In my previous blog post, I let you in on the “big secret” that larger enterprises use to help them get more value out of their back office operations.
They establish lean, cost-effective back office operations, utilizing a combination of process improvement and standardization, organization restructuring and automation to reduce staff, increase efficiency, lower operating costs and increase operational focus on more strategic activities.
As I said in that post, not much of a secret, is it?
The challenge for mid-market enterprises (MMEs) is not in the know-how, it’s in the execution. MMEs, by definition, have less time, less focus and less resources to work with than do larger organizations. Because of their smaller size, the financial benefits are less so the effort seems less worthwhile.
Of course, I have never met anyone who says they would rather work less efficiently and pay more than they have to, so the reality is, in today’s rapidly changing business dynamic, you can’t afford to not improve your back office operation and cost structure.
So how can a MME improve its operational efficiency, lower its operating cost and change its operational focus from transactional to more strategic activities?
Outsourcing can present a strong option to help 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.
This is not to say that outsourcing is the only answer to solve this problem, but it should become part of a MME’s strategy for back office performance improvement.
As a first step, you can begin to identify the areas within your business that fit into an effective outsourcing profile:
- Transactional, rules-based activities
- Activities that are not core to the business, and do not directly affect business growth and performance
- Functions that are known to be inefficient and require process improvement and/or technology upgrades
- Functions with high turnover, or those for which it is difficult to attract and retain talent
Look at these functions first and assess which can be transitioned to a third party, with minimal impact to the business, and with an expectation of increased operational performance and lower operating cost through the use of an outsourcing firm.
This approach requires a different operating model for the outsourcing firm. Traditional, commodity-oriented outsourcers try to “fit your square peg into their round hole.” They want you to do things their way, leveraging their processes and systems. They call this “process improvement” and provide “enabling technologies” that your organization may not have access to.
In theory this sounds great, but in reality, MMEs struggle to fit into this “black box” outsourcing model. Back office operations in most MMEs are not streamlined superhighways, where a transaction enters the on ramp, and goes full speed until it gets to its “fully processed and recorded” exit on the other side. Instead, they tend to be more like decaying urban highways, where lane closures and bad drivers snarl traffic, as the transaction makes its way down the road in “bumper to bumper” fashion.
Maybe the metaphor is a little dramatic, but you get the idea. Middle market back office operations are generally full of exceptions, manual activities, operational silos and older, “patched up” technologies, none of which lend themselves well to a commodity-based approach.
MMEs require a more customized approach, designed to take their existing operations and systems, and enhance, not replace, them. Processes need to be fully documented, analyzed and designed with a process improvement end-result in mind. Sometimes, part of a process may need to remain in-house, with only certain activities “carved out” for outsourcing. The design process needs to be thorough and collaborative.
And instead of replacing core systems with those of the outsourcing provider, look to leverage your existing systems and add “wrapper” technologies that provide additional functionality not readily available to the middle market company due to cost factors. These may include document management, workflow, automated reconciliation and self-service platforms to facilitate and improve activities, not replace them.
And what of robotics, the “hot” new solution that is going to make your human processors extinct? Well, don’t start calling the paleontologists in just yet.
RPA definitely has its potential to reduce the amount of manual work required in an operation, but those same issues highlighted above, such as exceptions and silos, will minimize what a “robot” can do, and still require human oversight and intervention. To be effective, the RPA solution needs to be designed and integrated into a process, just like any other new system, and its use case and ROI must be fully understood. A recent study conducted by Auxis of more than 30 shared services centers in Latin America highlighted the fact that none of the organizations had implemented an RPA platform, with only 16% planned to do so in the next two years.
A middle market-oriented outsourcing firm should be able to provide the key technologies that will help improve and facilitate back office processing, not replace the existing platform for its own benefit. The firm needs to come in and design a custom solution, built on the client’s existing operations, and make changes that integrate with, not overwhelm, the current operations.
Beyond operational challenges, for many MMEs outsourcing also presents a cultural challenge. Often, the middle market back office is heavily people-oriented, where individuals, rather than processes, own the transactional activity. This is not a scalable approach, and ultimately is higher risk because you become dependent on these individuals and the knowledge they possess. Outsourcing can help to solve this problem.
Another cultural challenge is tied to the siloed, exception-based operating environment previously mentioned. Due to this, interaction with various company staff and departments may be required to research, resolve and complete a transaction. The Asia-based outsourcing venues that are halfway around the world and operate on completely opposite work schedules, make this especially challenging.
A nearshore option, one that is time zone and language compatible and easier to get to, can effectively resolve this problem. For U.S. companies, these operations are located in Latin America, most commonly found in countries like Costa Rica, Mexico and Colombia. In these locations, you can find many options to support your requirements, although the cost structure will be a little higher than the typical Asia-based models. We have seen cost differentials of 10-20% for Latin American based nearshore services, compared to Asia-based models.
So, the opportunity for MMEs to create lean, cost effective back office operations, and leveraging outsourcing to help you get there, is available. It just takes a different approach, implementing a custom-designed solution that incorporates process improvement and organizational restructuring, and introduces (not replaces) enabling technologies to reduce manual work. And, a nearshore location will help to reduce the complexity and challenges associated with ongoing communication and needed interaction.