As the U.S. Mid Market Spends More on IT, Nearshore Vendors Look to Capitalize

By Luke Bujarski

America’s cash-rich middle market is poised to make significant investments in information technology, according to KPMG’s 2012 Mid Market Outlook Survey. For next-generation nearshore outsourcers serious about the U.S. market, biz dev and process innovation dollars spent here could prove more fruitful than chasing after the ‘whale’ contracts.  With fewer big dollar outsourcing deals coming online, middle corporate America could offer fresher opportunities for nimble, agile-driven nearshore outsourcers that can successfully bring scalable applications and services to market.

Companies in the $10M-$1B in annual revenue range are what organizations like the National Center for the Middle Market (NCMM) call America’s economic backbone. This middle market economy equates to approximately 197,000 companies, 43 million jobs, accounts for 34 percent of total U.S. private employment, and generates more than $9 trillion in combined revenues annually. “If looked at as an individual market segment, the middle market would be the world’s fourth largest global economy,” according to the Center.

A wave of IT spending in the middle market could prove particularly welcome news for fresh Latin American outsourcing vendors hungry for U.S. clientele.

Why should outsourcers care?  In addition to its size and impact, the middle market has also weathered the Great Recession relatively well and is now on solid fiscal footing to invest in IT.  KPMG’s 2012 Middle Market Outlook Survey (companies $100M-$1B surveyed) showed that 62 percent of executives have “significant” cash on their balance sheets, with 60 percent of respondents predicting that their investment spending will increase this year. When asked where they would look to invest, Information Technology ranked the highest on their priority list.  Forty three percent of businesses surveyed pointed to IT as a priority for investment over the next year.

That equates to as many as 7,700 (43%) mid-sized companies that have on average 1,000 to 3,000 employees, and cash in hand for IT infrastructure, services and systems upgrades – not a bad place to start digging for new business development prospects.

Upper Tier Middle Market

Smaller companies generally have fewer in-house resources to hire top-notch IT programmers and other professionals- all good news for outsourcing vendors.  Data also suggest that they feel pressure to offload additional costs, given the competitive landscape.  According to the KPMG survey, the most significant growth barriers over the next year are pricing pressures (increased global competition), regulatory and legislative pressures (rising health care costs), and a lack of customer demand.

The upper tier of the middle market – e.g. companies with revenues between $100m-$1b, are likely to be in the best position to invest more in IT and more comprehensive sourcing solutions, given their management structure and scope of operations.  While the broader outlook for Q3 was less peachy than KPMG’s findings, the NCMM Middle Market Indicator showed that this upper tier was generally more optimistic about making investments, and about the global economic outlook.

Company profiles vary but firms in this segment are starting to resemble multinational companies, particularly regarding sales force capabilities, customer focus, easier access to capital, and a more global footprint.  About half also confirm they have locations outside of the U.S. and a third utilizes global suppliers, according to NCMM.

A Good Fit

A wave of IT spending in the middle market could prove particularly welcome news for fresh Latin American outsourcing vendors hungry for U.S. clientele.  The big multinational outsourcers have historically ignored the middle, focusing mainly on servicing the largest of fortune 500 companies.  This gap opens opportunities for mid-sized vendors that can accommodate both small and larger-scale projects.  According to consultancy firm Novus Origo, “the best providers to deliver on the promise of process outsourcing are Middle Market service providers who truly understand the culture, technology infrastructure and back-office processes driving their mid-market clients”.

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However, in order to go after the middle market, Latin American outsourcers will need to beef up their sales and delivery capabilities in the United States.  Smaller companies are less accustomed to outsourcing.  Only 23 percent of the middle market sources materials and services globally, compared to 49 percent of big business, according to NCMM. The middle market also varies widely in corporate structure and industry type.  Sixty-seven percent of middle market companies ($100m-$1B) are privately held compared to only 30 percent of big business.  About 30 percent are services companies, 12 percent retail, 17 percent manufacturing, and 8 percent financial services.

According to Steve Crandall of Middle Market Executives, an industry journal focused on the lower tier of the middle market, this diversity in structure and verticals makes cook-cutter sourcing models and customizable one-to-many sourcing solutions developed by the big outsourcers impractical and cost ineffective for smaller companies.

Tighter Competition

Likewise, there is less to go around for Latin American outsourcers hungry for big U.S. clients.  Researchers from Everest Group point to a maturing of the industry.  Profit margins are shrinking and global sourcing activity overall had decreased over the last year, according to recent reports and webinars delivered by the firm. As competition ratchets up, Latin American vendors will feel even more heat going toe-to-toe with established U.S. and Indian multinationals.  In a recent interview John Pinto from Sylvan advisory also explained that “billion dollar contracts are growing fewer and fewer. What you’re seeing now is a bunch of million dollar contracts.”  For those vendors willing to sacrifice some profit and to put in the extra work, the middle market could be a good place to shore up new business.