Back Office 5.1. What is a Virtual Back Office?

So, why outsource your back office? Isn’t it easier just to do it yourself? Hire other people?

The answer is both yes and no. In many ways, it is simpler to do it yourself, but it requires a huge amount of work even at the very beginning of your venture. If you can’t do all that work, hiring your own staff to do your business’ accounting, payroll, and phone answering has many advantages. You can deal directly with your employees, you can judge the quality of their work, and you can have some control over the security of your business’ information. These are not minor advantages.

But doing the work yourself or hiring employees have their disadvantages, the most significant of which are the limitations they place on your business’ growth. Your back office must ramp up as your business grows. That’s not as easy as it sounds. Today you have a bookkeeper and a receptionist. Tomorrow you require a bank of phone operators, a bookkeeper, payroll expert, accountant, and a human resources department to handle all those employees.

Outsourcing your back office gives you three distinct advantages: scalability, cost savings, and avoiding the general headaches that having a staff entails.

The most significant factor limiting your business’ growth, in general, is your ability to scale up your staff to meet greater market demand. You may have the best product in the world, and lots of people want to buy it. However, the more they buy, the more your organization and your back office needs to grow. Believe it or not, many small businesses fail when they succeed; they can’t scale relative to the market demand. I worked for a small business once that had a twenty year growth history that looked like a sine curve: every four years they’d grow to about forty employees and four years later they’d shrink to about four employees. The principals could not manage the larger organizations market success required―the sure sign that they were going to fail was when they succeeded.

The right outsourcing vendors can greatly increase a business’s capacity to grow and reach new markets. The vendors devote all their expertise to the back office functions and ramp up (or down) to meet your needs; all you need to do is worry about getting your product made and selling it. You don’t have to master the intricacies of managing a complex organization with widely disparate departments and functions.

In addition, hiring employees puts you under all sorts of legal and tax obligations, so you have to handle a bunch of forms and familiarize yourself with a hogpile of ever-changing laws, which you must obey. These laws govern everything from how many taxes to withhold from their paycheck, how much vacation time they get, when you’re supposed to pay them overtime, and how many breaks they get throughout the day. Direct hires also come with an army of legal rights. If your employee doesn’t work out, you will find it very difficult to get rid of that employee. It doesn’t matter if you sign an “at will” employment agreement with them. Being sued by an employee and winning is just a little less costly than being sued and losing, which is why most major companies almost never fire bad employees anymore. That’s right. It’s really hard for an employee to get fired nowadays.

Employees are also more expensive than their wages. Once employees work a certain number of hours each week, there are things besides wages you’re legally or ethically bound to give them, including unemployment. You will also want to offer incentives for them to stay, like health benefits. Factor in sick days and vacations to these obligations and a $10 an hour employee suddenly is costing you close to $20 an hour when all is said and done. And did I say it’s really difficult to fire a bad employee?

There are yet more costs. Employee “cost” also includes physical infrastructure, as well. If you’re running a big enough business, you don’t really see these expenses; your accountant hides them under “overhead” and “capital expenditures.” But if you’re starting a business on a shoestring, these extra costs really matter. For instance, if you hire a bookkeeper, you have to buy a computer. You have to purchase software for that computer. Your bookkeeper needs a desk and a chair, a phone, a connection to the Internet, and maybe even an office. If you hire a word processor, the same routine plays out: computer, software, chair, desk, and phone. Get enough people on board, “phone” becomes “phone system” with separate extensions, voice mail, and a bigger bill every month from your phone provider. “Computer” becomes Ethernet, router, server, back-up tape system, hub, and a part-time computer guy to fix all this junk because it goes kablooey every few weeks. You get the picture.

Last, but certainly not least, employees mean payroll and payroll means you always have to pay a “wages bill” every two weeks. Payroll is even more inevitable than death and taxes. Taxes only come once a quarter and death, knock on wood, less frequently than that. So payroll means you must manage your cash flow very, very efficiently. If cash isn’t flowing, paychecks still have to go out, and you end up in the worst possible nightmare: borrowing to pay your employees. In a survey I did among small business owners, the anxiety that kept most of them up at night was meeting payroll.

Outsourcing solves many of these problems but saddles you with other headaches. If you outsource your back office functions, you never really meet your employees. You can’t evaluate them individually and guide the improvement of their performance. You can only evaluate the performance of your outsourcing partner. In addition, “your” employees at the outsource company often work for more than one business. As a result, they don’t really get to know your business very well and rarely care about it. That does matter. For instance, you may want customer service to be your business’ calling card. With a direct hire, you can train them in customer service and monitor how well they perform. More importantly, you can hire and nurture an employee to care about your business and customers. You do not have that luxury with an outsource partner. Typically, you never even talk to “your” employees―you spend all your time with a manager or account executive. That makes it even more difficult to ensure the highest quality work, dedication, and service.

On the other hand, you don’t have to handle payroll. There are no income taxes to deduct. No W-2 forms to prepare at the end of the year. No health insurance. No unemployment insurance. No laws to keep up on. No performance reviews. No write-ups. You pay your bill to the contractor every month and you’re done with it.

In addition, outsource office support is also typically much cheaper than an employee―as low as 15% (if you offshore) of what an employee would cost in wages, infrastructure, and additional compensation. You still have to worry about paying your outsource bill, which can be either variable or fixed, but it’s typically a lot less than a staff would cost. So, just like payroll, you need healthy cash flow to pay your bill on a regular basis. But if you manage to get your back office services at a significantly lower price than direct hires, you’re more likely to sleep at night.

There is an additional advantage. Because many outsource providers have a large number of clients, they are able to take advantage of economies of scale to offer services you could never afford on your own. For instance, if you want a phone receptionist available twenty-four hours a day―because somewhere between 50% and 80% of all callers who reach a phone machine never leave a message―you would have to hire three full-time employees to work around-the-clock. You can get the same twenty-four hour reception service from an outsource provider for little more than it would cost you for 8 hours of daily phone reception.

And finally, outsourced “virtual” employees do not require physical infrastructure. Your deal with the outsource vendor means that they provide the desk, the chair, the computer, the software, the phone system, the computer system, and every other piece of “overhead” that comes with employees. Taking advantage of economies of scale, this means that “your” employees at the outsource location are able to use sophisticated, state-of-the-art technologies that you could never afford―bringing an outsource vendor on board often means bringing the best technologies on board, as well. The vendor does pass these costs on to you, to be sure, but the costs are spread across a large number of clients.

Outsourcing has one additional benefit. If you set up the right contract with an outsource provider, it’s much, much easier to dismiss an underperforming contractor than an employee. If you’re unhappy with the bookkeeping service you’ve hired, fire them. Hire a new one. It’s usually that simple. And here’s something that’s genuinely cool. If you don’t like your vendor’s performance and tell them about it, they usually make an effort to improve.

However, a relationship with an outsource partner requires care, nurturing, and close management. Your goal is not just simply to avoid the problems with staffing your business, you also want the best performance and dedication to your company that you can get, just as with any employee, but you now have to elicit that excellence and dedication from a distance.

It’s an absolute certainty that one or more of your outsource relationships will go bust. The reason outsourcing relationships fail is subject to a fair amount of debate. Because so many American businesses are outsourcing so many of their functions, there’s an entire discipline devoted to figuring this problem out. My experience, and the experience of many corporate consultants, is that outsource relationships fail because of lack of management by the client. In other words, if you think a business process outsource relationship is easy, you’re mistaken. You must develop the skills and devote the time to manage that relationship before and after you sign up the contractor.

What skills do you need? You need the exact same skills companies like IBM or Exxon-Mobil need to manage their outsource relationships. The difference is this: IBM or Exxon-Mobil can hire an army of MBAs and McKinsey consultants with those skills. You, on the other hand, must develop those skills all on your lonesome. These skills are:

  • communication
  • negotiation
  • project management
  • contract and legal document understanding (you can’t avoid this one―you have to closely read and really understand what is in a legal document)
  • adaptability

Outsourcing to meet your back office needs can actually be fairly complicated to set up―limited only by your innate creativity. You have several options that you can mix and match creatively:

  • Outsourcing: this is where you take a project, program, or an entire department (like your accounting department, say) and hire another company to perform the work for you.
  • Off-shoring: you offshore when you hire an outsource company from another country. By far, the most common off-shoring destination is India.
  • Multi-sourcing: you multi-source when you take a program or department and get the work done through a combination of internal staff and outsource partners. For instance, you may have a bookkeeper on your staff, but have other functions, such as financial reports and taxes, done by an outsource accountant. Your accounting department, therefore, is multi-sourced.
  • Freelancers: Using a job board or freelancer online RFP marketplace, you can outsource back office functions on a piece-work basis. For instance, you may have no need for a regular transcription service (creating a word processed document from an audio or video file), but every once in a while you require a transcription. Freelancers can provide that service at significant cost-savings on a one-time basis . . . sometimes for pennies on the dollar in comparison to what an outsource provider would cost.
  • Sharing: You can always partner with another company and share a program or department; it’s essentially like having a part-time employee. Sharing often works best for commission-based positions, like salespeople. For instance, I once helped set up a salesperson position that was shared between four small businesses all in different aspects of the marketing communications business (design, advertising, photography, research). None of the four could actually afford a dedicated salesperson. For that matter, none of the four were busy enough to fill the time of a salesperson. However, if one salesperson represented all four companies, that salesperson could generate enough work to justify the cost. Sharing between companies can be difficult (what happens if the salesperson decides it’s easier to make sales if he concentrates on only one of the partners in the deal?), but it can work. You can even set up sharing relationships with your clients or suppliers, who are sometimes happy to let you foot part of the cost of under-utilized employees.
  • Shared services: This is not actually an outsourcing solution, per se, but “shared services” are frequently lumped into the “outsourcing” category. You can only “share services” if you actually have employees. When you share services, you essentially make one department or employee responsible for more than one task. For instance, you may have your bookkeeper also do payroll and take all customer service calls. So your bookkeeper is the accounting, payroll, and customer service department all wrapped into one less-than-tidy package. Of course, the nature of most start-ups means that most if not all your business processes are “shared” by one person: you. But you probably know that already.

When setting up an outsource relationship―even a one-time deal with a freelancer―you should focus on the following key areas:

  • Alignment: you want to make sure that the outsource partner is rewarded for the performance you want and punished for the performance you do not want. If you want a call center to give the highest possible customer service, then you want the means to penalize the outsource partner financially if customers complain about the call center.
  • Growth: you want to meet your short-term needs with an outsource partner; you also want to know if your outsource partner can grow with your business. If not, you will find your outsource partner limiting your growth―the exact same problem you have with direct hires. So, based on a realistic expectation of what the future holds for your business, choose an outsource partner that can help fuel that future rather than hinder it.
  • Management: your agreement with an outsource partner should provide management tools to make sure that the service is performing as expected and has mechanisms to respond to change, like a sudden spike in your needs.

5.1.1. TutorialReports.com

http://www.tutorialreports.com

TutorialReports.com offers a series of introductions to leading technologies and the use of those technologies, providing easy-to-understand explanations of these technologies. Topics include:

  • Patents
  • RFID
  • VoIP
  • WiMAX
  • Zigbee
  • Bluetooth
  • Web Design
  • Broadband Content
  • And, of course, outsourcing

While useful across a variety of topics, TutorialReports.com provides the best Web-based introductions to outsourcing issues.

Chances are, you’re unfamiliar with outsourcing. You’ve never done it. You’ve never seen it done. You’re sobered by the fact that the people who are really good at it, that is, major corporations, fail much of the time when they try to outsource. If the Harvard MBAs with experience in outsourcing screw it up a big percentage of the time, what can you do?

Our first advice is that you get a very good handle on what outsourcing really is. TutorialReports.com offers an excellent set of tutorials that cover all the major issues you should be familiar with:

  • Outsourcing Basics
  • IT Outsourcing
  • Customer Service Outsourcing
  • Outsourcing to India (India is by far the major destination for outsourcing)
  • Business Process Outsourcing

These are useful introductions to the entire field of outsourcing and you really shouldn’t proceed until you’ve mastered the topic at this level.

5.1.2. Sourcingmag

http://www.sourcingmag.com

In this age of information overload, it would probably not surprise you that there is a Web-based magazine solely devoted to outsourcing. While TutorialReports.com presents good introductions, Sourcingmag provides the nitty-gritty details about outsourcing relationships.

Resources include:

  • Introductions to outsourcing issues
  • A directory of outsourcing firms
  • Bookstore
  • Blogs
  • Forum

Articles on outsourcing include:

  • What Is Outsourcing?
  • What Is Off-shoring?
  • What Is BPO?
  • Off-shoring to India
  • Off-shoring to China

For Sourcingmag, successful outsourcing involves four distinct stages:

1) Strategic thinking: developing the philosophy behind the business’ outsourcing

2) Evaluation and selection: deciding the appropriate functions or departments to outsource and evaluating potential providers

3) Contract development: working out legal, pricing, and service level agreements

4) Outsourcing management and governance: working with the provider to ensure the highest quality service

Must-read articles on the site include:

  • Managing Your Offshore Team
  • Looking Beyond Cost Savings in Outsourcing
  • The Secret to Outsourcing Customer Care Operations Smartly
  • Offshore Outsourcing Models
  • Crawl, Walk, Run Strategy Leads to Success in Offshore Outsourcing
  • How to Reduce Offshore Hidden Costs
  • Fine-Tuning the Offshoring Model
  • Working With India: What To Know Before You Go
  • Culture Matters: 5 Challenges India Offshore Teams Face in Working With Americans

5.1.3. OffshoreExperts.com

http://www.offshoreexperts.com

Listing over 20,000 outsourcing firms, OffshoreExperts.com is a major international directory of outsourcing professionals. Offshoring categories include:

  • Business Process Outsourcing (BPO)
  • Programming, Software, Database
  • Website Design and Development
  • Engineering, CAD, Architecture
  • Graphic Design and Presentations
  • Writing, Editing and Translation
  • Business Consulting
  • Sales and Marketing
  • Finance and Accounting
  • Legal
  • Game Design and Development
  • Networking, Hardware, Telephony
  • ERP/CRM
  • Manufacturing
  • Advertising
  • Illustration and Art
  • Photography and Videography
  • Fashion, Interior, Landscape Design

General back office categories include:

  • Accounting
  • Collections
  • Call Center
  • Contract Management
  • Customer Service
  • Data Entry
  • Due Diligence
  • Event Planning
  • HR
  • Mailing Lists
  • Office Management
  • Payroll
  • Secretarial Support
  • Transcription
  • Word Processing

5.1.4. Outsourcing.org

http://www.outsourcing.org

By far the number one outsourcing destination for business process and information technology is India. Due to a happy confluence of several factors―a large, English-speaking population, a large college-educated population, and low wages―Indian outsource companies provide the quality global business requires at significant cost-savings. Of course, these cost-savings will evaporate as the standard of living increases in India, but that’s another topic.

There’s a very good chance that you’ll outsource some or all of your back office to an Indian vendor if cost is your primary concern. Outsourcing.org is the most comprehensive directory of Indian outsourcing firms across the entire gamut of business needs: manufacturing, IT, and business processes. The back office outsourcing directory lists eighty-seven companies and the call center directory lists 173 companies as of the publication date of this book.

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