March 18, 2019
The $600bn outsourcing service-marketplace
Outsourcing is a little known, and largely misunderstood tool for business. Yet, it is probably the single most powerful tool out there, which can literally transform a company’s profits and prospects for growth.
Outsourcing has been around for 25 years, but has only now, just become accessible to small and medium sized businesses.
There is an upcoming ‘next wave’ of outsourcing, which has the potential to generate 30 million more jobs and $600bn of economic activity – all catalysed by the fast-advancing globalisation and technology.
Despite being an esoteric high-value B2B service, there is only one aggregator marketplace for the entire outsourcing industry – Outsource Accelerator. It is an industry that desperately needs the advantages that a managed marketplace offers.
This is the argument for the power of outsourcing, how it will generate 30 million jobs, and why a well constructed services marketplace, could have an incredible impact on the industry and world.
A brief history of offshore outsourcing
America and the ‘West’ has been outsourcing to Philippines and India for the last 25 years. As soon as international telephony became cheap enough, someone realised that American call centers could be managed by people sitting in Philippine at a fraction of the cost.
As we all know, IT and telecommunications has improved exponentially over that time. The internet soon replaced basic telephony, and as the bandwidth and use of the internet expanded, the applications of outsourcing equally grew. Outsourcing started with call centers, but now serves literally any role/function that can be done in front of a computer – which is now 80% of the functions of 99% businesses, across 99% of business sectors.
In the beginning, access to outsourcing was strictly limited to the ‘Fortune 500’ companies of the world. The setup and infrastructure costs were so great, that companies needed massive scale to justify the setup and ongoing costs. Outsourcing clients back then, would typically have a minimum of 500-1000 people performing one business function.
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Now, as technology, servers, software and everything is in the cloud and at a fraction of the cost, outsourcing has become infinitely cheaper, more flexible, and as a result, available to the Small and Medium Sized Enterprises (SMEs) of the world. Now, there are a new breed of outsourcing suppliers, that offer more affordable and flexible services. These new outsourcing suppliers now work with SMEs, require just 1-2 full time people – and offer more flexible contracts to boot.
However, access, does not mean adoption. Despite the fact the world’s major corporations have all been outsourcing for decades – 95% of the big companies outsource, only 0.5% of the SMEs have tried it.
To put the potential market into perspective, the ‘West’ has about 35 million SMEs. If 80% of those SMEs eventually outsource, that’s another 30-60 million jobs on the way…
The primary reason for outsourcing is simple: you can save 60%-80% on your staffing costs.
There are very few tools out there that can have such a profound effect on an organisation, and its P&L, than a 70% reduction on one of its equally most critical, and most expensive inputs.
The primary benefit of outsourcing is simple and clear, but let’s delve a little deeper into the secondary considerations.
Outsourcing is not all about cost savings. For savings to make sense, they cannot be at the cost of income, customers, output or quality. So it is critical to realise that outsourcing offers a ‘net’ saving of 70% when considering all of the different structural impacts and considerations.
Equally, these savings cannot come at the expense of great inefficiency or ‘friction’. If there is too much friction in doing something, then even if you save 90%, it just wouldn’t be worth doing. Thus, it’s important to realise that successful outsourcing, can, and must be delivered with minimal friction compared to traditional operations.
Outsourcing is not just about mitigating cost and friction. The biggest opportunity lays in the vast upside. If you have access to abundant, highly skilled resources, at a 70% discount to your competitor, you have a huge competitive and strategic advantage. Abundant cheaper human resource can allow your organisation to research, market, sell, service customers, develop products and explore new markets – better, faster, cheaper and more frequently than everyone else. This is where outsourcing gets really exciting – not least for SMEs where resources are tight.
Education and awareness
The adoption of outsourcing in the SME sector is in early stages. The very fact that i had to give an introduction to outsourcing at the start of this article illustrates that the understanding and adoption of the outsourcing industry is still very nascent. In contrast, when people first described Uber, they didn’t have to first define what taxis were, and why people use them.
Outsourcing is beset by people not really understanding what it is, mistaking it for the ‘Tim Ferriss style of side-hustle freelancing’, or generally defaulting to doubting its efficacy. This is similar to the ‘early non-adopters’ of tech. When a market is nascent, it simply means that the customers need a lot of education and nurturing.
Managed marketplaces – a place for education, curation and advisory
Marketplaces have not commonly been built around services – they typically focus on products. This is for a number of good reasons. Services are typically:
- more complex and difficult to define and categorise
- the outcomes are less binary, more qualitative and open to dispute
- ongoing in nature and often with dependencies
- higher value and non-finite cost structures
It is for these reasons that services are not easily, and thus uncommonly aggregated into platforms.
Ironically though, it is exactly this complexity and difficulty that justifies the existence of a marketplace in the services space. If a marketplace can make something that is complex, more simple, then the marketplace is adding tremendous value, and will catalyse more sales.
Because outsourcing is not only a high-value services sector, but it is also a nascent, misunderstood and under-appreciated sector, then there is even stronger argument for a managed marketplace, such as Outsource Accelerator, in this space. The managed marketplace offers much needed education and curation, and builds awareness, comfort and trust – as a part of its service offering.
SMEs as ‘B2C consumers’
If we are to coax more SMEs into outsourcing, it’s important to realise that they make business decisions differently to their enterprise counterparts. SMEs think, act and consume, more like a B2C consumer than an enterprise. This is because it is really just a consumer (ie 1-2 people) at the helm of an SME, and not a structured corporate process, which is typically making the decisions on behalf of enterprises.
B2C consumers are now used to, and expect, marketplaces, aggregators and comparison sites, to guide their buying decisions, and expect easy contracts, quick on-boarding processes, flexible terms, and easy cancellation and refunds when buying.
If we want SMEs to engage in outsourcing, then the outsourcing marketplace needs to follow these similar protocols.
Service-based managed marketplaces are slowly on the rise. However, not all services are created equal. A manicure service, differs greatly from a private wealth management service. Some services can be complex, yet low value – like massage (lots of things can go wrong with massages), whereas others can be much higher value, with less complexity.
Another great thing about B2B services, is that they are generally much higher value than B2C services. They aren’t necessarily less complex, but the higher value and ongoing long-term nature, can more than compensate for this. Outsourcing is a high value service with typical engagements priced at $15,000-$150,000 per year, extending for many years, and with low attrition rates.
A market-maker, not just an aggregator
Outsource Accelerator is as much a market maker as it is an aggregator. A successful marketplace will not only ease entry into outsourcing, but it will grow the overall size of the market, because it raises awareness, and makes outsourcing easier to understand, engage with, and adopt.
Apple is a good example where they created a huge new economy from their iPhone Apps – where previously nothing existed. Apple doesn’t just make buying the apps easier, it actually created the use case, and demand for Apps. Without Apple, there were no Apps.
The good thing about creating a market, is that you can then make the rules of the market. The market-maker effectively becomes the governing body of that market. People have to agree to Apple’s terms, otherwise they are locked out. This is a very powerful position to be in.
Outsource Accelerator isn’t exactly ‘inventing’ outsourcing, but it has a good shot as being the first to create a significant fluid marketplace for SMEs, as as such, have significant influence over how people engage within that marketplace.
New employment – a globalised market
The interpersonal structure of employment will not radically change over the coming decades. Humans have been organising themselves in a similar fashion for the last few millenia.
However, globalization will have dramatic impact on the ‘pool’ from which we hire. Globalisation will eventually make one big employment pool, instead of the current geographically fractured marketplace.
Freelancing platforms such as Upwork and Freelancer offer new approaches to short-term and project-based employment. But this isn’t a substitute for ‘real employment’ in a traditional sense, and generally the short-term nature, and ‘free-for-all’ market means that some (both supplier and consumer) walk away disappointed from their experience. These platforms have demonstrated that freelancing is a useful tool, suitable for startups on a budget and one-off projects, but users often find that the process is fraught with trial and error, and cannot be scaled.
For as long as there have been companies, there have been employees. Companies are powered by employees, and as companies grow they employ more people.
The key value proposition of outsourcing is that it is basically augmented managed employment for your business, but leverages an incredible 60%-90% discount on salaries, whilst maintaining or improving quality of output and efficiency.
Employment will be the same but the market size will grow
Globalisation removes the friction of distance and the relevance of location.
As the economy continues to move towards service and intellectual-property based work, the ‘wider bandwidth’ of internet (greater capacity) and deeper reliance on apps and software interfaces means that more and more can be done ‘online’ and remotely. This move to remote, will inevitably lead to increase the ubiquity of cross-border employment.
The exponential improvement and adoption of software – such as Slack, Skype, Zoom, chat, Trello boards etc – will mean that remote networking becomes more and more ubiquitous. ‘Young society’ has demonstrated that people enjoy and even prefer online communication. We see this with the millennials spending all day texting each other, interacting in Facebook communities and the massive rise in virtual gaming worlds (and gaming addiction).
As globalization and technology removes the geographic relevance of interaction, people will realise that there are countries such as The Philippines that offer equally qualified candidates, at an 80%+ discount. And outsourcing will become an increasingly obvious choice.
This all leads to a perfect storm for the next wave of outsourcing, and the pathway to 30 million outsourced roles.
The internet – making one big world
The future of employment will change as more people enter the market. Currently only 50% of the world’s population – 4 billion people – have access to the internet.
The early users (ie wealthy countries) of the internet were ‘consumers’. They consume content, games, and products through the internet. The latter entrants to internet – those in the developing economies – will increasingly be the ‘producers’ – the workers of the internet era.
Most of the four billion people, that aren’t online yet, commonly earn less than $5 per day. As education and cultural alignment rises (through Youtube, online forums, MOOCS and broader education) the potential prospective workforce of these countries will become more relevant and valuable. Market forces will mean that their salaries will eventually increase to parity to the West, but the large supply (4bn people entering the market) will mean that the salaries will remain low for a long time to come.
This long term view is largely irrelevant to the scope of this article, but it helps demonstrate that there are already many millions of people that are online, well educated, and, culturally aligned, that work for significantly lower salaries. The only ‘compromise’ is that they work remotely.
Outsourcing is a win-win
At this point, people might be concerned about the ‘hazardous ethical effects of outsourcing’. I have written many articles on this topic for people to reference. However, in short (i) globalisation is inevitable, (ii) one single, bigger networked economy is many times more powerful than numerous separated smaller economies which benefits all participants of the more powerful economy, and (iii) outsourcing is a catalyst for efficiency and growth, which is positive for all participants of a market. It is a win-win for all.
Friction to starting outsourcing – thus, need a platform
If you own a business, then outsourcing makes perfect sense. Yet, there is as yet, such low adoption by the SME population. This is the issue that Outsource Accelerator is addressing.
There is friction in commencing outsourcing because people aren’t aware of it and if they are they have concerns and misgivings. Very few people in SMEs really understand how it works. This is a major hurdle to overcome in terms of exploration and engagement.
Even once people are open to exploring outsourcing; because it is a complex ongoing service, the sales cycle is slower and complex. This means that that the uptake and engagement will be much slower. This is generally the nature of B2B services. It is slow moving.
This complexity and friction is compounded by the fact that outsourcing is maybe the only industry in world where, by definition, the customers are in one country, and the suppliers are in another country – typically a ‘developing country’. This tyranny of distance only adds to the transaction’s opacity, friction and distrust.
This complex relationship means that a managed marketplace is desperately needed.
$600bn – big market, big growth
If this was a small industry, the complexities might not justify the proposed solution. However, outsourcing is already a $25bn industry in Philippines, a $200bn industry worldwide, and we project a staggering growth rate with an additional $600bn of activity over the coming years.
As globalisation, remote work and outsourcing become more normalised, then the outsourced workforce will expand from the current 4 million people to 34 million people.
Outsourcing is not new. The benefits have been successfully proven for 25 years, by its continued adoption from the world’s big corporations. Yet, adoption rates are low amongst the SMEs. I believe that this is simply because there isn’t a proper marketplace in existence – until now – that helps catalyse the growth. Without proper education, awareness, and curation – growth could remain low. However, with these things in place, growth could become exponential.