Why exploring operations outsourcing should be your first step after investing in a portfolio company?

Introduction

Are you thinking about operations outsourcing?

So, you are a Private Equity or a Venture Capital firm that invested in a portfolio company? Or you are the owner of a small or family business and want to change the culture? Or you are an advisor to firms that are looking to reduce operations cost? This article may help you.

The company has been in existence for decades and has had a decent run in terms of profitability and growth over the years.

Or, it’s a tech or SaaS startup and has the potential to see explosive growth in a short time.

Whatever is the case, assessing the potential of operations outsourcing should be the first step for any investor, owner, or advisor who can call shots when it comes to the strategy of the portfolio company

We will detail out the challenges of a new investor in the portfolio company and then go onto make a business case for outsourcing. We will also let you know the required process to outsource the chunks of operations for the newly acquired company.

Challenges of a new investor in the portfolio company

Here are the challenges that investors face after investing in a portfolio company

-Quick and Profitable Exit: The portfolio company is at a promising stage. It is either giving consistent returns from the past or has the potential for explosive growth. The investor needs to improve the revenue and profitability dramatically for a juicy exit in 5 to 10 years.

-Change Management: If the company has been around for some time and is generating decent returns, the next step would require shaking the complacency of family or small businesses, so that they are ready for the next stage of growth

-Focus: If the company is comparatively new, the focus should be laser sharp on a few key metrics like subscribers’ growth, conversions, clicks, etc. Though the focus is on a few key metrics, still management needs to keep an eye on the other operational metrics too.

– Non-controlling stake: Not all the time investors may have a hold on the management and decision making. Even without being in control, the investor needs to add value with effective advisory with the minority stake

A few quick wins in these situations go a long way in assuring Limited Partners and the management of the newly acquired company about the investor’s ability to turn around the situation.

How does operations outsourcing help?

Here is how outsourcing helps in multiple ways in the situations explained above:

–Reducing the operations cost quickly: There are lots of apprehensions about what could be outsourced. Smaller companies think outsourcing produces impact only for the headcount of hundreds of thousands. That is far from reality. Any job that could be performed away from the office could effectively be outsourced. Outsourcing reduced the cost of operations anywhere from 20% to 70% depending on the location and the operating model of the business

–Brings in critical skills without much risk: When investors identify priorities, they quickly need to bring the critical skills onboard. Outsourcing could help in bringing those niche skills without any performance risks.

-Improves the pace of implementation: As there is an extended partner, sitting out in a different jurisdiction, that ensures critical skills are available as soon as possible, there is a remarkable improvement in the pace of implementation of strategic initiatives.

What could be outsourced?

Outsourcing has a low-cost low-quality connotation. Outsourcing as an industry has come a long way since its beginning as low-cost low-quality jobs. Currently, there will not be any Fortune 500 company on the planet that may not be outsourcing any of its jobs. That does show the indispensability of outsourcing but does nothing to quell fears related to quality. Currently, the jobs that could be outsourced, not only belong to the low-end customer care jobs, but high end as well like Investment Banking. Magistral has helped dozens of its clients in outsourcing operations to low-cost countries like India.

Here are the examples of jobs that were successfully outsourced

-Design engineering for an interior designing firm, including kitchens and bathrooms

-Bill of Material preparation for a civil contractor

-Digital Marketing for a SaaS-based investment platform

-Handling high-end B2B accounts related inquiries

-Preparing legal agreements for a BFSI player

-Managing procurement function of a steel company

Well, this may be a small piece of the universe, but you get an idea. If you need an operational element outsourced, but are not sure if it could be outsourced, visit here, for a free assessment. If you are still not convinced, read further to understand the safest way of doing this for your portfolio company

How to go about operations outsourcing?

Here are the stages involved in an effective operations’ outsourcing

Business Analysis: An outsourcing potential assessment starts with a detailed business analysis of the current operations. All operational elements are evaluated on the potential for outsourcing, risks related to outsourcing, and the criticality of the job for the operations. Depending on the business analysis, the recommendations are suggested for either complete, part, or no outsourcing for all operational jobs. The business analysis could be done over online meetings or onsite visits depending on the scope of the outsourcing project

Knowledge Transfer: Knowledge transfer from onsite to offshore is done effectively in conjunction with the client. SOPs, KT plans, RACI, SLAs, and other tools are used to make sure knowledge transfer is effective, accountable, and rapid. At the end of the knowledge transfer exercise, all the knowledge in people’s heads is transferred to standard operating process documents. The client signs off the documents for further steps

Dry Run: Once the KT is completed, a dry run is undertaken for a small part of operations, being performed from offshore. Service Level Agreements and Operational KPIs are monitored closely. Some initial hiccups are expected in this stage of the process. All hiccups are slowly ironed out. Once all KPIs and SLAs stabilize, the process moves to a wet run.

Wet Run: In the wet run, the process is scaled up for multiple areas, but still a small portion of each area at a time is taken to be delivered from offshore.

Scale Up: Once KPIs and SLAs stabilize after initial hiccups of dry run and wet run, the offshoring is scaled up for the complete process. Effective governance and quality control measures ensure the process stability throughout the engagement

The multiple stages of offshoring protect the investor and the portfolio companies from shocks related to performance and job quality. At every stage, there is a mechanism to see if things are working out as planned. Corrective measures could be taken as soon as the deviation occurs.

Magistral has assisted multiple investors in outsourcing operations of portfolio companies through this process. Magistral has also helped multiple small and medium-sized businesses in the United States, United Kingdom, and Europe in taking advantage of Operations’ Outsourcing.

To commission a business analysis for a portfolio company visit here. To know more about our capabilities, visit here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at [email protected] for any queries or business inquiries.