Mid-market enterprises (MMEs) are like the Rodney Dangerfield of the business world, “They don’t get no respect!”
Their competition attacks from above and below, as large, global enterprises seek to capture more and more market share; while smaller competitors are popping up from unlikely sources, globally as well as from non-traditional, localized operations. Their staff is stretched thin, and with tighter margins and zero-based budgeting, being tasked to “do more with less.” Investment in new technologies is scarce, forcing them to run older technologies, patching and prodding systems with resources that are often aging and over-taxed, delivering information that is marginally compatible with the demands of the new business dynamic. And they struggle to attract and retain the talent to help lead them into this brave new business world that they are facing.
At the same time, the ways that companies do business are rapidly changing. Consumers are demanding unique, “concierge” like customer service models. New and emerging technologies are driving rapidly changing marketing activities, with an uncertain ROI. The cost to attract and retain talent is increasing, both from new health care and living wage legislation, as well as market demand for specialized skillsets.
What’s a MME to do?
The same things that larger companies have been doing for the past 10-15 years: run their operations efficiently and at the lowest possible cost; re-invest the savings attained from lower operational cost into new business services, and the technologies needed to deliver them; and, have your best people focus on higher value, strategic activities that drive business growth.
Our experience in business operations has shown that MMEs often spend 70-80% of their time focused on transactional work. “Transactional” in this definition, means performing activities that need to be done, but are not driving business growth. Examples of “transactional” activities are processing and paying vendor invoices, billing customers, receiving and applying customer payments, reconciling general ledger and bank accounts, posting journal entries, etc. If your Accounting department spends most of its time doing accruals, adjustments, and reconciliations, and little time analyzing business performance and understanding forecast variances, they are doing transactional work.
While there is no one “right” answer for how much time you should spend on transactional work, the bigger question may be “Who?” Who is doing the transactional work in your company? If it’s higher cost, more experienced staff, your organizational focus is misaligned.
That’s the secret that the larger companies have been hiding from you. They have built lean, cost effective back office operations, utilizing a variety of proven, well-established methods.
They standardize transaction processing to provide operational discipline and structure, and reduce the complexity of diverse, yet similar operations. They automate manual processes to eliminate (or at least reduce) the amount of manual work that typically occurs in back office operations. The monitor and measure the work being done to understand the ebbs and flows of transactional activity, and identify operational issues as they occur, rather than reacting to them well after the fact. And they attack operational issues by focusing on continuous improvement, implementing improvement plans and establishing performance improvement targets that these organizations are measured against.
And, they do all of this at the lowest cost possible, by establishing shared service centers, often in lower cost labor markets, and implementing a hybrid operating model that incorporates outsourcing for certain lower value, non-core transactional work, removing the transactional focus from their more experienced, higher cost staff.
And the more experienced, more expensive staff are asked to focus on higher value activities, ones that are directly dealing with customers, driving revenue, and analyzing, understanding and improving business performance. Your best people, doing a better job, and bringing more value back to the business? That’s the secret!
Not much of a secret, is it?
I tell my clients all of the time that in all likelihood I am not going to tell you anything that you don’t already know. But the reality is that many companies know what they should be doing operationally, but generally don’t have the time, focus and resources to execute the changes. And MMEs, by definition, have less time, less focus and less resources to work with.
Larger organizations, because of their scale, can achieve higher level of benefits when implementing back office optimization initiatives. Because of their scale, when they consolidate and streamline decentralized operations, the resulting cost savings can generally support further investments in technologies to drive additional efficiencies. By shrinking a large operational footprint, increasing operational performance and efficiency, and driving down operational cost through some labor arbitrage, the organization becomes more scalable. As the business grows, it truly can “do more with less,” instead of just asking its people to work longer and harder.
Scale is one reason why MMEs struggle to achieve the same benefits as larger organizations. The benefits are less so the effort seems less worthwhile. But over time, those benefits add up, and if the organization grows, you are “bending the cost curve,” and increasing the ability of the back office to handle more work. More importantly, you shift the focus from “keeping the lights on”, a/k/a “transactional work”, to higher value, growth oriented work.
MMEs really don’t have the time to spend on lower value, transactional work. But this kind of work isn’t going away any time soon, so you need to follow the lead of larger organizations, and improve your back office operations.
The challenge for MMEs is to get this done, given the limited resources that are available to them. Outsourcing can present a strong option for helping MMEs not only lower their cost structure, but also attain higher levels of performance, and even take advantage of some of the newer technologies to increase automation in the back office.
Outsourcing continues to grow, and a recent study by KPMG and Hfs Research (“Industry Trends in Global Service Delivery Operating Model, Global Business Services Industry Study”, January 2014) highlights this trend. In the study, 59% of companies surveyed indicated that their use of outsourcing will increase; with only 16% indicating that they will increase their use of in-house services. Perhaps more significantly, 62% of companies surveyed indicated that they will increase their use of a hybrid services model (incorporating shared services and outsourcing).
And MMEs are joining the parade, with 73% of MMEs stating that they are planning to expand their use outsourcing services over the next 2-3 years, according to a recent Duke University survey (Duke University Fuqua School of Business, “Global Sourcing of Business Services”, Annual Study-2015).
But for many MMEs, outsourcing presents a new set of challenges: cultural and operational ones that are exacerbated by the traditional, Asia-based venues that are half-way around the world and operate on completely opposite work schedules.
In my next blog, I talk about a different kind of outsourcing model, leveraging nearshore resources that we believe will help MMEs not only lower their back office cost, but also increase their back office performance.