Improving Processes, Going Offshore Best Ways to Reduce G&A Costs
Outsourcing service providers servicing the midmarket (defined here as companies with $1billion to $3 billion in annual revenues) face challenges that differ from working with large corporate buyers. How do they provide the same type of services as they do for enterprises and stay profitable, especially when offshoring labor arbitrage is something they want to avoid?
The midmarket challenge
Midmarket firms feel "a greater sense of urgency" to remove general and administrative costs than the larger enterprises do," observes Mike Atwood, an independent senior outsourcing consultant. A just-released FAO report from HfS Research found 90 percent of midmarket companies outsource to reduce cost, according to CEO Phil Fersht. (Fifty percent reported they outsourced to transform and reengineer processes.)
Atwood says there are two sources of opportunity:
- Improve their process by consolidating or simplifying what they do or use technology more effectively
- Do the work in a lower-cost location
Many consulting firms can help companies improve their processes, but these projects normally take significant investments in time and dollars and generally have a significant risk due to the change management required throughout the company, according to Atwood. Many midmarket companies are community-oriented, and moving the work to a lower labor-cost location seems unpatriotic and can cause labor unrest. So what is a company to do?
"Midmarket companies want the same things as the large enterprises do, but what they want more than anything else is ways to enable their growth," says Rich Dobbs, Senior Managing Director, ACS Finance & Accounting, ACS, a Xerox Company. "They're going to have much more upside from a growth standpoint than the large enterprises do. They want a solution that frees up their resources and takes infrastructure cost out of their business model so that they can invest more in growth opportunities," he says.
Dan McCue, Senior Vice President, Finance and Accounting Services for Sutherland Global Services, agrees the midmarket expects to be treated like large enterprises. However, he says they "tend to be more risk averse and have less outsourcing experience. They often require expert financial skills like planning and analysis. The midmarket F&A solution approach must address these issues and provide uncompromising quality of standardized service."
Mark Vengroff, CEO, Vengroff, Williams and Associates, sees three areas that challenge providers in reaching out to the midmarket:
- Few providers with a global footprint are providing services into the midmarket, and many midsize companies are selling now on a worldwide basis. Inversely, providers that have a global footprint don't necessarily sell into the midmarket. That becomes a prohibitor for a lot of these companies.
- Servicing midmarket companies requires a high degree of customization.
- Midsized businesses don't have the infrastructure or staff to provide significant support around the IT.
The offshoring conundrum
Atwood says cost reduction in the midmarket arena is "about how you do the work and where you do it." Unfortunately, he says the only way to maximize savings is to do both "or you leave money on the table."
The challenge is offshoring may be less attractive to a prospective midmarket firm, according to Peter Ryan, Lead Analyst for Contact Center Outsourcing and BPO for Ovum. He says midmarket firms are "more likely to request that the service provider deliver the services from a more localized spot rather than doing the work offshore."
Vengroff agrees that labor arbitrage in this specific market is more unpopular than in enterprise firms largely due to the business culture they operate in. "Their key customers dictate a lot of the special practices at these midmarket companies; they have to comply to keep that business. They don't have as much luxury to dictate their own process or policy to those key customers. It really comes down to what providers can do to provide savings outside of labor," he says.
Atwood says going offshore "is simple and quick and is an easy way to get back your investment." In his experience, companies typically can reduce their costs by 30 percent within 14 months if they offshore. On the other hand, improving processes "can be risky because it's messy. The people, process, even the business have to change."
How some service providers are responding
"The service providers seem to be positive about this opportunity," Ryan reports. "Equally, they're realistic. They understand that in the current economic climate, outsourcing contracts have taken a hit. Many companies are not going to embark on any new projects until they start seeing signs of a robust recovery."
Dobbs says midmarket FAO "is a much different value proposition. If I'm signing up a midmarket enterprise and taking on accounts payable, there are five to ten people in their accounts payable operation. I have to pool together several deals in that range to get the same scale I got from one company offering me 100."
Providers have just one answer for organizations with business cultures resistant to offshoring: process expertise with state-of-the-art technology to improve efficiencies to drive cost savings. McCue agrees, saying the key for service providers is enhancing the IT ecosystems of the midmarket firms.
Atwood says some service providers have developed more standard packages that allow for larger leverage. Many have developed "process directories" that allow them to show a client what the best-in-class process is and how to implement it. These same providers have service centers scattered throughout the globe. This allows them to work with companies to improve processes and then move the work to a low-cost location when they are ready.