Can BPO Work for Small Business?

John Olinger has no plans to outsource customer service tasks from his 40-person manufacturing firm to an overseas location. Wages may be cheaper for call-center workers in India or the Philippines, but he is sticking with his staff of three customer service representatives. That’s partly because Olinger, president of Westport, Mass.-based Hoyt Corporation, doubts he could find foreign workers with the right expertise for his business, which makes dry cleaning equipment as well as washer and dryers for military submarines and ships. “It’s pretty difficult to find customer service reps for our industry,” he said. “It’s pretty specialized.”

On the other hand, Olinger has outsourced his payroll operations to domestic service provider ADP for roughly three years, and has expanded the employee services he farms out.

Hoyt is like a lot of other small U.S. businesses when it comes to outsourcing decisions. Mom-and-pop shops and other small organizations are quite comfortable contracting with other companies or independent professionals for tasks such as tax advice, graphic design work or computer systems help. And small businesses are taking advantage of a wider range of offerings from outsourcers.

But this outsourcing activity appears to stop at the nation’s shores. Large companies have been busy arranging deals with service providers touting overseas facilities, which are used for services such as transaction processing and call center operations. Yet the offshore outsourcing phenomenon is not reaching down to the level of small companies, and probably won’t for the foreseeable future, says Debashish Sinha, an analyst with market research firm Gartner.

According to Sinha, the business model for offshore generally involves establishing a dedicated facility for a particular client. That only makes sense when the client wants to transfer a significant amount of work offshore. “You need a critical mass in order for this model to be cost effective.” For example, Sinha says, it wouldn’t be wise to ship customer-care contact center operations offshore unless the contact center is 50 seats or larger.

The offshore outsourcing trend is of little concern to Savela & Associates, a Birmingham, Ala.-based staffing company with roughly 20 permanent employees. “It’s not a focus right now,” notes Amy Spires, Savela’s business and technology manager. Savela doesn’t contract with foreign-based service providers nor with any U.S.-based firms that promise overseas outsourcing operations.

On the other hand, Savela has farmed out its payroll and tax duties to service provider Paychex for about five years. Rochester, N.Y.-based Paychex cuts the checks for the 200 to 225 temporary workers Savela assigns to clients, and also takes care of submitting payroll taxes on Savela’s behalf. Early this year, Savela decided to outsource another task to Paychex: unemployment claims processing. When former Savela temps file for unemployment insurance, the state government used to send Savela forms to complete. There could be up to 30 cases a month, Spires says. Now those forms go directly to Paychex. “Just taking that paperwork nightmare away is a big, big piece” of what they do for us, Spires says.

Hoyt also has increased the number of tasks it requests of its payroll services provider, Roseland, N.J.-based ADP. About a year and a half ago, Olinger turned over management of its 401K pension plan to ADP. Before that, Hoyt staff had to calculate the proper contributions to the employee accounts, and then submit deposits to the fund manager.

To Olinger, outsourcing payroll tasks is a no-brainer for a small business like his. He says ADP saves him from having to hire an extra employee to manage payroll — for less than half the cost of a worker. At the same time, he says, ADP provides better service than an employee of his own could. “It’s absolutely crazy to keep payroll in-house these days,” he says.

Giving an outside company like ADP direct access to the company’s accounts might make some business leaders nervous. But Olinger says he can reconcile bank statements with ADP’s transactions. He’s had no problems with ADP so far, and he trusts the firm is above robbing him on the sly. “You may have to worry about that with some service providers,” Olinger says. “But ADP is a pretty reputable” company.

ADP has won the confidence of quite a few businesses like Hoyt. The company has roughly 350,000 small business clients — defined as a business with fewer than 50 employees. Generally, small clients call or fax in their payroll information and the checks go out the next day, says Rich Watson, product manager for ADP’s small business services division.

This might seem like the kind of work that could be located overseas. After all, plenty of call centers are popping up with lower-wage workers in India, the Philippines and Jamaica. And improved communications and computer networks could allow checks to be processed abroad, printed at home. But ADP doesn’t serve any of its U.S. small business customers from offshore locations. “It’s something we’re looking at,” he says. “It’s not something we’re doing right now.”

For now, ADP uses a network of 33 facilities throughout the United States to do processing work for small business clients. It would be difficult to duplicate the quality of service offshore, Watson suggests, because tax questions can come up that are particular to different regions. Tax-related service, therefore, requires regional smarts. “It’s very dependent on local knowledge — expertise within a specific state.”

ADP isn’t philosophically opposed to the offshore model. Its subsidiary ADP Wilco has operations in Hyderabad, India that provide services such as managing securities data.

It’s possible that companies selling outsourcing services to small businesses might do the actual work overseas, says Mike Atwood, president of consulting firm Everest Group. A company such as ADP could aggregate enough customers so that an offshore customer relations call center might make sense, he suggests. Companies that provide information technology or business process outsourcing services to large firms — service providers such as Hewlett-Packard and Electronic Data Systems — are expanding their offshore resources to cut costs for clients and compete with foreign-based rivals.

Atwood expects high-end outsourcers like EDS to try to make inroads with smaller customers. “They’re all going to want to reach down into the small business market,” he says. “Nobody’s been able to figure out how to do it yet.”

Atwood is skeptical the high-end service providers will succeed. In the mid-1980s, he led an effort at EDS to try to serve smaller businesses. The push was abandoned, he said. One problem facing the high-end service providers, he suggests, is that they are used to customizing their offerings for big companies, but the small business market requires a more standardized product.

Another issue relates to marketing, Atwood says. Getting the attention of small businesses is hard to do in a cost-effective way. “The cost of sending a salesman (out to convince a small business) is probably more than the amount of profit you’re going to get in the life of the relationship.”

Even if high-end service providers make a dent in the small business market, it’s not clear small companies will sign up for offshore offerings. Part of what makes small businesses attractive to their customers is their loyalty to a community.

Amid the furor over job losses due to offshore outsourcing, small businesses may choose to keep their work on U.S. shores. Hoyt’s Olinger, for example, notes that his equipment is made in America. That domestic feature serves him well in contracting with one of his major customers: Uncle Sam. “We want to make sure we don’t depart from those roots too much,” he says.