Outsourcing has taken on a new dimension among large companies as low-wage economies give multinationals an easy route to driving down costs and increasing efficiencies. But small and medium-sized enterprises (SMEs), according to technology trend-watcher Gartner, have yet to embrace outsourcing for mainstream business processes such as finance, IT and HR.
“It is really early days for SMEs,” says Cathy Tornbohm, business process outsource (BPO) research director at Gartner. But Deloitte research director Chris Gentle argues where big companies go, smaller companies have to follow: “As a smaller company you have to respond. You can’t just ignore it or you will find yourself uncompetitive on price,” he says. “There is no doubt that the dynamics of the market are going to make it even more difficult for SMEs to operate effectively,” he says.
Unsurprisingly, he argues in favour of greater outsourcing of standard business processes, whatever the company size. “Small companies need to ask themselves if they really need to own an HR function, an IT function, a finance function, in order to be successful. Can they find efficiencies by giving this work to someone else and focus instead on the areas where they really make their money,” he asks.
For Tornbohm, the future for SMEs lies in taking the idea of “standard processes” literally. She says there are already instances where BPO is available to SMEs as a “factory” service, or “shared services centre” (where the outsource provider sets up a one-size-fits-all service for a number of SMEs). These SMEs usually come from the same vertical industry. “The definition of a shared service model for us is less than 15 per cent customisation for each customer,” she says.
Mainstream outsourcers, Tornbohm argues, such as IBM Global Services and EDS, need more agility to address the SME market. Small company contracts, potentially worth only five-figure sums, are hardly worth it, unless a clutch of SMEs aggregates to create a bigger contract.
She suggests a “bundled” solution that encompasses a whole range of functions and adds up to a large outsourcing provider’s starting point—around £1m. But contracts should be carefully managed for best results. “Often, when SMEs do outsource, they only put out a portion of a function to the outsourcer and still do a lot of the function themselves. This is not efficient: the aim is to hand over as many processes as possible and to streamline the business,” she says. She maintains, though, that few outsourcers with an outsource “factory” set up to offer an in-depth range of services to SMEs. “No-one has quite got their shop set up to do that yet,” she says.
But there are specialists that target small companies, according to Preet Chahal, a director at ihotdesk, which offers managed IT outsourcing services to SMEs. Chahal sees positive benefits in using smaller suppliers, which he says can “build up layers to reach a bespoke solution” and help clients with budgeting and projected spend. Smaller outsourcers, he says, win points on service, speed and consistency—“clients tend to see the same people for support and account management. There are companies that are very good at what they do and solely focus on this, rather than providing many services.”
In India, Som Sarma, vice-president of Satyam Europe, which specialises in total solutions outsourcing, is receiving an increasing number of small business enquiries. “Take design; the cost per hour of a design consultant in any of the industrial companies is enormous. There is a big IT component to design and we are seeing a real demand now for that side of things to be outsourced from India for companies in a whole range of sectors,” he says.
Sarma anticipates the rise of shared-service centres for SMEs, arguing that value-intensive industries, such as those with a high design component, can achieve a step change in output for a small investment. “The inhibiting factor for SMEs is that many of them have never done any outsourcing and they approach the whole area with fear,” he says. One concern is the that their intellectual property will be pinched, he adds. “I see the SME outsourcing market picking up a little more as global outsourcing settles down,” he says.
Norman Pitman, EDS’s executive leader (EMEA) for BPO, notes a growing interest in medium-sized companies, but is quite clear that at present “EDS could not put together a commercially compelling offering for a smaller company. Outsourcers have been regarded as whale-hunters, focused on the multi-billion pound industries. But there is an opportunity now for us to bring value to mid-range companies,” he says. From EDS’s perspective, of course, it’s about developing future clients—tomorrow’s blue chips or takeover targets.
Pitman believes it is in helping a company reach a strategic goal that outsourcing comes into its own. For companies in the £50 to £100m range, Pitman says, the driver is often the skillset that a large outsourcer brings. “About 60 per cent of the 16,000 people we have in the UK have joined EDS through TUPE [employmemt protection] deals. A lot of our senior management come to us from other companies. One of our skills is identifying talent and developing talented individuals. An SME can’t match that,” he says.
But ihotdesk’s Chahal refutes this. “They can offer more money than a small provider, but we offer a better work-life balance.” In smaller outsourcers, he adds, there is a greater variety of work and potential: “Views are heard at the top level and the opportunities are there as the company grows.”
Small company, big hitter
Outsourcing’s often used to cover off low-skilled roles. But its a boon for small firms in need of top flight directors. By Anthony Harrington
If the essence of outsourcing is simply “sourcing”, there are already many innovative outsourced services on offer from newer, smaller suppliers. Among them is the idea of “in-sourcing” finance directors and HR directors (where in-sourcing is effectively just an alternative term for a branch of outsourcing).
The SME market is perfect for an in-sourcing service that can provide an FD or an HR director, working anything from two days a month to two days a week.
Sandra Pilson, who launched HR in-sourcing company PEO People in March, offers a bundled set of HR-related services including outsourced payroll and HR administration, as well as an HR executive. The HR professional signs on with PEO People and is contracted to the client on a part-time basis, while partners such as IFA Origen (part of the Aegon Group) provide any outsourced HR benefits services that the client company requires.
Client companies tend to have between 100 and 600 staff, according to Pilson.“HR processes in this size of company are generally weak, but these are knowledge-based organisations, with highly paid, skilled staff in sectors such as IT, pharmaceuticals and financial services,” she says. “They have very demanding HR requirements that they often struggle to service in-house.”
PEO People sees its role as enhancing growth and works closely to establish a potential client’s business strategy and the impact on its people, rewards and training requirements. “If the SME’s strategy is high growth, what does it need to fill the skills gap between where it is now and where it wants to be in one or two years’ time,” asks Liz Field, head of talent at PEO People. HR in-sourcers will undertake a talent audit for the client, then analyse performance management systems, roles and competencies, then create fitting reward and recruitment policies for the client company.
Similarly, FDUK brings a strategic element to small business finance. Founded in Bristol by Jeff Macklin and Stephen King, FDUK has a growing list of associates, all experienced finance directors ranging in age from 30 to 60-plus. “Our clients are all owner-managed businesses and our sales proposition to them is that they all need and can benefit from some level of support from a fully experienced FD, even though they can’t justify employing a FTSE-500 level FD full time,” says Macklin. Contracts can be for a set number of days each month or for the duration of a specific project.
“Most of our clients will have their own bookkeeper, so this is not about doing accountancy work. It is about being a strategic-minded FD, helping the business to analyse where it’s strengths are and what it could do going forward,” he says. There is plenty of demand for this kind of service. “We have gone from nothing to 37 people in four years, and we now have half a dozen competitors where, four years ago, we were alone in the market,” he comments.
Liam Wall is one of FDUK’s associate directors. “What I do for SMEs is improve the prosperity of their businesses by helping them to make astute business decisions,” he says. Formerly FD for a couple of property companies, Wall has been freelance for four years and thinks the FDUK concept is a great service to SMEs and a great opportunity for FDs such as himself.
“What interests me most in this model is the variety of challenges it brings. You get to do the real strategy part of things. You are not spending hours fiddling around with spreadsheets. So the quality of the work you do, as well as the quality of the advice you bring to the client, is much higher as a result,” he says.
One of company he’s working with already has a CEO who is a fully qualified accountant. “The point is that even he recognises the value of a fresh perspective and a fresh pair of eyes on the business,” he says. What makes the outsourced FD model particularly strong for the client, he believes, is that he can turn to any or all of the other FDs who make up FDUK for advice on a tricky issue.
Case study
London City set to take off
London City airport is handing over its IT operation, including staff, to a third party so it can get on with quadrupling passenger numbers by 2030 instead. By Kevin Rozario
In May, London City became the first airport in the UK to outsource its entire IT and communications infrastructure to Geneva-based air transport IT solutions firm SITA.
In the case of an airport, IT might be considered a core element of the business, but London City’s managing director Richard Gooding has other ideas.
“We have an ambitious masterplan for the next 25 years which forecasts eight million passengers annually (up from two million today) and jobs set to rise from 1,500 to more than 4,000 by 2030,” says Gooding. “To do this, we need the right technical support and IT services—it’s not something we could achieve with a small in-house department.”
He views IT and telecoms as utilities and better placed in the hands of specialists so the airport can focus on development, much of which hinges on servicing lucrative City business, as well as the extra visitors already coming in preparation for London’s 2012 Olympic Games. SITA has a seven-year contract with the airport and has taken on London City’s three IT staff. Francesco Violante, CEO designate of SITA, notes there is a growing trend among more airports to turn to outsourcing on an increasingly large scale.
SITA sees the London City contract as a strategic deal that allows it to develop other business opportunities at the airport through London City’s existing customer relationships and knowledge. SITA also has a blueprint of sorts to follow.
Last August, it signed a 10-year IT outsourcing deal at Düsseldorf airport, the first of its kind in Europe. This is a much bigger project, with 63 IT staff transferred to SITA’s payroll. “In our first 10 months of that contract we have been able to make the IT department think on much more commercial lines,” says Norbert Steiger, senior vice-president of outsourcing at SITA.
“The airport operates just like a little city and an outsourced IT department can view itself not simply as beholden to one company but an enterprise that can also seek business contracts from other tenants at the airport.”
At Düsseldorf, the IT department acts as an IT hub for other regional airports in Germany, adding value to the country’s third largest gateway. Adding value through outsourcing is something London City will be keen to do in the light of bids that have been made for the airport recently, and which have resulted in the airport’s Irish owner, Dermot Desmond, appointing investment bank Morgan Stanley to evaluate prospects.
