International Investor

The future will belong to outsourcing companies who understand the industry culture and demands, and have a solid plan. We spoke to David White, CEO, DRG Outsourcing, a human resource outsourcing company based in KwaZulu Natal, South Africa for their thoughts on outsourcing structures and what the industries’ future may look like.

DRG Outsourcing services an emerging entrepreneurial market of small and medium size companies with outsourced human resource products and services.

Human Resource Outsourcing moves forward

Throughout the world, new terms are describing business models that provide more efficient and effective client solutions. The concept called outsourcing is nothing new… However, sophistication brought about through the internet and globalization has now made outsourcing highly attractive to entrepreneurs, investors and clients.

There are two distinct structures within outsourcing relationships. Functional outsourcing in its simplistic form may include, for example, outsourcing cleaning and gardening functions. An organisation may choose to outsource these activities to an independent business (employing its own staff) who provides the service for a fee. Functional Outsourcing has its roots in the barter system, and will always to be a necessary service within business.

Industry activity and opportunity has arisen in environmental outsourcing. The thought-action behind this type of outsourcing is that every company (large and small) needs to be sufficient within each business environment to achieve success.

Business environments include, in the centre company leadership/entrepreneurship, and surrounding this core, human resources, marketing, finance and accounting, operations and IT. It would be natural to suggest that each company would not be totally efficient within each discipline, and this is the foundation of environmental outsourcing.

Within environmental outsourcing there are two groups of outsourcing suppliers. Strategic environmental outsourcing companies services are strategy focused, linking their client’s environmental strategy with its grand strategy. (An example that we are all familiar with is when an organisation out sources its IT environment/department to a third party). Strategic outsourcing companies employ highly skilled teams to ensure their client objective and market image, and typically trade their services to large organisations.

Administrative outsourcing suppliers, or as termed "new generation" outsourcing suppliers, have taken outsourcing thinking to new heights. Their uniqueness is in supplying clients with administrative "duplicatable" products that service specific activities within each business environment.

An example within an outsource human resource supplier is having products in each activity within a client’s human resource environment. These activities include: payroll processing, contract employee management, employee revenue obligation, consulting and training, employee benefits and staff recruitment. Clients choose outsource human resource activity products specific to their business requirement, and gain a professional one-shop service through the outsourcing companies preferred supplier network. Administrative human resource companies have become an invaluable service to small and medium size companies throughout the world, and the human resource industry has been considered one of the fastest growing globally.

The advantage that administrative outsourcing suppliers have (over strategic competitors) is that their products and delivery process are standard, and hence require less highly skilled personnel to maintain client service levels. Administrative outsourcing suppliers rely on economies of scale and their experience within the industry to market aggressively on price, and to provide clients with ongoing professional advice and products.

The reasons why companies may choose to import skills (employ staff) or outsource environmental functions within a business are common throughout the world and include: drawing skills (and processes) into a business environment, refocusing company resources, or/and managing a unique structure within an organisation. Set-up companies need back up support, and mature companies acquire external assistance to support their business objectives. (Companies realize that much of their time is spent on local and core activities, and that reliable advice from an external consultant is necessary).

Outsourcing is a tool in business that should not be ignored, however, note that statistics record one in four outsourcing relationships as having failed, (WOC USA 2002). The reasons why companies fail are varied, but mostly focus on the factors of value vs expectation. Outsourcing suppliers, who have spent time in the outsourcing industry, understand its delivery and distribution culture, and gain a reputation for reliable and professional client solutions, will continue to expand exponentially. To paraphrase what was said on the day of the Titanic "We have only seen the tip of this outsourcing iceberg".

The core function in an administrative outsourcing company is the processing (and treasury activity) of employee payslips, payroll management reports, third party payment coordination, and contract employee management. Secondary to this core competency, administrative human resource suppliers provide clients with labour audits, hr training and consulting, employee tax management products, human resource software, placement services, medical aids, employee retirement programs… Administrative outsourcing companies may have internal skills to provide secondary services, or may use services of preferred suppliers to provide their "one-shop" human resource service to clients.

Administrative companies’ success is driven from three areas. Firstly, in supplying clients with value payroll processing (and contract employee management services) a relationship of integrity and loyalty is built. Human resource is personal to each organisation, and the regular interaction (gathering of primary data and delivery of formal information) between the client and the administrative supplier helps to build this solid foundation. Secondly, administration companies enhance their service options and company profile through supplier networks, and thirdly, through an ongoing research function. Outsourcing companies need to be aware of client wants and needs, and ensure that the advice (and products) supplied are current within statutory employment parameters. Success in this field is created from long-term intentions and relationships between the outsourcing company, its supplier networks, and clients.

Administrative companies, through their relationship-building core processing function and preferred supplier networks, are able to supply clients with one-source solutions to all human resource requirements. They maintain client relationships through their core processing (and invoicing) service, and provide a marketing infrastructure for the service suppliers grouped in their network. Administrative companies elevate their market posture by combining their seamless hand-over and coordination process between suppliers and clients, and through choosing valued brands as preferred suppliers. Administrative companies provide marketing support to their supplier network through vertical markets, existing client appreciation and referrals, and collective cross selling.

Administrative outsourcing companies typically do not charge traditional per hour consulting rates for services offered. Their fees are recurring based and dependent on units processed. This helps to create a culture of partnership and long-term thinking between all parties. Administrative outsourcing companies are customer and IT driven, and through maintaining a client need and solution focus, are able to combine product groups to provide strategic solutions to clients.

There is no industry more dynamic than the management of human capital, and hence there is a skills barrier for new outsourcing entrants. It is because of this phenomenon that leading outsourcing companies have considered a franchise business framework as an ideal vehicle to distribute products. From a marketing perspective the franchise model provides for broad (and quick) distribution, and secures local preference in supplier choice. Administrative companies products are duplicatable, ie each product sold follows a similar path from marketing to sales to operations and back to the client. These "canned" processes in marketing and delivery maintenance suit the franchise framework and culture well. Franchise strategists believe that due to the complexity outsourcing suppliers face in developing internal controls and stability, they will opt to use tested structures and supplier networks, and will be relieved with the leadership support within a franchise network.

Some strategists have directed thoughts towards creating virtual organisation structures. Consider that, traditionally, human resource has been a cost center within a business, using staff and systems to coordinate people management activities. In a virtual structure, organisations could use similar outsourcing company software, job functions, and preferred supplier networks to service their in-house requirements. These structures will reduce clutter accumulated in most company human resource departments, get activities focused, reduce internal costs… and in some cases turn what was previously a company cost center into a division contributing to bottom line profit.

These two models represent a huge shift in the entrepreneurial opportunity that exists within the outsourcing industry, and at the rate the industry has been moving over the past few years, it will not be long before new and exciting environmental company brands start appearing. With modern e-commerce and technology, there are no longer geographical boundaries in the supply of outsourcing services, and in commonality, most countries worldwide have accepted similar employment management parameters. Multi Nationals will find confidence in the parallel activities that their localized operations encounter, and the lessons gained globally will improve the service and standard of the industry. The next few years should see the whole outsourcing process becoming more consolidated, and focused on improving client delivery processes. The unique advantage in market penetration will be brand acceptability and reliability in delivery standards, and as with all international business, few companies will dominate this arena.

There has been much research and advancement into client outsourcing techniques by many organisations worldwide, and parallel to this core industry has grown a multitude of software programs, marketing consultants, networking advisors… who assist with client attraction and retention services. There are many positive factors influencing the growth of the outsourcing industry, and many predict it will have a positive effect on business through its’ new application and sharing of skills. Contrary to what many have considered, outsourcing does not reduce employment opportunities, but rather enhances them by providing services that help more companies to be more successful more often.

Why some countries seem to be developing in outsourcing more than others is primarily due to location and urgency. In South Africa, there is a new Constitution, eight new labour acts, a new income tax act, and a huge entrepreneurial drive within small and medium size companies. These newer employment parameters have create demand for outsourcing services, and a recent search on a local South African search engine showed 21,000 companies with outsourcing and human resource websites.

Outsourcing is, and will always be about engineering more efficient and effective business process, to result in providing end users of products (and shareholders) better value in their purchase decision. Industry leaders within outsourcing will be those companies that have created client loyalty through superior branding and a reliable image, and have the controls and stability to distribute their products to widespread audiences.

It would seem that the cumulated processes of globalization, e-communication and technology, modern marketing techniques and enthusiastic thinking have converged in one modern business technique… namely, outsourcing.

The future looks bright for sure for those outsourcing companies who have prepared their foundations well, and are ready to cope with environmental change on the one hand and extreme growth on the other. David White, CEO, DRG Outsourcing david@drgoutsourcing.com www.drgoutsourcing.com