In the modern business environment, companies are under increasing pressure to reduce costs to maintain their competitiveness. Therefore, it is important for SMEs to examine their range of operations to identify areas that are perhaps non-core, and can be carried out better and cheaper by a specialised, or outsourced firm, says Dr. Ashraf Mahate, Head of Export Market Intelligence, Dubai Exports, and Vice Chair of the Economics Policy Committee, Dubai Economic Department.
Outsourcing is more often embraced by companies that are exporting their products or services to foreign markets and competing with low-cost producers. Generally when one refers to outsourcing of activities it usually implies back office, or call centre related tasks. However, in recent years, the trend to outsource activities with the corresponding cost savings has led firms to re-evaluate the services that can be provided by a third party company.
Various studies have shown that cost savings tend to be pretty clear, especially where labour is concerned, because no longer is the SME concerned with the individual’s salary and overhead costs, such as office space, gratuity, medical insurance and so on. Generally speaking, the average cost savings tend to be about a third of the company’s previous costs.
Today, the communication media in outsourcing is well established and largely assisted by the development of technology. Only a few years ago, outsourcing relied on the telephone and courier services. Today, both the outsourcing and client companies have very sophisticated video conference equipment, which is quite cheap and easy to set up. The common range of communication media are:
- E-mail based
This is by far the most common and allows the outsourcing and client company to scan documents as well as files. This is very convenient but suffers from security issues and most client companies require that e-mails are encrypted.
- Secure server based
This is a more secure method, whereby the client company uploads the files in an encrypted format onto the pre-agreed server. Once the documents are on the server the outsourcing company can gain access and can deliver the finished work onto the same server.
- Remote access based
In some cases, the client company may give access to the client company’s servers. This is very convenient as the outsourcing company simply becomes an extension of the client company. More importantly, the client company has complete control of the documents in terms of recording, access, printability and so on.
Various options exist from the fixed-line variety, to Internet-based forms, such as Skype. This allows the outsourcing and client company to have regular dialogue and for the former to understand the requirements of each assignment.
Issues in outsourcing
Although, outsourcing may bring about benefits, the client company may actually have some concerns, the most common of which are as follows:
By definition, all information is sensitive by nature and needs to be stored and transmitted in a secure manner. This is by far the most important concern that client companies tend to have, especially as any breach may lead to misuse.
Associated with this is the aspect of confidentiality. Any UAE company seeking to outsource any part of its activities needs to have appropriate controls in place to ensure that client confidentiality is maintained along with security.
- Quality of work
In theory, a company specialising in one aspect or activity. should have a very high quality of output. However, the reality is not always the same as the theory. Client companies tend to fear that any error, or low-quality output, will impact on their own reputation.
The usual approach is to create an internal quality control system along with regular staff training to ensure that the output meets the requirements of the client company.
Some companies may fear that they do not have control over the outsourced employees. Of course, the real concern is that internal staff may work weekends or holidays to meet deadlines, but the same level of commitment may not exist for overseas staff.
- Additional costs
In some cases there may be additional costs involved, such as field trips that might add to the overall cost.
Accounting work, like most sectors, is both seasonal to some extent and definitely cyclical, implying that the client company would need considerable flexibility.
Success factors in outsourcing
If SMEs wish to outsource one or more of their non-core activities, they need to bear the following points:
1. Significant cost savings
For a firm to really consider outsourcing any activity, it has to offer substantial cost savings in the region of 20% or more. Any cost savings below this level do not necessarily make it worthwhile for SMEs to outsource. SMEs need to weigh the cost savings with the need to deal with outsourced staff. Therefore, the cost savings need to be worthwhile for SMEs to make the change.
SMEs looking to outsource one or more of their non-core activities need to ensure they have the flexibility to upscale or downscale their commitment depending on their needs. This implies that the outsourcing company needs to have additional resources which can be called upon at short notice.
3. Focus on core activities
A number of outsourcing companies have adopted the strategy of specialising in certain services rather than being multi-focused. In this respect, the SME can be assured of the level of experience and competence. The SME needs to ensure that the outsource company has the appropriate expertise with the experience.
The real success of any outsourcing company is its technology, as it needs to provide a seamless and quality service. More importantly, the SME may wish to have web-conferencing facilities, encrypted web enabled software, disaster recovery systems and so on. Although they are readily available, the real problem is that they get outdated at a fast pace and require regular investment.
Also, high-end technology requires qualified individuals who can maintain the system. The SME needs to carry out appropriate technology based on due diligence to ensure that the outsource company is able to deliver in this regard.
5. 24/7 operations
The key to a successful outsourcing is for the outsource company to provide 24-hours-a-day and seven days a week service.
SMEs could still keep complete control on the data and their customer accounts. They can get the data uploaded to their own server, or get the data scanned and sent by secure e-file share systems.
Outsourcing the export department
SMEs seeking to export their products or services into foreign markets have a number of different ways of outsourcing their export departments which include the following:
Commissioned agents: They act as brokers, who link an exporter’s product with a foreign buyer. Usually, the agent does not fulfill the orders, but passes them to the exporter for acceptance. These agents can sometimes assist with export logistics such as packing, shipping and export documentation.
Export management companies (EMCs): EMCs act as an exporter’s off-site export department, representing the exporter’s product to potential foreign buyers. The EMC searches for business on behalf of the export firm and takes care of all aspects of the export transaction. Hiring an EMC is often a viable option for smaller exporters who lack the time and expertise to break into foreign markets on their own.
An EMC provides a range of services from negotiating export contracts to providing after-sales services. Usually, the EMCs operate on a commission basis, but some take title to the products they sell and make a profit on the mark-up.
Export trading companies (ETCs): ETCs perform many of the functions of EMCs. However, they tend to be demand-driven and transaction-oriented, acting as an agent between the buyer and seller. Most ETCs will take title to your goods for export and will pay your company directly. This arrangement practically eliminates the risks associated with exporting.
However, the exporter needs to make sure that appropriate checks are made regarding the ETC. More often than not, an ETC can be a good source of export opportunity.
Export merchants: Export merchants will purchase and then re-package products for export, assuming all risks and selling the product to their own customers. This export intermediary option should be considered carefully, as your business runs the risk of losing control over your product’s pricing and marketing in foreign markets.
Dr. Ashraf Mahate is the Head of Export Market Intelligence at Dubai Exports (formerly known as the Dubai Export
Development Corporation), which is an agency of the Dubai Economic Department. Dr. Mahate is also the Vice Chair of the Economic Policy Committee with the Dubai Economic Committee with the Dubai Economic Department. He has written a number of journal articles, chapters in books and edited books in the areas of economics, finance and banking. He has also presented papers at major international conferences. Dr. Mahate has provided extensive consultancy services to various organisations in the areas of banking, economics and finance. He has been a director of a number of companies including a venture capital company and a private equity fund.
Dr. Mahate received his doctorate from Cass City University Business School in London (UK) which was ranked by the Financial Times newspaper as the 12th best university in the world for finance. He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institution of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists. (ACAMS)
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.