Outsourcing was a hot topic in November’s Presidential election, with President Obama slamming candidate Mitt Romney for sending jobs overseas to take advantage of low-cost labor, and Romney (late in the campaign) accusing Obama of having shipped Jeep manufacturing jobs to China (an accusation that swiftly unraveled).
But for businesses in the $100 million revenue range, the rationale for outsourcing is generally less controversial, more strategic, and, for the most part, has little to do with sending American jobs overseas. It’s more about finding partners who can do what you need to do better than you can.
Global competitors, the Internet marketplace, and higher customer expectations have raised the bar for small-to-midsize businesses (SMBs). The products and services delivered by smaller companies have to meet or exceed not just those of their comparably-sized peers but also those of larger corporations with vastly greater resources. In many areas, these smaller companies simply cannot hope to compete using a do-it-yourself approach.
Instead of focusing on the cost advantages associated with moving jobs overseas, smaller businesses are using outsourcing to punch above their weight in critical business functions, including IT, transportation and logistics, and procurement. For smaller businesses, there are three questions that need to be answered when defining targets of opportunity for outsourcing:
- Can we gain economies of scale? When superstorm Sandy slammed into the East Coast last October, we saw both how well and how poorly our disaster-recovery systems and processes worked. In New York, for example, as much of the local infrastructure (roads, subways, tunnels) flooded, very few of the large companies in hard-hit, low-lying lower Manhattan experienced major system outages. These companies routinely spread their data-processing loads across multiple data centers, affording them a measure of resiliency. But a midmarket company generally does not need multiple data centers, and signing up for redundant storage with a data-center provider can be costly. Enter the outsourcers.
For example, Envision EMI, a provider of educational seminars, reduced the risk of losing (or losing access to) critical client data by contracting with firms that host Envision’s order-entry and marketing databases, respectively. The outsourcers assume responsibility for the redundant infrastructure that helps Envision weather storms. This arrangement enables Envision to focus on business imperatives rather than on disaster recovery.
- Do we need specialized skills and/or complex systems that are not core to what we do? When Alfred Angelo, a $100 million–plus manufacturer and retailer of wedding gowns and bridesmaid dresses, needed to get its products from its Chinese distribution center to a network of more than a thousand company-owned stores and independent retailers, and do so quickly and reliably, it turned to a major third-party logistics provider. Alfred Angelo could not have afforded to develop the systems and management tools, or the infrastructure, by itself. Its business is brides, not logistics.
- Do we need new technologies to spur growth? As midmarket companies grow, they inevitably become more complex. The systems they rely on for transaction processing can rapidly become inadequate. Until recently, the solutions used by larger companies to tackle business complexity were much too expensive for midsize companies. Today that’s changing as service providers are offering high-end business-intelligence capabilities (largely by subscription through the cloud) to the SMB market. In this way, smaller businesses can take advantage of new planning, analytic, transaction, and management tools without making back-breaking capex investments.
For midsize companies, outsourcing should be less about labor arbitrage and more about acquiring the capabilities heretofore monopolized by larger competitors. As we head into 2013, midmarket firms have a greater opportunity than ever before to focus their resources on the most critical, value-added activities while relying on partners to fill in the gaps.
Mark Neibart is a managing partner and co-founder of Camber Advisors and Gerry Mendelbaum is a Camber Advisors managing partner. Camber Advisors offers operational and technological expertise primarily to private-equity firms and their portfolio companies.