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Business Risk

Outsourcing Takes Away the Scary Part of ‘New’

New. The word sounds delicious. New markets. New products. New revenue streams. But new is also synonymous with risk. What if the venture doesn’t work? The marketplace hates the product? The software is riddled with bugs? Someone else got there first?

“The biggest risks for businesses are they take too long to change, they do the wrong thing or they don’t do their job well,” says Michel Janssen, chief operating officer of the Outsourcing Center. Outsourcing can mitigate much of that business risk by sharing the risks as well as the gains with the outsourcing supplier. “Outsourcing supplies you with someone who is totally focused on your success,” continues Janssen.

Opening Up A New Territory

Agilent Technologies chose to outsource when it decided to open a new market and concentrate on a specific product. Agilent provides technology-based equipment that supports patient care in and out of the hospital. In 1998 the Andover, Massachusetts division decided it wanted to intensify its concentration on its defibrillator business on the west coast. “We realized there was a business risk. There were a number of variables – size of the territory, the cost of the launch, its productivity. If we miscalculated, we would have a big dollar exposure,” says Melvin Boaz, Agilent’s U.S. sales manager, hospital resuscitation.

Its current sales effort includes 30 direct sales people plus manufacturer’s reps. However, competition was so intense Boaz felt signing on more manufacturer’s reps would not get the job done. “We wanted a more focused approach,” he explained. However, Agilent “does not believe in hiring and firing.” The average tenure in the resuscitation division is 20 years. “That’s the old HP mentality,” explains Boaz. (Agilent is a Hewlett-Packard spinout.) So the company was reticent about hiring people for a new venture where it could not guarantee employment for the next 20 years.

At the same time, “we needed to move quickly because our market pressures were great,” continues Boaz. Even if Agilent decided to hire its own sales force, Boaz says that wasn’t an option because assembling a sales force “was too time consuming.” So Agilent decided to outsource its sales force, an option it had never considered before. “It all boiled down to one fact: outsourcing could mitigate risk,” says Boaz.

Agilent outsourced its sales force to Salience, an Andover, Massachusetts sales force outsourcing provider. Even though the recruitment process occurred between Thanksgiving and Christmas, Salience had a sales force in place in 60 days, marvels Boaz.

In addition to the speed to market, outsourcing the personnel in the new venture became a fixed cost. “We didn’t have the corporate overhead associated with a sales force,” Boaz points out.

Boaz reports the outsourcing arrangement “was a rousing success.” Together, the two companies grew the defibrillator business 30 percent, above Agilent’s original expectations. In fact, when Agilent decided to repeat the same campaign on the east coast, it retained Salience again.

“How do companies in this quick time economy take advantage of emerging possibilities? They outsource. That’s where outsourcing shines,” says Alan Gonsenhauser, vice president and chief marketing officer for Salience. He adds that if a new venture doesn’t work out, “it’s easy to get out if you outsource.”

Global Roll Outs

Janssen says outsourcing is crucial in a global roll out. “You can be big in the U.S., but you don’t have the infrastructure in place to do an international campaign,” he explains.

IQ Commerce realized the importance of having a European partner when it decided to tackle the market “across the pond.” The Saratoga, California company provides online direct marketing solutions to its buyers. Its “click and stay” software allows shoppers to complete an entire transaction without having to leave that Web site. The application service provider’s (ASP) goal is to help its buyers capture, convert and retain their customers who are using all forms of digital media.

On February 20 iQ Commerce formed a joint venture with eVerger, a London, England funding company, to create iQEurope. Christopher McCarthy, vice president, marketing and strategic services for iQ Commerce, says the California company joined hands with eVerger to ease its entry into the European market.

Unlike the United States, which shares the same tax base, language and monetary system, Europe is a union of individualistic countries with different languages, cultures and currencies. “In Europe you need in-country managers who can speak the language, know the customs and cultures, and have connections,” says McCarthy. EVerger, the 10th largest media buying company in the world, has those connections.

The ASP executive says speed to market “was of the essence.” The strategic alliance with EVerger allowed iQ Commerce to “get a leg up on the European market.” Of course, eVerger received a sophisticated customer interaction technology that can be deployed quickly. The duo wanted to cement iQEurope in the marketplace “to prevent any competition from coming in,” continues McCarthy.

McCarthy says iQ preferred a joint venture rather than an outsourcing relationship because the JV “strengthened the bond between the two companies. Your fortunes are tied together more explicitly. You win or lose together.”

Outsourcing also slashes business risk by forcing the buyer to define the project or process and set expectations. This is a difficult but crucial task that many companies avoid until they write their first outsourcing request for proposal. “This exercise clarifies for you what you want, so you know what to do,” says Janssen. In addition, outsourcing allows the buyer to measure supplier performance so it can hold its supplier accountable.

Mitigating Risk During Times of Change

At no time is this more important than during times of change. Our story, High-Quality, Impermanent Solutions (in this issue), deals with technological change. Today, technological change is a business risk. Companies, know they must learn how to maximize the benefits of eCommerce, and are taking assertive actions to engage in the digital economy while acquiring the requisite infrastructure, according to Michael Fischer, president, strategic business development at EDS, a Plano, Texas information technology outsourcing supplier. “We have to fix the airplane while it’s flying,” he says.

Because its core competency is “the rapid and effective utilization of new technology,” EDS has experience in integrating the new with what is already working, removing business risk for its customers.

Outsourcing suppliers also have more experience in the new technologies. “We are at a higher level than is possible internally because we do the process over and over again,” says Gary Klemens, director of application outsourcing implementation services for Keane Inc., a Boston, Massachusetts eSolution and application development company. Outsourcing to a supplier who is better at the process increases the odds of your success and lowers your business risk.

Fischer says companies outsource to EDS because the company takes operational responsibility for what it builds. “We are focused on the business performance of our customer,” he says.

And that’s the essence of transferring business risk: You know you are engaged in the right relationship when the supplier is just as concerned about your success as you are.

Lessons from the Outsourcing Primer:

  • Outsourcing transfers business risk from buyer to supplier.
  • Companies opening up new markets or introducing new products can cut the risk through outsourcing.
  • Outsourcing suppliers are accountable and care about their customers? success.
  • Outsourcing also mitigates some of the business risk of migrating to new technology.

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