Solving The Value Equation

2009 Top Ten Trends for Performance Improvement: #10: Valuation as your Decision-Making Guide

Using valuation as a tool for decision-making will align short-term and long-term interests as well as remove emotional fears.

The goal of valuation is Profit Maximization.  Your objective is to reduce “Risk and Spend.”  Here are two strategies:

1. Increase near-term earnings by improving levers that impact a combination of Revenue, Operations, Workforce, G&A, and Management Scalability; and
2. Create strategic options for value creation (alliances, acquisitions, partnerships, etc).

Should you invest more in marketing? What about implementing a performance review system?  Contemplate these decisions based on the impact on the company’s valuation and you cannot go wrong. 

2009 Top Ten Trends for Performance Improvement: #9: M&A as a Growth Driver

Mid-market enterprises have the:

1. Opportunity to consolidate fragmented markets (quality investments more important than ever!)
   
2. Capital available to purchase distressed and “cheap” assets (in recessionary times is #1 PE priority)
   
3. As a ‘Perform Businesses’ it is “time-to-shine”; the deals being transacted have positive cash flows and increasing revenue streams resulting in increasing valuations.

 

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2009 Top Ten Trends for Performance Improvement: #5 Outsourcing Adoption is Required.

Both the mid-market and large market have comparable overall revenue potential (50,000 small businesses in the US alone outsource more than one business function!) However, the mid-market produces higher margin outsourcers.

Buyer adoption varies across geography, industry, and company size however for $1M to $100M: nearly 10% outsource the HR function, 25% IT, and 40% part or all of accounting and finance.

The Value Proposition Demanded by Organizations is Expanding:

1. Buyers have moved far beyond cost savings.
2. Outsourcing must achieve strategic, operational, technology, human resources, and risk management benefits.
3. Pricing is changing to on-demand, pay-as-you-go models:
• Buyers moving away from “Per Hire Fees”
• Non-transactional pricing models such as BPO concepts with performance guarantees and earn out pricing will become prevalent
• In a slowing economy, buyers prefer a componentized model (i.e. pay-as-you-go) over a wide-scoping transformation model. Customer potential for multi-process or entire functions has low penetration, especially in the small and mid-market; but partial outsourcing growth is escalating.

 

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2009 Top Ten Trends for Performance Improvement: #2: Customer Acquisition via Alternative Distribution Models:

Alternative distribution channels (i.e. customer acquisition methods) for you to examine the “Spend and Risk” associated with each:

1. Proliferation of online sales and service models:
1. Subscription models
2. SaaS models
   
2. Create strategic alliances.
   
3. Leverage channels, agents, resellers.
   
4. Partner with consultants, VARs, integrators.

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2009 Top Ten Trends for Performance Improvement: #1 Targeting

Your customers can be segmented into three groups according to our research:

1. 20% of companies that are laying off and slashing costs.
2. 20% that are methodically growing (pursuing acquisitions, implementing initiatives, etc.)
3. The middle 60% that needs direction and is looking for cost-savings.

> All three segments represent opportunities, but the message to the mid-tier must be “I will save you $3 (for which you get $1).”

 

Signs That Your Company Needs Outsourcing

Successful corporations have higher revenue and profits-per-employee because they leverage technology, best practice processes, and capabilities of outsourcing providers.

The value-proposition of outsourcing (beyond 20 to 60 percent cost savings versus internal staff) is access to best-in-class capabilities, business processes, people, technology, and tools for a period of time until it makes cents and sense to bring the function inhouse.

If your organization would benefit from any of the below outsourcing benefits you should evaluate the specific outsourcing benefits and ROI for your firm.

1. Rising Costs: Rapidly rising costs in payroll, benefits, and workforce management continue to be the primary driver for HR outsourcing. While cost reduction is certainly a major consideration; access to expertise in the following areas can make a substantial impact on your firm a) market and competitor compensation and incentive studies, b) new manager assessment and training, c) leadership development and succession planning, d) workforce planning, and more! Average small business will save 30% by implementing HR best practices.
   
2. Resource Constraints: When tasks are beginning to overwhelm internal HR, IT, and management resources, it’s time to either invest in technology or at a minimum turn some of the workload over to a third-party outsourcing provider.
• It is typically more cost-effective to utilize an outsourcing provider’s technology rather than spend internal resources evaluating, implementing and managing on your own.
• Your employees only have so much time. Outsourcing will save managers and employees time to focus on core revenue-producing tasks.
  
3. Risk Management: Compliance, laws, and regulations are regularly updated and changed; do you want to pay your internal staff to attend conferences, seminars, and maintain their certifications or would you have more peace-of-mind by relying on trained professionals whose entire specialty is compliance?
   
4. Misaligned Work: The contractual obligations of outsourcing providers means that through SLAs (service level agreements) and scorecards work is prioritized in connection with the firm’s financial objectives. Mediocre work is also mitigated by the very nature of using a partner.|
   
5. Agility: Are your competitor’s more price or cost efficient? Ask around and find out what benefits your rivals are gaining from outsourcing work. You may discover that these same issues apply to your organization.
   

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Outsourcing Market Adoption 2009 Update

A few facts for you to consider:

> The majority of businesses with more than 40 employees outsource at least two of the following functions: payroll, benefits, IT, recruiting, or accounting (Ephor Group Research).

> Nearly 40% of small business mangers subscribe to online software (Jupiter Research).

> The human resources outsourcing market (HRO) is a $2.9 billion (in terms of annual contract value) market in the US alone (Gartner)!

While outsourcing adoption varies across geography, industry, and employee segments there are trends:

> Outsourcing demand from Europe continues to rise;

> Manufacturing, high-tech, telecom, healthcare, and professional and financial services are the leading adopters of HRO in the US;

> Small and mid-market businesses are adopting at a faster rate than larger corporations (the mid-market and large market have comparable revenue potential and the mid-market has higher margins).

HR software and technology is growing within the mid-market at more than 20% per year. The fastest growing segments center around performance management with special emphasis on creating a “High Performance Workforce” (HPW).

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Ten 2009 Outsourcing Best Practices

1. Integrate Industry Benchmarking to Set Goals: Continual focus on raising the bar and setting new standards of excellence is a requirement for top-quartile performing firms.
   
2. Implement Workflow: Using workflow technologies streamlines and automates operations while eliminating redundant tasks.
   
3. Knowledge Management: Create a central repository and library of all your best practices, processes, documents, and data. Online technologies such as Wiki’s have made this cost-effective for small businesses.
   
4. Operational Metrics: Employees that know and measure themselves against operational metrics are more aligned with the businesses’ financial goals and objectives.
   
5. Labor Analytics: Reduce turnover costs, overtime, and PTO (Paid-Time-Off).
   
6. Change Management: Often overlooked, change management is the critical factor for adopting any new process or system.
   
7. SLA’s and Expectations: (SLA’s is the abbreviation for Service Level Agreements.) When one says “I got everything I wanted at the negotiating table," they lost. In successful negotiations there are winners only when two parties who have arrived at a mutually beneficial and sustainable arrangement.
   
8. Executive Oversight: Provide insight and visibility into daily outputs and results through reporting and analytics. 
9. Decentralization: Empower front-line staff and push down decision-making to the periphery.
   
10. Need for Integration Between Applications: For example, the financial accounting software shows the detailed picture of the financial status of the company. But often businesses need to analyze trends to see where improvements can be made in service and sales. Most businesses are forced to mine different systems, rely on Microsoft Excel, and thus always review historical / data (lagging indicators) as opposed to leading indicators (trends).

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Top Ten Drivers When Choosing an Outsourcing Partner

We have noticed a trend in the criteria for selecting an outsourced provider, the second time a provider is chosen proximity, speed-to-quick results and industry vertical experience play a much larger role. 

1. Proximity (location of service delivery) – There are three types of outsourcing delivery options:
• Remote, over-the-phone and online support with infrequent visits on a quarterly or semi-annual basis.
• Outsourcing provider assigns part-time liaison, account manager, or representative who visits and works on at your operations on a regular basis. Liaison supported by experts and shared services remotely.
• Provider places full-time account manager and/or generalists on premises and supports with specialists and/or shared services remotely.
2. Total Cost of Ownership (TCO) & Return on Investment (ROI)
3. Industry Experience
4. Client Satisfaction & Attrition Rates
5. Technology Systems Expertise and Fit
6. Project Communication
7. Scalability & Flexibility
8. Best Practices and Process Methodologies
9. Business Continuity and Risk Mitigation
10. Organizational Fit (Culture, Language, Policies, Methodology)

Outsourcing Scorecard for Selecting a Partner:

The criteria for decision making should be weighed according to the business goals and their long-term effect on a business’ objectives and goals for valuation. More outsourcing best practices can be read here.

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