Jared WadeOutsourcing was once a competitive advantage reserved for major corporations. Setting up delivery centers in India or elsewhere required a massive investment. Forgoing that meant partnering with a large service provider, and doing that required a knowledge of the marketplace, the right connections, and a volume of business large enough to attract a legitimate vendor’s attention.
But things have changed. Due to technological advances and rising fiscal pressures in every sector, small company outsourcing to the nearshore is easier than ever. Whether that is a small ramp up for a short-term project or pushing off an entire back office function, like payroll and HR, to a third party, the IT revolution has allowed cross-border collaboration that wasn’t viable for most even five years ago.
Hurdles remain, however, and one of the largest is psychological. While many smaller companies want to jump into foreign waters in theory, they are worried that their low-value contracts will led to subpar service and unresponsive attention from major providers.
“The looming risk that is still out there in the small- to mid-market is that they worry about being a small fish in a big pond,” said Aaron M. Oser, partner and leader of global sourcing at Pillsbury Winthrop Shaw Pittman LLP.
This is a legitimate concern. There is a zero-sum element on the vendor side: Any resources used to serve a small-time contract are not going towards the deep-pocket clients that really drive revenue. “It’s a cost-of-sales issue,” said Esteban Herrera, partner at ISG. “Sales are extremely expensive in this business, and the return has to be large. Not only that, they are not proportional: It costs just as much to pursue and win a $10 million deal as it does a $100 million deal. Where do you think they will focus?”
Herrera says that small companies are not on the radar of the big boys because it simply isn’t worth their time. “There isn’t a single large, global provider who has ever asked me, ‘How can we win more business with smaller companies?’” he said.
Becoming a Whale
Others in the industry say it isn’t so simple. While looking at a potential client’s annual revenue and potential to spend is the first thing all vendors do, there are other factors to consider. “What really matters when evaluating an outsourcing deal is the potential of growth of the client and what we can do to help them to achieve the objectives,” said Daniel Carrasco, global solutions director at Unisys.
So unlike some competitors, Unisys is very interested in winning more small clients. “There are many more small fish in the ocean than whales,” said Carrasco. “And sometimes a fish could transform into whale.”
The key for a large provider that wants to cater to this market is flexibility. It should develop offerings tailored for the smaller fish. Rather than rolling out the same large, expensive suite of solutions that it pitches to large corporations, the vendor should come with a basic package that includes optional features depending on client needs.
CGS, a New York-based provider with service locations from Chile to Eastern Europe to India, chases this business through a similar approach. “It takes great skill in meeting the demands of this market with the right balance of agility, process, and proven solutions,” said Frank Bianchi the company’s VP of sales and technology outsourcing.
He agrees that a market full of small fish can be lucrative — and will only grow with time. These companies face similar risks to their larger counterparts all while having greater constraints on hiring full-time in-house experts. So the need to partner with vendors on solutions for concerns like disaster recovery, data storage in the cloud, and cybersecurity protection will only grow. “We expect the pace of outsourcing to continue well into 2020 as the small- to medium-sized businesses better understand the price points and ROI,” said Bianchi.
Upfront Costs Matter
Convincing the small fish of this reality is easier said than done, however. In his advisory role, Oser is working with a handful of suppliers to speed up the procurement process and make pitching mid-market clients more economically viable. Especially with one emerging (unnamed) technology, his clients see vast untapped opportunities at the mid-market level. This is low-hanging fruit for bigger suppliers.
The numbers have to add up though, meaning that the initial resources spent in negotiation must be lower. So companies are working to come up with a more-ready-made, pre-negotiated arrangement that doesn’t require expending so much time and money during the procurement process.
“Large firms are better positioned now than ever before to meet small-company needs, so there is a definite opportunity,” said David Hartley, principal of technology advisors services at UHY Advisors. “The technology is much better. The staffing models are more flexible.”
He does note that delivering services to a company with $30 million in annual revenues is much different from a company with $30 billion. And running a single $5 million outsourcing engagement is much different than running fifty $100,000 engagements. So the cost structure is different, the profit model is different, and the expectations are different. But that shouldn’t be a problem as long as it is understood. “Both sides of an outsourcing deal need to understand how they will make money and what level of service will be provided,” said Hartley.
Steven Rothberg founded College Recruiter in 1991. He has overseen sizable growth in his small business, which like Career Builder or LinkedIn offers a job board where clients pay to advertise openings fit for students and recent graduates.
Rothberg says that his decision to outsource has been critical to success. Even now, the company still only has 12 full-time employees, but because it relies on vendors for so many services, he says the company punches above its weight. “When you look at body count in terms of W2, we produce about twice as much as a company our size because of those sourcing relationships,” said Rothberg.
He started by finding a local payroll company then later did the same with human resources and employee benefits. Partnering with Insperity, the company was able to offer 401K, comprehensive health care, vision, dental, and various other types of insurance.
Those benefits have been instrumental to retention and recruitment, with Rothberg noting that he has hired people who said they normally wouldn’t consider working for a company so small since they usually have bare-bones benefits plans. “We have a benefits plan that’s comparable to a Fortune 500 company,” said Rothberg, adding that there is “no way we could offer all that stuff” without using a service provider.
He was still nervous last year, however, when the company switched providers. Insperity had been an fantastic partner for years, but ADP cold-called him saying they could do the same thing much cheaper. The numbers were good enough — dropping costs for the company and every employee — that Rothberg had to consider a change. “That answered the financial piece of our concerns, but we were not ready to switch until we knew it would work for our employees and that we were going to receive the customer service we were accustomed to,” he said.
He made the change, and so far everything has gone perfectly post-transition. But it was a nerve-racking decision as Rothberg knew he might be sacrificing things that had become core to operations just to save money.
College Recruiter also outsources much of its IT work, including the development of its new website — which took eight months through a provider instead of an estimated 16 it would have taken otherwise. He also currently has an Indian firm upgrading the search functionality job seekers use to make it more dynamic. The work is cheaper and faster, so he has been pleased. But he also says that he will consider using nearshore in the future — which he has done on smaller data management and graphic design work — given the time-zone and geographic advantages.
No Time Like the Present
Rothberg’s path hasn’t been the norm. Most companies his size have not had a long history with service providers and are reluctant to explore the options due to a lack of knowledge or cultural factors. Many have a way of doing things, so there is a reluctance, especially from those with an average employee tenure of 20 years. “Human nature kicks in,” said Oser. “You have some push back from the back end in even doing these types of deals. But that rear guard undermining change is largely not a viable answer anymore. Management has basically demanded that they need to do something.”
Essentially, small firms need to start now. Perhaps it is prudent to begin with small functions — and certainly not core functions. But the offerings from cloud providers, IT specialists, and HR experts have reached a level of sophistication that leaves little reason to use in-house personnel. “It doesn’t make sense any more for many smaller companies to run their own IT department or process their own payroll in-house,” said Hartley of UHY. “Smaller companies are growing increasingly confident and comfortable exploring creative ways to solve problems and move their business forward.”
For many, this will free them up to focus on their key areas and grease the wheels for more efficiency and expansion. “Small companies that grow up with these services starting today will be the big companies of the future,” said Herrera of ISG. “Their operating model will have an inherent competitive advantage that legacy-saddled large enterprises of today won’t be able to match.”
Cloud adoption and non-traditional outsourcing models are also flipping the cart. “The cloud business model is bringing the democracy to the small and medium companies,” said Carrasco of Unisys. “This allows them to have access to the same level of technology and quality of services that the large organizations have — with a price that they can afford to pay due the economy of scale.”
It is imperative that small companies understand their place in the pecking order. They may want to look to small service providers or do enough shopping among the big players to ensure they find one that actually wants — not simply tolerates — their mid-level deals. But that just means having caution, not fear. “There is no reason for this market to feel like a small fish in a large pond,” said Bianchi.
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