Qualifying your Outsourcing Services

Toward the last quarter of 2014, Japan declared it was in a state of recession. The United Kingdom released finding of its studies that revealed the world was heading into another global recession. The new millennium has been besieged with events that have shaken the world economy. In a recession, aggregate demand suffers and corporate earnings plummet.

The primary recourse of companies is to reduce spending by identifying areas where it can cut costs. The biggest casualty is almost always labor. The first decade of the new millennium has been punctuated with massive layoffs worldwide. Labor is the first cost component to be reviewed because the actual cost of a hired employee rises exponentially year after year due to increased benefits.

Why Going Big Isn’t Always the Best

The estimated cost of a regular employee is one-and-a-half times to double the rate of his or her monthly salary.

An alternative for companies that want to streamline labor cost without affecting productivity is through outsourcing services.

The best Outsourcing services take advantage of the comparative cost advantages available in another region. In the outsourcing process, labor is the biggest comparative cost advantage. A regular office employee in the office is paid a total compensation equivalent to US$30 to 40 per hour including benefits.

Comparatively, through an outsourcing services arrangement, an outsourced worker is only paid a total compensation equivalent to US$3.50 to US$7 per hour depending on designation and skill level.

The growth of outsourcing services as a viable option for companies seeking to reduce costs can be seen in the growth of the Philippines outsourcing industry. It has been on pace to maintain its annual growth rate of 20% first projected in 2003. Estimated receipts from outsourcing in 2014 are at US$15Billion while projected receipts for 2015 are at US$18Billion.

The Philippines real estate sector has responded to the demand for outsourcing with more than 700,000 square meters of commercial space allocated for outsourced back office operations alone for 2015. And back office is only an emerging segment of outsourcing. The bulk of revenues come from voice accounts such as telemarketing and customer service. More outsourcing companies are being registered as new business and office spaces are being converted as seat lease facilities.

With such a large ocean of opportunities in outsourcing, the question for the company seeking to outsource services is: Which company do I approach?

The immediate reaction would be to approach a large outsourcing company with a long track record and history in the Philippines. But that may not be in the prospective client’s best interest especially if the enterprise is small in scale.

The majority of the large outsourcing companies operate on a system of PROTI or Potential Return on Time Invested. This means its portfolio of clientele will be maintained based on the return the services provider earns from each client. Those that meet the target PROTI are maintained and those that don’t will either have their contracts terminated or given the option to be sub-contracted to an affiliate center.

Majority of clients that have had their accounts terminated or sub-contracted to affiliate centers are those who are in retail and operate on a pay-per-performance schedule otherwise referred to as commission-based accounts. These types of accounts pay the services provider on the basis of qualified or authenticated sales.

The qualifying or turnaround process can be tedious, with most operating on a net 15 to 30 days schedule. This means payout will be remitted 15 to 30 days after submitting the sales summary. For the services provider, it will have to advance payment for operational expenses from internal sources during the qualifying period.

The risk for a services provider that manages commission-based accounts is if the disqualification rate remains high. In the Philippines, one of the fastest growing industries for outsourcing is in healthcare accounts such as diabetes enrollments. Delays in the qualifying process occur when the signed up subscribers to the program cannot be contacted to confirm their agreement to the enrollment or if the attending physicians are not available to authorize the transfer to the new program.

Even if the service provider adheres to the protocols, if the enrollments cannot be qualified within the prescribed period, the sale will be nullified.

Conclusion about qualifying best outsource services

Large service providers have the economies of scale to cover these advances. But if the qualifying period is further delayed and the disqualification rate is not mitigated, these accounts will most likely be discontinued or sub-contracted. In addition to PROTI, a service provider ideally wants to make each account its own profit center; it must be self-sustaining and within profitability benchmarks.

In Part 2, I will discuss the steps required in qualifying a right-fit outsourcing services provider.