OUTSOURCING FOR SMALL AND MID-SIZED BUSINESSES

By Stefan R. Bothe

Small and mid-sized businesses face enormous hurdles: larger, more established competitors, the impact of globalization, the danger of technological obsolescence, and the need to contain costs. Focusing on one’s core business can be difficult; growing pains can skew a CEO’s perspective and obscure the market, often leading to dangerous results.

Business process outsourcing (BPO) is a strategic tool that enables companies to regain focus on their business, become more efficient, and even rival the systems and control level of larger companies. Most importantly, BPO helps companies focus their efforts on the value-added functions of their business, thereby improving the bottom line.

BPOs vs. ASPs

At one time, application service provider (ASP) services were popular solutions for companies that wanted to harness the functionality and power of high-tech software but could only afford to lease the technology. Companies connected to the ASP to use the software and warehoused data. But many companies realized this was only a partial answer. While the automation and ease of use provided by a good ASP helped a company handle certain functions better, service was often lacking.

In the BPO model, however, service and results are of paramount importance—the focus is on increased efficiency and output. This kind of outsourcing takes place when a company contracts business processes to an outside service provider. The company retains strategic control while the outside service provider takes on procedural control (i.e., day-to-day functions). The BPO provides a service rather than a commodity software product and technology.

BPO is not a new idea. It is a return to the basic business principle of service. In larger companies, taking specific business processes and assigning them to outside professionals is standard procedure. Outsourced functions usually involve a controllable, predictable cost and enhanced adaptability. Functions like payroll and accounting, legal services, and accounting are more efficient when they are outsourced.

But is BPO a viable answer for small or mid-sized companies? It can be. In the past, taking company functions outside the corporate structure was a question of cost. Teams of experts like lawyers and accountants were expensive to outsource. Because of increased productivity and improved communications technology, functions that can be readily automated, like payroll and accounting, can be outsourced at a reasonable cost even for small or mid-sized companies.

To be effective, BPO relies on two elements: organization and technology. The small or mid-sized company should properly plan and conceive any business process to be outsourced. Management should know exactly what it needs from a business process. This will determine the criteria for choosing an outsourcing provider. Outsourcing is also driven by technology. In general, the more technologically advanced outsourcing provider will deliver a greater level of service.

Who’s in Control?

When outsourcing accounting, management generally expects more efficiency, increased focus, and enhanced scalability. The question becomes how much of the outsourced function management wants to move outside of its control. Companies usually procedurize outsourced functions and insist these rules are followed, keeping strategic decisions within the corporate structure and assigning day-to-day responsibilities to the provider. Accounting rules and company standards are set by the company and followed by the BPO provider. The company should maintain control of the outsourced function; the outsourcing provider is expected to report to client company management to give updates and receive permission to make decisions.

A Growing Practice

Statistics show that outsourcing can help businesses. “Market perception has shifted from outsourcing as a way for companies to meet short-term financial objectives to a technique for strong companies to improve competitive positions,” a Gartner Group report concluded. In a joint survey by Chief Executive Magazine and Andersen Consulting, half of the CEOs surveyed said they used BPO strategically. According to a study conducted by Gartner Group and Dataquest, BPO is estimated to grow 21.1% from now until 2004. Dataquest projects the highest BPO growth—a whopping 28%—in the finance and accounting area.

It is clear that strategic outsourcing is emerging as a practical tool for “unbundling” the corporation, and it can also effectively create alliances and partnerships. By next year, the market for outsourcing is estimated to be several billion dollars, according to an Andersen Consulting survey.

Reasons to Outsource

Initially, the decision to outsource can spring from the start-up’s need for a business process in or the need to take a time-consuming business process to the next level. A prime example is the accounting function. The accounting function is handled by management in many new businesses. The CEO of a small or mid-sized company may discover, however, that performing the accounting function takes too much time away from running the company. As the company grows, it may hire an accountant and possibly an in-house controller to manage the books. Over time, the company may decide to create its own in-house accounting department or look for outside help to manage finances.

As the business grows, so too does the need for skilled employees and solutions, making outsourcing a viable solution. Outsourcing allows the client company to grow quickly and efficiently.

When to Outsource

Certain business processes are well suited to outsourcing. These processes are usually labor-intensive, require considerable expertise, and are capable of being procedurized and given to outside agents to manage. Such processes include information technology (IT), accounting, payroll, legal, and human resources. Nonstrategic business functions that operate inefficiently and functions that will eventually become too large to handle in-house would also benefit from outsourcing.

Positive answers to the following questions should alert a company to seek the help of outsourced providers: