Corporate layoffs command the headlines. Inflation numbers are jumping up and the NASDAQ index is diving down. Yet some industries still can’t find enough people to meet their growing orders. Are we heading toward the locust years or new boom?
While economists are debating the answer, businesses have to decide what to do. Should they hire more people to be ready for a surge? Or should they lay off staff to stay lean and mean in preparation for the hard times ahead? Decisions today can affect the bottom line tomorrow.
But one thing is clear in the cloudy horizon: “Outsourcing is one of the best tools to deal with change in uncertain times,” says Michel Janssen, chief operating officer of Outsourcing Center in Dallas, Texas.
For example, Spherion, an Atlanta, Georgia outsourcing vendor, staffs a center that designs and prepares sales proposals for a large company. The outsourcing buyer, worried about recession, cut its sales force. Then it asked Spherion to maximize its use of technology and minimize its people to service its smaller sales force. “We were able to cut our staff to accommodate a decline in demand,” says Kay Colson, vice president, solutions development for Spherion.
“Outsourcing makes companies more nimble when the business landscape shifts,” says Alan Gonsenhauser, vice president and chief marketing office of Salience, an Andover, Massachusetts sales force outsourcing vendor. “We can provide a much speedier entrance or exit.” Salience guarantees it can assemble a dedicated outsourced sales force in 45 days to take advantage of sudden windows of opportunity.
Economic hard times often burden corporations with “stranded costs,” according to Claude Hartridge, senior partner responsible for global business development for PricewaterhouseCoopers (PwC). When companies downsize, they may sell off a business unit. But the departing division’s† support staff remains with the parent, creating a “stranded cost.” “Outsourcing fixes that,” says Hartridge, who is based in London, England.
Say a corporation has a shared services center of 1,000 people that serves four divisions. When the parent sells one division, it now only needs 750 people in the shared services division. After the sale, the parent is now paying salaries for 250 people it really doesn’t need. Hartridge says vendors like PwC will employ those 250 people with other current or new clients. “Outsourcing allows companies to easily reduce their head counts. The responsibility for managing the number of employees is ours, not theirs,” he adds.
Outsourcing Cuts Cost
Outsourcing also reduces costs, an important consideration during economic downturns when businesses are scrambling to streamline their operations to save money. Hartridge says PwC may move its service centers from high cost areas to low cost locations to generate cost savings. Companies headquartered in expensive locales don’t have the flexibility to do that.
Outsourcing turns fixed costs into variable costs, Janssen points out. The burden of the head count or the facilities is transferred to the vendor’s balance sheet. The buyer can then move its cost base into investments that are definable, measurable and controllable.
This shift helps the buyer’s corporate balance sheet. In bad times, the switch makes the company’s overall financial position look better to Wall Street. In good times, the move to variable costs paints the company’s financial picture in rosier terms, making the company more attractive to its bank or venture capital investors who must provide the capital for growth.
Outsourcing Provides Expertise
Outsourcing also provides expensive expertise companies cannot afford when sales are slow. “Outsourcing takes the management of a function that is non-core and puts it into the hands of experts,” points out Lesley Pool, director of corporate marketing for ACS, a Dallas-based information technology and BPO vendor.
Process expertise is critical in times of† business constriction or expansion. During the down stage of the business cycle, companies are strapped for cash and must invest in their own core functions to remain competitive. During an upswing, companies can’t win the talent war. The dearth of seasoned employees occupied the headlines last year.
“Outsourcing allows you to use other people’s money to continue to invest in non-core functions to achieve economies of scale,” says Janssen of Outsourcing Center. “The outsourcing vendor will continue to invest in that process even when your internal cash to do so becomes restricted.” Better use of newer technology allows outsourcing buyers to take advantage of unit price efficiencies because the vendor can consolidate other customers’ volumes with yours.
Finally, outsourcing transfer risk from the buyer to the vendor. On the personnel front, buyers do not have to spend precious capital hiring and training employees only to have to let them go when times turn bad. “That’s a big financial penalty,” says Kyle Andrews, vice president and founding partner of Pretium Partners Inc. in Columbus, Ohio. Pretium Partners helps outsourcing vendors sell the business impact of the outsourcing solution. “Outsourcing limits the risk by letting the vendor’s dollars pay for the hiring and training.”
In times of uncertainty, companies need to shed their risk, cut their costs, reconfigure their balance sheets and remain flexible. Outsourcing makes all that possible.
Lessons from the Outsourcing Primer:
- Outsourcing allows companies to ramp down quickly.
- Outsourcing takes fixed costs and makes them variable, improving the corporate balance sheet.
- Outsourcing transfers risk to the supplier.
- Outsourcing allows companies to remain flexible in uncertain times.
- Outsourcing lets experts handle the non-core functions.