Ephor Group – Outsourcing

Jump to:

• Philosophy
• Investment Criteria
• Marketplace
• Market Opportunity
• Outsourcing Adoption
• Selling Outsourcing
• Outsourcing Trends
• Outsourcing Key Performance Indicators (KPIs)
• Outsourcing Resources
• ITO information
• FAO information
• HRO information
• MSO information

Ephor Group's Philosophy on Creating Wealth for Outsourcing Partners

Ephor Group’s continued focus on the outsourcing industry is driven by several key trends including:

1. The need for all small businesses and emerging enterprises to outsource multiple business processes and functions to remain cost competitive and to gain access to capabilities/expertise/resources/tools otherwise unaffordable;
2. Evolving market dynamics such as the increased need for mobility, risk management and governance requirements;
3. Highly fragmented mid-market;
4. Economically efficient model driven by recurring revenues (long-term contracts, valuations, high switching costs);
5. Operational performance driven by people performance, scalable customer acquisition and cost models;
6. Increased dissatisfaction with service levels from Fortune 500 vendors presents small business and mid-market opportunities.

[ BACK TO TOP ]

Key Criteria for Ephor Group Involvement and Investment of Resources

• Market Opportunity (Size, Trends, Position, etc.)
• Recurring Revenue Base (Industry Specialization, Productization, Vertical Sectors, Technology-enabled, Raving Fans)
• Scalable Operating Model
• $1M+ Revenues
• Management: Ephor Group backs existing management with domain expertise and the desire for continual improvement.
  

[ BACK TO TOP ]

The Mid-Market Outsourcing Marketplace

The outsourcing marketplace is a highly competitive and fragmented industry that is poised for enormous growth in the next decade as companies fight to maintain their competitiveness and profitability. The major drivers for this growth include:

1. Costs: As competition in your industry sector and/or region intensify and cost pressures continue to escalate; everything from rising benefits and healthcare costs to labor arbitrage to the cost of capital for companies is continuing to widen.


2. Competitiveness:
   1. All businesses have limited resources that must be narrowly focused on developing the core business.
   2. Demand for Service Level Agreements (SLAs) to ensure quality is managed and controlled.
   3. Knowledge and access to intellectual property.
   4. Access to operational best practice that would be too difficult or time consuming to develop in-house.
   5. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
   6. An organization can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone (i.e. the outsourcer is the change agent in the process).


3. Agility: Markets and industries change. The need to be able to respond to changing macro, competitor, customer, talent, and supplier change is an imperative for any business operator that takes a pragmatic view of their risks.
   1. Scalability: the outsourced company is better equipped to handle fluctuations in capacity and utilization.
   2. Outsourcers improve operating leverage (a measure that compares fixed costs to variable costs) by offering businesses a move from fixed to variable cost and also by making variable costs more predictable.
   3. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
   4. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

The outsourcing marketplace is a multi-hundred billion dollar industry encompassing tens of thousands of providers selling hundreds of different products and services. When you consider that virtually every business outsources some business process, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace. [ BACK TO TOP ]

Outsourcing Market Opportunity

In the early days, the term "Outsourcing" typically meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the small business and mid-market outsourcing market encompasses almost all business functions and processes; essentially anything not deemed to be core or a competitive advantage can (and perhaps should) be outsourced.

Currently, outsourcing takes many forms as some organizations contract outsourcing service providers to handle distinct business processes, such as benefits management or marketing. And many organizations outsource entire functions. In fact, the majority of businesses outsource to three or more business processes ranging from very common (payroll, benefits, staffing and information technology outsourcing - ITO) to entire functions: financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities, procurement (supply chain) and logistics.

Aggregate Sizing of the Market Opportunity

Mid-tier companies struggle to remain competitive in a global marketplace. Although these firms had considered outsourcing in the past, appropriate solutions were generally lacking, or the price was too high because of the dearth of competition. Today, huge market opportunities exists.

[ BACK TO TOP ]

Outsourcing Adoption

Most Common Outsourced Functions and Processes

Why did outsourcing take so long to catch on among mid-sized companies?

One key reason is the lack of stable, sizable outsourcing partners focused on the middle market. Big consulting firms and outsourcing providers have not developed efficient customer acquisition and operating models to service the small business mid-market with their high set-up expenses and the shorter contract lengths on which many smaller firms insist.

While there exists a plethora of smaller, thinly capitalized operations – often offshoots of CPA or bigger company consulting firms that cover just one city or region, the market opportunity to solve the outsourcing needs for small business is prevalent.

Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, and web development.

[ BACK TO TOP ]

Outsourcing Types & Descriptions

• Business Process Outsourcing (BPO) is the contracting of the operations and responsibilities of a specific business functions (or processes) to a third-party service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.


• Financial Accounting Outsourcing (FAO): Finance & Accounting Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. Some analysts see analytical services superseding the FAO market over the next decade as organizations have data overload yet are short on analytical talent, and ripe with business challenges requiring decision-making information. FAO analytical services can provide:


• Process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling.
• Leading organizations are looking at their entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections).
• In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.


• Procurement Outsourcing: Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Vendor management of indirect materials and services are typically the most popular outsourced activity. Procurement outsourcing solution that addresses the total procurement value chain for maximized results, including sourcing, savings implementation, and transaction management.


• Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.


• Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.
• Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.
• Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.
• Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.


• Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.


• Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.


• Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.

[ BACK TO TOP ]

Selling Outsourcing to the Small Business & Mid-Market

Economic conditions require employers to operate more efficiently and achieve more with fewer resources. But today's strategic partnerships are also about achieving ongoing efficiencies, innovation and improvement to the mutual profit of both partners. Outsourcing deployed effectively can reduce costs, increase agility, improve service levels.

Beyond startups, there is always a group or committee responsible for evaluating and purchasing outsourcing solutions. The sales challenge as a provider is identifying these committee members, their roles, and creating buying and sponsorship from all influencers.

Outsourcing Decision Drivers: The Two-Headed Monster

1. Cost/Value aka Price-to-Value
2. Relationship or Emotional Motivation of the Buyer

Both decision drivers are required to get a deal done.

What to look for in an outsourcing provider?

1. Pricing:
• Implementation Fees,
• Training costs
• License versus Subscription versus Pay-per-Transaction
  (pay-for-performance)
2. Services Delivery Model: Technology Augmentation versus Platform Providers
3. Holistic versus Point oriented
4. Flexibility and/or customization requirements
5. Success Stories

[ BACK TO TOP ]

Outsourcing Trends

Employers are looking at outsourcing to better control costs and remain flexible costs structures. Technology is also a major consideration as most companies do not want to manage multiple providers and point solutions nor do they want to re-invest in upgrades or replacements.

Prevalent Outsourcing Trends:

1. An opportunity for mid-market niche providers to emerge as major consolidation among the larger providers continues.
2. Buyer adoption will continue to prefer a “Phased” over a “Big-Bang” approach.
3. The demand for analytics will continue to increase.
4. Industry specialization will continue especially from services-oriented and labor-demanding industries.
5. Mid-market adoption will continue and more demand from manufacturing, healthcare, and services sectors.
6. SaaS adoption.
7. Shift towards more strategic projects.

[ BACK TO TOP ]

Outsourcing Key Performance Indicators

What Are the Keys to Creating a Branded Company in the Outsourcing Sector?

1. Vertical Practices and Solutions;


2. Perform Culture that continually innovates and improves account management, shared services, quality, and productivity;


3. Communication systems, vehicles and formalization; and


4. Engagement synchronization regarding the performance against targets/expectations:
• Advanced coordinated metrics,
• Shared accountability.

Outsourcing Key Performance Indicators:

"It's difficult for mid-tier companies to find a partner with the right organizational fit and scalability, particularly if they need services on site in a number of locations; however, forward-thinking organizations have adopted online services delivery models are realizing results." – Garry Meier.

[ BACK TO TOP ]