By Ram Iyer
The compelling advantages and unique challenges of successful outsourcing for mid-market companies require special attention. This community increasingly requires outsourcing as a means to improve competitiveness, though it is poorly understood and weakly served by many outsourcing providers.
This recurring column will address the unique challenges of mid-market companies and how to overcome them. We will identify the right process for identifying candidate business processes and functions and discuss how to manage them to improve business results.
Defining The Mid-Market
Definitions of the mid-market vary widely. We define a mid-market company as one with annual revenues between $300M to $2B, with between 2,000 and 10,000 employees.
We reached this definition after speaking with many outsourcing practitioners. It is their consensus that such companies are most likely to employ outsourcing for competitive advantage and face unique challenges as a segment of the marketplace.
This definition may vary by industry but includes companies that are generally overlooked by larger service providers.
Mid-Market Gains
Like larger companies, the principal motivation for outsourcing in mid-market companies tends to be cost reduction. Additionally, they may do so for greater focus on the core business, access to scarce skills and other reasons we examined in Outsourcing in the Mid-Market (Outsourcing Central, QI, 2005). Ultimately, all of the reasons are powered by a drive toward improved competitiveness.
Many mid-tier companies have selectively outsourced some business processes but few have embraced outsourcing a strategic weapon for long-term competitive advantage.
However, evidence suggests a sea change is underway in the middle market, fuelled by increasing recognition of the business benefits of outsourcing.
Analysts of the Gartner Group observed in the February, 2004 edition of the Midmarket Report that: "The hottest area for (BPO) consideration among midsize businesses today is back-office administration...The ability to offload mundane, day-to-day tasks is a huge benefit and the primary rationale in the pursuit of BPO. In recent user studies, 46% of MSBs stated that they are either outsourcing or planning to outsource a business administration process. A common refrain from MSBs considering BPO is the need for services that "help me focus on my core business"...A solid, back-office BPO value proposition from a reputable vendor can let you focus on priority #1: your customers."
Outsourcing can markedly improve the competitiveness of mid-market companies. First, it allows companies to concentrate on core competencies that are critical to their business.
Second, it enables companies to minimize risk by tapping into specialists for functions and processes outside of the core competencies. By building a network of specialists, companies can achieve 'best in class' competitiveness without the expense and risk of owning the network.
It is both an offensive and a defensive strategy that produces tactical and strategic advantages.
Unique Challenges
To achieve the greatest gains for mid-market companies from outsourcing, specialized understanding and skill must be applied in configuring, planning, implementing and managing to fit the unique needs and characteristics of these organizations.
Several different outsourcing models can be used, depending upon the specific company, the outsourced function(s) and the objectives. Models used by larger companies are usually inappropriate for mid-market companies but those models contain many useful lessons which can sometimes be adapted for the mid-market.
Mid-market companies want the benefits of outsourcing without penalty for reduced scale. Of course, in these companies, the typical scope of outsourcing is different than in a large company.
So, avoiding the scope penalty might demand creative solutions. For example, a large company may outsource all accounts payable to one vendor and receive significant scale incentives. A mid-market company might consider outsourcing the entire 'quote-to-cash' process – broadening the scope, while limiting the scale of service. Although such a decision may redefine conventional industry practice, it can make mid-market companies very attractive customers for some providers.
Research findings show middle market enterprises value four key attributes in outsourcing:
- Speed-to-benefit – a much shorter time horizon for gaining benefits.
- Retaining control of the business process/function.
- Long-term relationships with continuous value enhancement.
- Flexibility/adaptability to changing business conditions and needs.
In the next several columns we'll discuss the unique outsourcing challenges of the mid-market and practical steps to overcome them. We will review the various outsourcing models along with their respective advantages and disadvantages. Additionally, we will evaluate specific steps mid-market companies can take to select process candidates for outsourcing, work them through the sourcing lifecycle and manage them to get the greatest benefits from outsourcing.
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