Rachel Kovar: PE Physician, Heal Thyself!

After you invest in a business, you are constantly looking for ways to control costs without reducing quality or taking on unnecessary administrative responsibility. Scalability is important to both grow your business and swiftly respond to market changes. A comprehensive tactical and strategic operating plan is essential to the profitability of the investment, as is installing the right management and staff.

Managing your own shop should be no different. There exist measures in place to evaluate, improve and manage core business performance, but what about taking on non-core functions?

Partnering with an expert internal support services provider can deliver the same kind of results for your portfolio and performance you expect from your partners. Though not a traditional solution for PE firms, outsourcing is worth considering as part of cost management strategy, particularly when it comes to business support services – from back office (low-skill copy and mail to creative/graphics services), to research and knowledge management. Just as your organization provides expert business counsel to achieve profitability and growth, an outsourced services provider can function similarly. The right partner will help assess your internal support and provides you with a roadmap that matches your organization’s goals and immediate needs.

The ROI from outsourcing – when done well – can be significant as it achieves the following:

• Provides firms with scalable resources while reducing HR risk exposure
• Eliminates certain infrastructure costs and helps firms avoid some significant long-term capital expenditures
• Reduces people costs through labor arbitrage, leveraging the right technology, refining processes and aligning skills to tasks
• Enables refocus on core business activities to drive revenue and increase profit

Lowering costs is a primary reason to outsource, however, more business leaders outsourcing today put increased revenue and productivity ahead of immediate savings. For example, the IAOP World Summit 2010 reported that 65% of its delegates listed long-term cost savings, supporting future growth plans, and increasing overall business flexibility as their top reasons to outsource.

Where to Start:
1) Divide business activities into two distinct categories: core (revenue generating) and non-core.
2) Identify tasks (not functions or roles) that fall into the non-core category and separate those out in to two groups (1) supports revenue growth, or (2) keeps the lights on.
3) It seems counter-intuitive, but “supports revenue growth” is the best place to start. Outsource service providers that are equipped to recruit and manage talent in the more complex support areas like knowledge management, or which require highly developed conceptual, technical skills and/or front office interaction is required should be able to procure and/or, provide and manage all of the back-office services that “keep the lights on”.
4) Consider off-shore vs. domestic outsourcing options. Offshoring is often a lower cost solution, but even domestic outsourcing delivers impressive savings (10%-40%) and providers are more likely equipped to deliver multi-service solutions. Many US companies that already outsource want their suppliers to expand their offerings and manage more services, meaning fewer suppliers managing higher-level activities that require more highly skilled resource. This is driving many business leaders to turn to domestic service providers to reduce the risk of miscommunication and, protection of confidential information, which is often less regulated offshore.

It’s Still Your Business:
The perceived loss of control makes it difficult for business leaders to outsource. This is one of the most common mistakes. This perceived control often stems from poor and/or sporadic reporting, little or no planning (strategic or otherwise), lack of transparency or poor communication. You don’t have to be in the weeds to have control. Set up the program the right way from the start:
1) Establish concrete measurable expectations.
i) Ask for sample reports.
ii) Set Service Level Agreements.
2) Require a tactical service delivery plan for implementation, change management, SOPs, communications and escalations on both sides.
3) Plan for both expected and unexpected changes in demand.

Excising costs, changing processes and replacing/realigning personnel to derive the greatest profits possible from the assets your firm manages is your core business. Outsourcing offers private equity firms and their portfolio effective ways to reduce and control ongoing costs, take advantage of the right resources for the right jobs, and leverage easy-to-use, configurable tools and technologies to support growth. Partnering with an external expert whose core business is internal support services can be the key to delivering tangible bottom-line value for your firm.

Rachel Kovar is an expert on multi-sector domestic and global outsourcing. She is founder and president of Managed Business Services. Opinions expressed here are her own.