Risks and Complexities in Outsourcing Decisions in the Midmarket

For the most part, industry experts say the midmarket is poised for significant growth in outsourcing during the next five years. However, some point out that the nature of midsized companies may hinder growth. Outsourcing Center interviewed providers and advisors serving the midmarket regarding upcoming changes in this market and the risks and challenges that midsized buyers face. This article presents their perspectives.

Capital sensitivities cause survival syndrome

Midsized businesses tend to take a cost-oriented focus in their business solutions. “In a highly competitive market coupled with pressure on resources, they tend to focus their energies on a survival syndrome such as cost reduction or downsizing,” says Swami Swaminathan, CEO & MD, Infosys BPO. This approach is counter-productive as it “takes their eyes off the opportunity to use outsourcing to reengineer business processes and eliminate work streams through technology.”

By taking a cost-based approach instead of a value-based approach to outsourcing, they will face the risk of selecting a service provider that cannot offer a flexible, transformational, global delivery model that would make them efficient, agile, and able to compete with large businesses.

Dina Kholkar, Head, BFSI, TCS BPO Services, points out that business continuity planning (BCP) and disaster risk management tend to be one of the first casualties of cost-reduction pressure. He warns that midsized companies are also at risk because they often lack an established BCP owner to ensure that business need, rather than the commercials, drives the BCP solution.

It’s not uncommon, as an outsourcing project progresses, that additional investment becomes necessary due to new requirements or delays. Rajan Kohli, CMO, Wipro Technologies, says “for midsize buyers, the availability of capital is a bigger issue than for large organizations, and they often lack the flexibility to raise budgets on a large scale. They face big risks from possible delays or glitches in a project. Delays would have a high probability of affecting the business as midsized companies are more vulnerable to disruptions and emergencies.”

Kohli also points out the technology opportunities around cloud, collaboration, and mobility don’t necessarily require large outlays to take advantage of them. “However, these technologies are prone to more risks than time-tested technologies and methodologies. Many midsized buyers would rather not take that risk right now,” he says.

Management capabilities

Mid-market buyers have some advantages in that they can move faster to new outsourcing offerings than large enterprises. However, Kevin Schatzle, President of Allied Digital Services, says they will also have more risk due to possible lack of executive talent and oversight.

One of the challenges in the midmarket is that organizations need more sophisticated, larger service providers, but they lack the ability to manage such providers. “Most providers in the midmarket are niche providers themselves, which necessitates a multisourcing strategy,” explains Ram V. Iyer, Founder and President of The Midmarket Institute, a think tank and portal that focuses entirely on the midmarket. Multisourcing adds to the cost and complexity of managing outsourcing relationships.

Also, unlike large companies, Iyer says midsized companies do not have the ability to “parse the value chain and outsource it to multiple providers. And they don’t know how to re-integrate the value chain.”

Cloud adoption

To compete, Swaminathan at Infosys BPO says midsized buyers will be required to change swiftly and move away from legacy processes and systems. However, it’s not unusual for companies in the midmarket to resist change; thus, he predicts there will be some resistance to adopting cloud computing and platform-based offerings. The risk in not adopting these technologies is slower time to market and remaining in a cap-ex model rather than converting to op-ex.

Iyer at The Midmarket Institute, who describes the nature of the midmarket as “outcome-oriented, control and certainty seeking,” believes there is definitely a market for cloud computing with the appropriate SaaS applications for the midmarket buyers.

However, Iyer says providers need to develop and sell cloud offerings differently to different segments of the midmarket. “For example, for a ‘gazelle’ company, it will be the ability of the cloud/SaaS solution to help the company scale quickly in a particular area or geography. For a ‘small giant,’ it may be the ability to envelope a broad scope of capabilities (think ERP-type integration of multiple capabilities as opposed to just providing F&A outsourcing capabilities).”

He believes the adoption of cloud computing has more to do with the ability of the provider community to develop solutions for particular segments of the midmarket than the willingness of midsize companies to embrace the solutions. “The business benefits have to be clear to the midsize business,” says Iyer.

Don Schulman, General Manager, Global F&A & SCM, IBM, says BPO-related cloud solutions can succeed where BPO offerings have not always been available or accessible to small and medium-sized enterprises. “These standardized, asset-based solutions enable ease of purchase and increased adoption, along with a reduced price of application-level transaction processing. The cost factor, in conjunction with simple implementation and an end-to-end solution, will continue to force consideration of these products.”

Considerations in service provider selection

For those who decide to adopt new technologies to help their return to growth, Kohli at Wipro advises they should select providers that offer more hard-line solutions. More conservative buyers should opt for more mainstream technologies. With either strategy, Partha Sakar, Global CEO of Hinduja Global Solutions, warns buyers not to get locked into rigid contractual structures that restrict growth.

Terrence McCrossan, Division Vice President, Marketing & Strategy at ADP, advises key factors in provider-selection criteria should include financial stability (assuring the provider will have the capital to invest in solutions) and global regulatory compliance expertise.

Midsized companies are vulnerable to IT risks since they have limited executive oversight for various aspects of IT delivery – no CSO, for example. Kevin Schatzle, President, Allied Digital Services, says it’s important for them to select outsourcing providers that have visibility and transparency into the operations and have “a depth of resources and skill sets to mitigate security considerations.”

Angela Hills, Executive Vice President, Pinstripe, points out that, “while smaller-scale projects can be desirable for large outsourcers trying to make their numbers in tough times, they may not be sizeable enough to gain the desired level of attention during times when business picks up.”

Hills advises it is important for midsized buyers to select outsourcing partners that have a long history of valuing relationships with midsized organizations and/or have dedicated resources to support an organization of this size. She warns that some providers only entered the midsize market to mitigate declines during the economic downturn of the past two years, and some may revert back to their core focus during recovery.

Many providers that tapped into the midmarket during the boom times are selling old formulas or large-company formulas that are downsized for the midmarket, says Iyer of The Midmarket Institute. He believes few of them understand the various segments of the midmarket and their unique needs. He also believes that “the more service providers segment the market based on the challenges these companies face and provide solutions for those challenges, the greater the revenues.”

The good news is some providers are developing solutions geared to midsized companies’ price sensitivities and ability to raise capital. For example, Joanne Olsen, SVP, Oracle Cloud Services, says some providers are offering lower pricing models to companies to reduce the entitlements yet not the scope (four application upgrades per year, for example, but limits in the number of users). “This type of offering enables smaller, less complex companies an opportunity to take advantage of the same software as larger companies but at a more affordable cost.”

Iyer at The Midmarket Institute says that, while cost is definitely a big motivator for outsourcing in this market, “the stigma attached with outsourcing in the current job market is huge for midsized companies, particularly for those that are ‘small giants.’” He predicts that, in the absence of a domestic solution, the adoption rate will continue to be low in spite of the buyers’ needs. Iyer says “Service providers have to provide tangible business benefits to offset the potential backlash. ‘Me too solutions’ and self-serving value propositions will not fly.”


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