Tuesday, February 5, 2008

Surely You Outsource

Almost every organization is outsourcing something even though they may not realize it. Most are at least outsourcing their payroll administration and have the paychecks of their employees prepared by some payroll bureau.

Why? Because they cannot do it any better or cheaper than the payroll bureau, at least not if they intend to comply with all the payroll/tax regulations and filings that accompany the employment of personnel. The bureaucratic and administrative burden for a limited number of employees is too great and the expertise required too specialized to be able to perform this task efficiently in-house.

In addition it is not productive for management to spend the time or add an additional resource to exclusively worry about generating paychecks, file taxes/withholdings etc for a limited number of employees when others can do it for you.

It is much more important that the company focus its resources on generating the sales and the income so that it can pay the employees every month as without the business there will be no paycheck.

So there are a number of important reasons why a company should outsource a function like payroll administration to an outside contractor for a fee.

• The contractor can do it more efficiently, better and cheaper than the employer.
• The employee will get more accurate and timely paychecks from the bureau and both the employer and the employee will have all of their monthly filing requirements taken care of by an expert in this field.
• The employees and company will be better able to focus on the main activity of the company which is to generate sales and profits, so that the employee can get paid their salary by the bureau.
• There is no need for the employer to invest in infrastructure or resources to provide the function.

Although it seems intuitively obvious why the bureau can do this function better and cheaper than most companies could do this in house, I believe it is worth enumerating them in detail as it is important in making the case for outsourcing.

First the bureau serves more than one company, probably hundreds, and does nothing else but administering payrolls and generating paychecks for those companies. This means the bureau has critical mass and is an expert at it. They are Subject Matter Expert (SME) as it is sometimes referred to and maintain payroll records for thousands of people and know what to file for what type of employee, where and when.
Invariably the bureau is certified and has person to person connections with tax authorities, insurance companies the social security people and so on, allowing them to resolve issues faster and better than an individual can do.
Very important with the advent of Sarbanes Oxley (SOX), they are most likely compliant and carry a certification to that effect this helps management of public companies with their audits and SEC filings.

All of the foregoing is important as it applies to most vendors of outsourcing services, will be a recurring theme in this document and their characteristics can be summarized as follows.

• They are SME’s or experts in their field/domain, so they can do it better and hit the ground running.
• They have critical mass, so they can do it cheaper
• They are SOX certified, so you do not have to worry about controls
• They allow their client to concentrate on what is important to its business and focus on its core competencies.
• They eliminate the need for their client to set up their own infrastructure or staffing to perform the process.

I started with the example of a payroll bureau because it is the earliest and most recognizable form of business process outsourcing (BPO) that most people have experienced on a daily basis.

The next logical step after payroll outsourcing involves another of the employee related services, employee administration or better known as Human Resources (HR).
HR outsourcing not only eliminates the burden of generating paychecks and compliance issues, but also adds another layer of service to your employees and your company.

Like the payroll services bureau, the HR service providers add value because they are experts, hit the ground running and have critical mass. One of the major benefits of using an HR outsourcer is that, in addition to performing HR administration functions, they tend to provide a wide selection of employee benefits at a cost that a small company will be hard pressed to match, if they are able to procure them at all.

Why? Because when the HR Company goes shopping for benefits they represent the cumulative total of the employees of all of their clients. So instead of shopping for benefits for say 200 employees they go shopping for 100,000 employees or more and the Insurance companies all of a sudden listen and provide competitive bids.

So now not only has the small Company been able to get their payroll done for their employees they can also offer them fortune 500 Company benefits, profit sharing and all!
All the while the small company is free to concentrate on what it does best, executing its business model.

Some of the larger outsource service providers also have a global reach. Great for multi-national companies struggling to integrate their in house and disparate legacy systems. Using one of these global outsourcers could instantly provide them with global integrated systems with uniform processes and policies, without significant investment.

I hope it is becoming clear that business process outsourcing (BPO) has been around for quite some time. BPO is not just for the larger corporations but has always provided benefits for small to medium sized companies also. It is just that no one ever thought about them in that way and did not call it outsourcing.

As illustrated above, although a function or process is critical to a Company's functioning (employees should be well provided for and paid), it is certainly not a core competence of the Company and definitely not one where most of its time and effort should be spent. Especially not when there are many service providers around that can do this process better, quicker, more efficiently, cheaper and often provide benefits better than any small or even medium sized company could provide on their own.

There are many functions and processes necessary for a company to run its business. Some are not part of its core competence and potentially could be outsourced so that management can focus its attention on the processes that are critical to the success of the business.

We know a company needs people to function (HR process), it needs to buy materials, office stationery, equipment, travel, space and so on (Procurement process), it may need to manufacture stuff (Manufacturing process), it needs to Sell products (Sales process), it distributes what it sells (Logistics and distribution process), it needs to account for all its transactions (Accounting process), to do all this it most likely will need Information technology, (IT process). There are many more processes such as product design and development, research and in addition these can be subdivided, but you get the drift.

There are many vendors around that could take care of many of those processes. We discussed the HR function and know that there are vendors around to whom you can outsource that process.
We also know that there are plenty of contract manufacturers ever since the OEM era, in China, India, Indonesia and other developing geographies.
DHL/FedEx/UPS are all familiar names in the logistics and distribution processes and there are many other transportation companies that now do logistics for you.
And then there are all the call centers that have sprouted up all over the world, performing back-office processes such as customer service, sales support, help desk, airline reservations and so on.
Not to forget the IT service providers, like IBM/EDS/Perrot Systems and so on and do not forget the software code writers in India.

I am sure you have noticed from the list above that there are very few business processes left that a company has to perform in house that can not be outsourced. IT, HR, Customer Service and Manufacturing outsourcing are among the most well known.

Examples of companies that use outsourcing in order to focus their resources on what they are especially good at are many. Hi-tech product companies can focus on design, engineering and product development (Apple; I-pod, I-phone. Logitech; mouse, webcam). A restaurant chain can focus on developing better or healthier menu's and better ways of preparing or delivering product (McDonalds, Coffee, all day Breakfast).

A lesser known but rapidly emerging process slated for outsourcing is Finance & Administration. One of the best examples of how outsourcing of Finance & Administrative processes liberates a profession/organization to focus on what it is supposed to do and what it is best at can be found in the medical profession.

Obviously the core competence of a medical professional is not billing, not filing claims, not any clerical or administrative process, but it is treating and healing patients. This is a classic example that illustrates that outsourcing of clerical and administrative functions allows an organization to do what they do best, without them having to worry about all the administrative chores and distractions.

There are more and more service providers with deep domain knowledge in the entire suite of administrative processes that allow the medical profession to outsource virtually all its admin functions to a service provider.

Taking this logic one step further, if this outsourcing of administrative and financial functions helps doctors to focus on their prime core competence what is there to stop this same logic to be applied to small companies and even large corporations?

And as you might have guessed, Finance & Administration on a grand scale is the newest discipline and process to be added to the outsourcing band wagon and for obvious reasons.

So should you or your company jump on the outsourcing bandwagon? Many companies complain that it is not what it was cracked up to be when they were early adopters. They do not get all the services they expected and every time they ask for another feature the service provider considers that an upgrade or increase in scope and increase the fee.

That is a subject for another edition, where I will discuss how to avoid the pitfalls and the way an outsourcing contract should be approached. The preparation involved, including
• Determining the strategy of what processes are key to the organization and which are candidates for outsourcing, precise descriptions of the functions to be outsourced
• Preparing an extensive Request For Quote (RFQ) so you get the best price.
• Writing up extensive Service Level Agreements (SLA) so you get the service you expect and avoid all these rate hikes and so on.
• www.visioneuropa.com are experts in this discipline and would gladly help you with determining the right strategy, do all your write-ups, RFQ’s and SLA’s to take the worry and the stress out of your outsourcing.
• Call toll Free 866-972-8899 for a free consultation.

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