As telecommuting becomes more of the norm companies may experience a cultural shift where they see their employees spend less time at the office and in other cases no time at all. This emerging trend may cause more companies to consider outsourcing some of their business functions especially the ones that lie outside their core business (i.e. business areas where that don’t provide any strategic advantage to the rest of the business) with common examples being Accounts Payable, Accounts Receivable, Human Resources etc. Outsourcing peripheral business functions isn’t a new concept and has actually been around for at least 30 years especially among large established companies. While traditionally blue-chip companies have been open to these outsourcing initiatives due to already having established and optimized business processes, I think there’s an opportunity for smaller companies and a wider variety of companies to adopt this style of operation model successfully as well.
What is Outsourcing?
So, what is outsourcing? My definition is an agreement where one company is contracted to take ownership and execute a specific operation (or business process) for another company. The company which the operation is outsourced to, handles all aspects of it including hiring and training of resources, and to an extent responsible for internal controls. There are also Service Labor Agreements that define what the scope of responsibility is for the contracted company, while also laying out quality, availability and processing level standards.
Benefits of Outsourcing
There any many benefits to outsourcing for companies including lower costs, freeing up of resources to focus on core businesses, and gaining access to expert knowledge and leading business practices/optimized processes. Not to mention there are also benefits to the company performing the outsourcing work including economies of scale, flexibility in shifting resources from engagement to engagement and also developing specialized expertise in outsourcing.
How an ERP Implementation Can Contribute to Outsourcing
An ERP implementation provides a unique pivoting point to begin offshoring business functions. During system implementations one of the first phases is analyzing a company’s existing business processes to determine their future state processes and eventually document them. Rushing this design phase or poorly documenting these processes is a common pitfall during implementations and can have everlasting negative effects even after go-live. However, with an outsourcing model the implementation is “pushed” to document these processes at a more detailed level or better, yet the outsourcing company can provide leading business processes that are already rigorously documented and proven. Another big part of system implementation is the training and end user adoption phase which can also be a common pitfall during implementations. With an outsourcing model the implementation project is again “pushed” to thoroughly document training materials as the new users of the system are being introduced to the system and the company at the same time. There may also be greater end user adoption and acceptance because the end users never operated in the previous system. Finally, implementing a cloud product eliminates many of the hurdles that may have previously prevented companies from outsourcing. For example, operating on a cloud ERP means there are less infrastructure start-up costs (since no on-prem is required) with outsourcing.
There are a few factors that determine what would make a company ideal for outsourcing. First would be companies that have a high level of turnover. Outsourcing companies are especially well-positioned to handle high turnover as the processes are well documented and there are already other resources waiting in the wings. This ensures better knowledge transfer and continuity. The second factor would be companies that are located in areas that have a limited talent pool. Filling positions in these areas are more difficult and therefore add to overhead and cost. The third factor would be companies that are located in high cost of living areas but have fairly standard back office processes. If a specialized skillset isn’t needed to execute these processes, then an outsourced resource can be just as effective as hiring a resource in a high cost of living area. The last factor would be companies that are seeking to decrease costs quickly, for example a company being acquired with the end goal of being flipped for a profit or a startup needing to justify a high valuation. In the case of management companies, this outsourcing strategy can be easily deployed and repeated. They are also specially positioned to take advantage of economies of scale by having the same outsourced team handle the processes for all companies in their portfolio. For a start-up looking to IPO outsourcing can be used to become profitable sooner and whereas in the past this may not have been considered due to company culture, the wide acceptance of telecommuting provides an opportunity for this to change.
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