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 do it oneself.
In addition it is not productive to spend the time worrying about and generating paychecks and filing taxes/withholdings etc for a limited number of employees or add an employee simply to do this strenuous task in house, 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 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. A Subject Matter Expert (SME) as it is sometimes referred to.
They maintain payroll records for thousands of people and know what to file for what type of employee and where.
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 this is important as this applies to most vendors of outsourcing services and this will be a recurring theme.
• 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
• There is no need for the company to set up its own infrastructure or staffing to perform the process.
• They allow the company to concentrate on what is important to its business, its core competencies.
I started with a payroll bureau as that is probably the earliest and most common and recognizable form of business process outsourcing (BPO) and most people are experiencing it 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, it also adds another layer of service to your employees and your company.
Again these companies that provide HR services add value because they are experts, hit the ground running and provide 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 benefits which the small Company will find hard to deliver at the cost that the HR outsourcing company is able to.
Why? because the HR company has critical mass. When the HR Company goes shopping for benefits they represent the cumulative total of employees of all 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 now offer them fortune 500 Company benefits, profit sharing and all!
And do not forget that the small company can do all this and still concentrate on what it does best, executing its business model.
I hope it is becoming clear that outsourcing business processes is not just for the larger corporations but has always provided benefits for small to medium sized companies also, except 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 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 other functions or processes in a Company necessary for it to execute its business model, which are not 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 such as product design and development, research and we can subdivide these processes, 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 definitely are vendors around to whom you can outsource that process.
We also know that there are plenty of contract manufacturers around 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 are not outsource able.
All these opportunities to outsource enable a company to concentrate on what it is best at, its core competencies. For example, a hi tech product company 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).
One of the best examples of how outsourcing liberates a profession/organization to focus on what it is supposed to do and is best at can be found in the medical profession.
As we all know, the core competence of a medical professional is not billing, not filing claims, not any clerical or administrative process, but their core competence 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 and 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 was not what it was cracked up to be when they first started. They do not get all the services they expected and any time they ask for another feature the service provider considers that an upgrade or increase in scope and they 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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