. Hodges says these new firms are chronically under funded. Exult raised $150 million to fund its startup, but spinouts rarely receive more than $5 million from their parent corporations. "That's not enough," says Hodges.
New spinouts can't earn enough revenue to make up for this shortfall in investment. They have to learn how to compete. The corporate culture of a spinout is far different from that of an outsourcing provider with battle scars earned in the fray of operating in the commercial world. "They don't know how to write a contract. What's a service level? They don't understand the marketplace," he says.
Spinouts have no reference point in the world of sales and marketing since they never had to win a customer. The executives of a spinout have a hard time paying their new sales force a competitive wage and bonus package. "It takes them a long time to come around and pay a salesperson $200,000 instead of $50,000," Hodges says.
The quickest way to solve this conundrum is to find a marketing partner who understands the challenges of selling BPO services. Forging a strategic alliance helps both partners make the new venture work.
The Dangers of Proprietary Software
Sometimes the product is wrong. BPO startups who base their business premise on proprietary software may have problems if the software is not scalable. They cannot achieve the revenues possible by leveraging their solution. In addition, proprietary software might "frighten away" potential buyers who are worried the new venture can't keep up with the latest technology.
Spinouts and shared services companies can be hamstrung if they are forced to keep all the employees in their division. "Look at your talent carefully," advises Hodges. New companies need the best talent available and can't afford deadwood.
Spinouts have a chance if they can ink a long-term contract with their parents. Hodges says the term of the contract must be at least three years. This security blanket provides constant revenue as the new company learns how to performs in the marketplace.
Lessons from the Outsourcing Primer:
- Spinouts must find outside investors to supply a much needed cash infusion. They are typically under funded.
- Spinouts generally don't understand how to compete in the marketplace. They don't pay their sales teams appropriately.
- Forming a strategic alliance with a marketing partner cuts ramp-up time.
- Only keep the best employees. Don't get stuck with deadwood.
- Proprietary software can scare away prospects who worry the new company can't keep up with technology.