Clear the Decks

• Clear the decks.pdf

Clear the decks.pdf

Fast-growing companies know the value of outsourcing – from the back office to the boardroom. But there are some disadvantages in running a virtual business. By Jacqui Walker

Soon after Tony Cross took over running his parents turf-grow­ing business four years ago, he realised that the business, Caboolture Turf, had a big problem. The casual labourers he was hiring to lay turf were unreliable and labour costs varied wildly, often exceeding the $1 a square metre he was charging clients for the service. It would cost us $1.20 [a square metre] to lay if it was a hot day and the labourers were drag­ging the chain, but if they were fresh and it was an easy job, it would cost us 80¢ or 60¢ a square metre.” Sometimes the turf layers did not turn up for work and Cross would be forced to lay the turf himself.

Cross says he was wasting time and money so he decided to outsource. “Now I deal with one guy and he gets all of our work. He gets [a fixed rate of] 77¢ a square metre for it.” Cross can accurately forecast the cost and value of each job and better manage his cashflow. He no longer has to deal with workers who slack off or fail to show up, and he reckons it has saved his father up to 10 hours a week managing workers. Caboolture Turf now makes money from offering clients the turf-laying service on every job, and Cross has time to concentrate on expanding the business.

BRW Fast 100 companies are at the fore­front of the outsourcing trend. 83% outsource at least some functions. Sixteen per cent outsource more than 20% of functions and 3% of the Fast 100 companies are virtual businesses, outsourcing more than three ­quarters of their functions. By contrast, a recent study by CPA Australia of 600 small businesses found that only one in three out­sourced any business function, and just 14% said they would consider outsourcing in the future. BRW’s survey found that 42% of the Fast 100 companies plan to outsource more this year.

Nearly all (93%) of the Fast 100 compa­nies that outsource say it has improved their business. They love it because it allows them to focus on their core business and bring in expertise they do not have themselves. Cross says: “The decision [of whether to outsource] gets back to knowing what your place is in the business … We don’t know anything about hiring staff, we are better off growing grass.”

The most commonly outsourced func­tions are legal services (54% of companies) and accounting services (50% of companies). Thirty-nine per cent of companies outsource information technology, and marketing and public relations are also heavily outsourced (24% and 32%). Some companies are even outsourcing management and strategy. Nearly 20% of Fast 100 companies are outsourcing functions overseas.

Messagecom, a company that produces telephone “on hold” messages for small and medium-size businesses, is outsourcing business strategy. The company’s manag­ing director, Troy Cooper, says he has been outsourcing strategy to DC Strategy for the past 12 months. Cooper went to DC Strategy for advice on how to franchise his business nationally. It’s s probably one of the best things we have done … what has happened along the way is that DC Strategy have identified structures, productivity for staff … all these things we wouldn’t have thought of. As your company grows it’s easy to take your eye off the ball on those small things but [the consultants] identified them and put in strategies to fix them.”

Cooper, who also outsources payroll, public relations and information technology, believes that small, fast-growing companies often need the skills of a company three times their size.

“We didn’t have the skills we needed on staff, and the only way to access these skills was to employ someone or outsource … We didn’t feel we had 40 hours a week worth of work, or couldn’t afford the salary of someone who would be doing this work. So rather than find someone who could do a little bit of this and a little bit of that, we decided to outsource and get a specialist.”

He is monitoring what is spent on outsourcing and will replace the consultants with employees when there is enough work to keep them busy full time.

Jay McAlister, the chief executive of the Imoda Group, a group of advertising, construction and manufacturing busi­nesses, has outsourced accounting and the role of the financial control­ler. McAlister says he has checks and balances to make sure there are no mistakes.

He prefers this to employing in-house accountants and finance managers because it means he does not have to deal with employees taking holidays at busy times, or sick days, and he has access to eight finance staff when the business needs extra help.

He believes outsourc­ing the work makes the people doing the work more accountable and allows him to make quick decisions and big changes to his busi­ness structure, such as buying a new business, without having to deal with underperforming staff. “This way, hav­ing a whole accounting team sitting externally, the way we do business because we do change and adapt a lot, it works for us.”

In the long run, he thinks it is no more expensive than having the finance people on staff because of the flex­ibility it offers.

EVERYONE IS DOING IT

OUTSOURCING FACTS

82.6%            Outsource products and services

16.1%            Outsource more than 20% of products and services

19%            Outsource work overseas

93%            Believe outsourcing has improved their business

42%            Will outsource more this year

OUTSOURCE WHAT?

54%            Legal services

50%            Accounting services

39%            Information Technology

32%            Public relations

24%            Marketing

22%            Design

12%            Manufacturing           

4%            Strategy

 

The disadvantages

The chief executive of the branding consultancy The One Centre, John Ford, would once have agreed with the idea of outsourcing most functions. But his experience of outsourcing has changed his view.

“Initially when I started the business I didn’t have any capital or security so I built the model around having a network of very expe­rienced high-profile people that became part of The One Centre, a virtual agency if you like.” But he found that after projects finished, there was no “legacy”.

“Its very hard to build a culture when there’s an outsourcing solu­tion. You manage your bottom line so that you have a very flexible workforce, but you don’t create any momentum and culture and energy and community sense within the business … Unless you commit to people and build a philosophy for them to work to, and which they can reflect, the company has no soul and has to reinvent itself every six to 12 months.” Two years after founding the business, Ford reversed the model; now at least 80% of work is done by his own staff.Ford says the right culture within a business can enable it to han­dle any challenge. ‘We want to gather an expansive array of talents within the building, like Universal Studios or Dreamworks.” He says developing an in-house team offers efficiencies as well, because time and energy are not wasted on developing ways of communicating and working for each new project. He admits that his bottom line is not as good as when he was largely outsourcing, but his ability to adapt and respond to opportunities is better “I have a team to bring to bear on that … and I also have an entity that runs when I am not here.”

A partner at PricewaterhouseCoopers who specialises in fast­ growing enterprises, Andrew Sneddon, says that if companies do not have all of their employees focused on developing consistent cus­tomer service, they tend to fail. And if quality declines, or customer service is in any way degraded, a company could be outsourcing too much.

The managing director of the property management company Property Gallery, David Pillinger, believes there is good and bad out­sourcing. He decided against outsourcing property condition reports.

“You really should know the condition of the property rather than reading someone else’s report.” But he thinks some things should be outsourced, and in the past financial year he spent about $80,000 on coaching and training his 18 staff.

Pillinger has a corporate coach for himself, a coach for the sales staff and another who focuses on team-building for the whole busi­ness. Pillinger says coaching has improved staff motivation: “We have outsourced overall decision making in the business by putting it in a forum where we get a lot more buy-in from the staff.”

“That way you get a lot more loyalty and the people are more com­mitted to the business and the projects, and those that aren’t commit­ted just leave.” He says there is no way he could have done this on his own. “There’s no way you can have a 360-degree view of yourself.”

Outsourcing offers fast-growing companies the chance to spread their risks and expand with limited working capital, but it has draw­backs. Companies must be careful to make sure quality is not sacri­ficed, relationships with clients are not hurt, and that staff are with the business long enough to develop a company culture and have the opportunity to commit to the founder’s vision.

BRW, pp 98-101
13-19 October 2005