What are the difficulties and advantages faced by small and medium-sized businesses thinking of outsourcing?
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Fri, 02 August 2007 - By Mark Kobayashi-Hillary
Outsourcing has been established for some time as the strategy of choice for large corporations eager to pay specialists for performing non-core tasks, rather than employing in-house teams. But how do smaller firms benefit from the trend?
Small to medium-sized enterprises (SMEs) do not usually possess the scale or internal resources capable of managing the outsourcing process. Yet SMEs make up almost all of the UK’s registered businesses – see 'The small business market' below – and need outsourcing for the same reasons as their larger counterparts.
A lot of small companies are one-man bands. They have enough of a challenge delivering services or goods to their clients, drumming up new business, and completing VAT and tax returns. The prospect of managing something new through a labyrinth of service level agreements can strike fear into the heart of even the most capable free agent. Strategies tend to be personal and specific.
James Ewart, managing director of niche travel firm Explore the World, says that as an SME, it is unlikely his organisation would want a large number of market researchers on the streets of London asking questions of the public to formulate a marketing strategy. ‘My requirements are more along the lines of helping me build a new web site and designing a variety of databases or electronic brochures,’ he says.
Ewart also mentions a recurring nightmare for every SME boss: just keeping the hardware running.
‘Some sort of maintenance of company computers and networks is often needed by smaller companies,’ he says. ‘I tend to sort out my own computer problems, but it is quite likely that other companies might be happy to open their network to an engineer who could resolve problems by remotely accessing the office systems.’
Nivid Technology Solutions offers the type of support service Ewart describes. The firm aims to offer a complete IT department to smaller organisations, and it has engineers that can support clients in London. For most firms, however, support takes the form of remote diagnosis – assuming the problem is not with the network itself.
Pushpendrasinh Jhala, chief executive of Nivid, says there are a number of key reasons why smaller companies should take a look at an outsourced solution.
‘Beyond just cost-reduction or creating a climate of certainty, the smaller organisation needs to take every opportunity it can to focus on its own business – rather than spending time on PC support,’ he says.
‘Such a focus should increase management time available for the core purpose of the business. Outsourcing also gives smaller companies access to experts within the area they are hiring. And gaining access to experienced IT engineers, for example, can significantly help the business by ensuring that the systems are managed well, not just managed as best as possible with the skills available in the office.’
Both Jhala and Ewart suggest that the biggest problem for smaller companies is a lack of understanding about the process of contracting and the process of defining exactly what the service provider will do. ‘Where do I find an external source I can trust that can do what I want with some understanding of what I am trying to do, and how I am trying to do it?’ says Ewart.
‘When you sit at a desk and discuss a problem with another human face-to-face it is a lot easier than when you write your requirements down in a brief. Not all small business owners will be prepared to do this.’
But some small firms are already taking a move towards external provision. Sean Cook, director of graphic and web design specialist Level Three Creative, has experience of not just outsourcing, but also offshoring small IT projects to India.
‘We have used programmers in India for the relatively small programming jobs that developing a small web site may require, such as getting forms to execute on the web server,’ he says.
‘The benefit for a company such as ours is simple – I can get the basic programming tasks I need doing completed cheaply and quickly.’
Cook says that some of the tasks are so small that when he has approached UK-based suppliers they are either not interested in the work, or it goes to the end of a very long queue. There are, however, instances when he has chosen to stick with domestic providers.
‘When I have a more complex database to outsource I have not yet used an Indian firm to do this because I do not have enough confidence to trust an organisation outside the UK for such work,’ he says.
Such reservations manifest through a combination of reasons: language, billing – Cook normally has to pay for services up front – and geographical separation. ‘I realise that some of these issues may be unfounded, but in my experience, I know that if I receive poor service from a local company then I am confident of how to complain and get issues resolved,’ he says.
B.G. Mahesh, chief executive of Greynium – a software and web development company in Bangalore – echoes Cook’s sentiments, suggesting that the offshore service provider has to act more like an extended department of the client company.
‘The outsourcing partner will work in line with the goals of the client and be an even more integral part of the SME than a similar large company outsourcing arrangement,’ he says.
Though it remains difficult to create an effective SME to SME outsourcing relationship, many smaller businesses have started exploring the external service provision option.
And with such a large number of firms looking for assistance, growth in the sector is likely to be the major outsourcing trend over the next few years.
Mark Kobayashi-Hillary is co-author of Global Services: Moving to a Level Playing Field and a director of the National Outsourcing Association. Read his blog at: http://markkobayashihillary.computing.co.uk
SME outsourcing growth
Research group Evalueserve recently analysed the potential for outsourcing to offshore partners on a small scale.
The process is referred to as person-to-person offshoring (PPO), in a belief that the trend is moving more towards a peer-to-peer model for skills rather than just a smaller version of large outsourcing contracts.
As the business schools and globalisation gurus such as Thomas Friedman have suggested for a long time, the internet offers a perfect market for skills and services – and now the theory appears to be approaching some credibility as a marked trend is developing.
PPO consists of services that can be offshored by entrepreneurs that are trying to kick-start their new organisation as efficiently as possible. With technological advances and the growth of the internet, small offices, home businesses and even individuals can use such services.
Risk and cost is low. And the kind of services that are already available include online tutoring, web site development, graphic design, database maintenance and software development.
The value of individual contracts is usually quite low – between $100 (£49) and $5,000 (£2,400) is considered normal – but since the number of consumers and small businesses is enormous, Evalueserve estimate that the potential market in the US alone easily exceeds $20bn (£10bn).
The research shows that between April 2006 and March 2007, the revenue from the small business sector was more than $250m (£122m) and is likely to grow to more than $2bn (£1bn) by 2015, representing a cumulative annual growth rate of about 26 per cent.
Furthermore, because SMEs – or individual consumers – have diverse requirements, the breadth of offshoring services offered is also likely to be fairly large.
Many of these offshoring trends are in the beginning of their lifecycles and others only have a few early adopters, so it is not clear that all of the services being offered will enjoy mass adoption in the long run.
Nevertheless, the value of receiving such services at a significantly lower cost and just in time is clearly irresistible, and therefore the overall sector shows the promise of rapid growth.
The small business market
There were an estimated 4.3 million private sector enterprises in the UK at the start of 2005 and almost all (99.3 per cent) were small businesses (up to 49 employees).
Only 27,000 (0.6 per cent) were medium-sized organisations (50 to 249 employees) and just 6,000 (0.1 per cent) were large companies (250 or more employees).
SMEs together accounted for more than half of UK employment (58.7 per cent) and business turnover (51.1 per cent).
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