>> Your Corporate & Business Solutions Partner in Asia

By N.Y. Ho
Director - Business Solutions Group (http://www.corporatevantage.com)

“We knew competing with larger businesses was a huge problem. We just didn’t know how to compete on a level playing field without the additional headcount and high overheads that affect our bottom-line.”

This is the often heard complaint of small and medium businesses when assessing their competitive advantage or indeed disadvantage against a larger and better staffed competitor vying for the same work.

The Challenge

In an era of intense competition affecting the margins of many companies, businesses are finding that they cannot afford the layers of administrative overhead needed to operate their core business. This is not helped by escalating wages, high workforce turnover and a looming recession. Fortunately, outsourcing offers these businesses a way out by not doing everything themselves while continuing to meet the demands of everyday business activities.

Outsourcing Defined 

To “Outsource” is to contract out some functions of your business to an external party. It doesn’t mean that you will be loosing control of your business. Instead, it puts you in much greater control over your business in terms of efficiency, functionality and cost savings.

Outsourcing had gained great popularity from the time when companies who needed to cut costs moved some of their processes like manufacturing and assembly work to a cheaper destination where wages and operating costs were much lower. This of course contributed to increased profit margins and the trend has continued unabated because of this immense benefit.

Although lower costs remain the primary driver of outsourcing, companies have over the years realized the other major advantages of outsourcing such as access to industry experts, quality of service, more available funds, stable pricing, larger virtual workforce, greater flexibility and more time to focus on revenue-generating core business activities. As a result, outsourced functions today have grown to include:

• Consulting (e.g. corporate advisory, M&A, JVs, due diligence, contract strategy and drafting)
• Company strategy and formation
• Accounting and tax preparation (i.e. routine work)
• Information Technology
• HR (e.g. payroll, employee screening, permanent and interim staffing)
• Sourcing, procurement and quality management
• Manufacturing and assembly (e.g. contract manufacturing, offshoring, co-packing)
• Supply chain (e.g. network optimization, logistics and distribution services)
• Office (e.g. turnkey setup, maintenance)
• Executive concierge, etc.

How Outsourcing Can Work For Your Business?

“It’s a hard time to be in business. Then again there’s no such thing as a good time to be in business. The main idea is to be in business”

Someone once made this statement which was very thought provoking. To be in business, you’ve got to move faster, think better and work smarter. For example, if you are in the marketing and distribution business, you may not need to hire a large support team dedicated to the functions like those listed above to add to your overhead. To keep the business nimble and focused on its revenue-generating core business, these functions may be outsourced to companies who can perform the same work more efficiently and economically than doing it in-house.

A good example is IT where the high costs associated with recruitment, staff salaries, benefits and specialized trainings to keep updated with the latest technologies and systems can be prohibitive for a small and medium sized business. Once this function is outsourced to an external party, management will have more freedom and peace of mind to focus entirely on strategic business development and growth priorities. Prospering the business then becomes a reality.

“We were hesitant at first. But after seeing how easy it was to outsource and the benefits of a much streamlined, more nimble and growth focused organization, we knew we made the right choice”

Outsourcing is never about cost alone. Other key benefits would include:

• Cost Reductions - By way of reduced fulltime headcount and costs associated with recruitment, salaries, benefits, trainings and staff supervision. Also, concerns around being able to retain highly trained staff that are in high demand diminishes. Additionally, any capital intensive functions that are outsourced reduce equipment investment, obsolescence and depreciation that otherwise would be borne wholly by the company.
  
  As the outsourcing vendor operate on leaner overhead structures and have a tighter reign on benefits and expenses, these additional savings indirectly benefit the clients.

• On-Call Experts - Having an industry expert perform an outsourced task can result in cost savings for the company as tasks can be completed more efficiently and quickly. With these experts on-call, the company has effectively enlarged its capability to go after bigger and better business opportunities requiring these specialist capabilities.

• Stable Pricing - In an outsourcing contract, a company is able to achieve a stable price structure and accurately budget such expenses without exposing itself to cost surprises. This is true with retainer service agreements which offer the best of both worlds for a fixed-fee-fixed-hours priority service and a scalable add-on fee structure to allow for increased business requirements.

• Service Quality - This is expected to be high on the agenda with the new vendor-client relationship. Additionally, a company will experience a higher service quality level from both the outsourcing vendor and a leaner ‘best-of-the best’ in-house staff. There will be total service quality improvement all around.

• Increased Funds - Outsourcing allows more funds to be made available for investing in revenue-generating core business activities instead of tying up capital in non-core activities that are now outsourced.

• Larger Workforce - Companies can now enjoy the services of a larger workforce without adding fulltime headcount and expense. There is complete scalability to meet any surge in business activity and a sense of job stability for fulltime staff during a business slowdown.
  
  Additionally, the flexibility of having a larger workforce means smaller companies can effectively compete with larger companies for major projects to achieve greater profits. This becomes a very potent tool for any small and medium sized business.

• Greater Focus on Core Business - The bottom-line is a company’s management needs to focus on strategic issues and directing business towards revenue generation to keep the business profitable and viable. Outsourcing frees management from some of the administrative and ancillary service function worries.

Potential Downsides 

To be fair, outsourcing has its potential downsides as well. Perhaps the most important of all, outsourcing vendors are in reality business partners where there is a mutual benefit to see each other succeed. Choosing the right outsourcing vendor is as important as choosing the right business partner.

There is a misnomer that bigger is better. Many business leaders associate success and experience with a name. This is especially so when it comes to consulting companies and service providers offering specialized expertise and knowhow.

There is nothing wrong with bigger firms. But the truth is you really need to know who exactly is doing the work for you beyond the sales call. Often times you will get very senior consultants fronting up for that important client meeting. Thereafter, the actual work is relegated to recent graduates with limited corporate work experience to manage all forms of deliverables.

Smaller firms on the other hand will place only experienced consultants with substantial years of experience simply because they are smaller and keeping their reputation is of paramount importance.

This is often the reason why many experienced business leaders, for reasons of cheaper cost, dedicated service levels and business operation intimacy, prefer smaller boutique outsourcing vendors who are more committed to the success of the company compared to larger established ones with many clients and a higher cost structure which ultimately gets cost passed on to the clients themselves.

Secondly, do not be too hasty to replace an existing job function with outsourcing. Unless there is a clear performance issue, management should always attempt to redeploy the affected staff to another productive business function. This helps assure talented staff who are contributing to the company bottom-line to feel secure about their jobs and keep the overall staff morale up. Also, keeping some internal capability to provide a basic level of service is a prudent measure.

In Conclusion 

While outsourcing brings a clear advantage to small and medium sized businesses, including new business setups, it is equally applicable to larger businesses wishing to rationalize their overheads to gain more flexibility and to operate with a healthy bottom-line.

The future of outsourced services will undoubtedly continue to grow as a result of the marketplace and it is how well you can leverage these services that will help you gain an advantage over your closest competitors.

N.Y. Ho has leadership responsbility for Corporate Vantage's business solutions group which specializes in helping businesses establish a solid and lean operating presence in Asia which includes Asian manufacturing outsourcing and offshoring, supply chain optimization, vendor quality management and business infrastructure development. He can be reached at .

 ? Back to Top