Missing the Mark in Middle Market Outsourcing – The Flaw of the ‘One to Many’ Outsourcing Model

DEFINING THE MIDDLE MARKET

The term ‘Middle Market’ organization may have many different definitions and for purposes of this article, it shall be defined as an organization having an employee population between 2,000 to 15,000 employees and a revenue base between 20 million to 100 million. These organizations are typically private entities which have achieved levels of success through extremely hard work, fiscal discipline, due diligence in their decision making, bringing on the right talent at the right time, and likely a little luck as well. A number of Middle Market organizations have grown their leadership teams from within. Many of the executives have worked their way up through the organization, gaining the knowledge and expertise in operational areas as they were promoted. The nature of this type of company is often that of a close knit family, with an expert knowledge of and focus on their core product and/or service.

With a primary focus on service delivery for their core business, a number of businesses tend to not have the infrastructure and processes in place to support the needed but costly internal employee systems such as; human resources, payroll, tax processing, recruiting, benefits, time and attendance, etc. As such, many are looking to find a Business Process Outsourcing (BPO) service provider that can either take over the function of these services, or at a minimum, augment inexperienced and/or shorthanded staff. They recognize the key advantages of investing in the above such as; cost savings, and improved performance, however, they feel that they do not have budget or months of employee effort to support such efforts. The issue is not whether these items are important or needed. The real question is how this can be done cost effectively and efficiently to increase value for the core business, without interfering with the required focus on the operations of the day to day business.

REQUIREMENTS FOR AN OUTSOURCING ENGAGEMENT

When the business case has been validated and decision to outsource has been made, a search for an outsourcing partner begins. The typical Middle Market organization is not always in search of an organization to simply come in and transform the way their business operates on a day to day basis. The need is to locate a strategic partner who will help them analyze both the short term and long term needs of the organization in order to help them optimize the tactical operations, so that the organization may focus on the strategic business. In order for this to be successful, this must be done economically and with the proper utilization of change management to minimize any amount of disruption to the core business by a partner with a functional expertise in the area of concern. The outsourcing partner must also demonstrate a flexibility to accommodate the rapidly changing business landscape that is a hallmark of the dynamic Middle Market. Simply, they want an inexpensive, adaptable subject matter expert that will help them enhance the bottom line. The support of a Middle Market Third Party Advisor (MMTPA) may be crucial to ensure that there is an ideal fit when searching for an outsourcing vendor and that the ultimate stated value of the business case is realized. Companies may leverage the experience of a Middle Market Third Party Advisor when it comes to the analysis of an outsourcing vendor in critical areas such as; Experience, Services, Quality, Flexibility, Partnership, Technology, Etc.

ECONOMIES OF SCALE, BEST PRACTICES, AND A FORCED MODEL

With the recent downturn in the economy, we are tending to see more of the larger ‘mega’ outsourcing deals disappear. The large multi-function supporting outsourcing companies or ‘mega-vendors’ have over the last several years believed that a ‘one to many’ model is the answer to finally penetrating the ever elusive Middle Market and have spent a significant amount of effort to eliminate the customized ‘one to one’ models. They believe that using a standardized ‘cookie-cutter’ process, leveraging economies of scale and implementing ‘best practice’, they can enter into the market at a price point that is more palatable to the Middle Market.

The concept of ‘best practice’ is primarily focused around the implementation of a proven stringent methodology to the outsourced process, so that the outsourcing organization or vendor does not have to deviate in any way, shape, or form from how they approach the outsourced process internally. This high level concept allows the mega-vendor to standardize, driving internal efficiency, thus they ‘believe’ that can do more with fewer employees and pass that savings onto the client.

THE ISSUE

Outsourcing providers that are truly able to leverage economies of scale are characteristically the mega-vendors. They come to the market with a high overhead cost per employee, which is typically due to their own internal inefficiencies, or cross-market operational costs that are outside of their core business concern, such as the corporate sharing of costs for delivery centers which may not offer the services of which a Middle Market client requires. For example the sharing of costs for a Financial Delivery Center offshore, when the Middle Market client only needs to outsource their HR Benefits services. This high overhead requires the outsourcing provider to charge more, effectively canceling out or at least limiting any savings they could have offered to the Middle Market client. This then leads to the outsourcing provider pressing the client into a ‘one to many’ model which may or may not fit the needs of the client, or at a minimum causes the client to undergo unplanned change management activities potentially causing service disruption and having an additional cost impact.

‘Best practice’ is subjective at best, every organization takes a different approach to each process, including the mega-vendors. As an example, if a Middle Market client needs lumberjacks in Alaska, the approach to sourcing lumberjacks in Alaska deviates greatly from the approach to sourcing accountants in Florida. The implementation of ‘best practice’ on a macro level, which is the core driver to the economies of scale logic mega-vendors are applying to the Middle Market, means they are implementing rigidity rather than the flexibility that the Middle Market requires. Essentially, Middle Market clients will be required to use a process or a hybrid process that is likely not efficient for them and does not support their core business.

The end result is counter to the premise stated above, that Middle Market companies want inexpensive, adaptable subject matter experts, that understand the needs of their businesses, and who will help them enhance the bottom line. The mega-vendors have had tremendous difficulty meeting these needs because they have the high overhead and in order to offer the economies of scale and they have to be inflexible, requiring clients to implement ‘best practice’.

SOLUTION

The providers that seem to be able to offer outsourcing that is not cost prohibitive yet flexible enough to meet the requirements of the Middle Market are smaller niche outsourcing vendors. They have not grown to the point where they have their own extreme internal inefficiencies, thus they do not have the overhead per employee that the mega-vendors have and are able to pass that cost savings on to the Middle Market customer. They are likely Middle Market companies themselves and understand the need for a long lasting strategic relationship that benefits both parties. Their concept of ‘best practice’ is on a micro level, they only source lumberjacks in Alaska and as this is their core business, they will grow with the Middle Market customer, giving the niche market outsourcer the advantage of greater subject matter expertise and flexibility.

This is not to say that all mega-vendors are unsuitable for all Middle Market consumers, but the ‘one to many’ model is not always the best nor most qualified answer. Outsourcing can be a very complex solution, Middle Market companies should not engage with a mega-vendor simply because they are star struck by the name on the business card or because that is who they read about in the magazine on the airplane. At a minimum, the organization must:

  • Validate the strategic outsourcing plan
  • Make certain the business case is sound
  • Complete a thorough due diligence effort to fully understand what it is they require from a vendor
  • Source experienced vendors that fit the defined requirements
  • Execute flexible contract terms and practical Service Level Agreements (SLA’s)
  • Ensure the internal resources are in place to support the transition effort
  • Employ a comprehensive change management strategy
  • Implement governance that ensures the vendor selected is going to be a true business partner and diligently manage the relationship as such

While Middle Market companies may have the in-house know-how to successfully outsource, it is advisable to leverage and benefit from the expertise of a Middle Market Third Party Advisor who will ensure that each step in the outsourcing process is managed and the strategic outsourcing needs of the company are realized. When a strategic outsourcing arrangement is formed between the client and vendor, a synergetic relationship is created that will produce the desired efficiencies and cost benefits for both parties and allow the Middle Market client to focus on what they do best, their core business.