The number of closed businesses has slowed dramatically over the last few decades despite the record amount of money held by venture capital and banks for investments and loans to emerging growth business.
San Francisco, CA (PRWEB) October 24, 2016
A Brookings Institution report released in 2014 concluded that business dynamism, or the number of new businesses formed in the U.S. versus the number of closed businesses has slowed dramatically over the last few decades despite the record amount of money held by venture capital and banks for investments and loans to emerging growth business.
The reasons are several fold but clearly one of the significant issues is the cost, both in terms of money and time in setting up a new business, including regulatory and compliance costs, labor, infrastructure and other costs.
Costs for a startup business can generally be classified into six major categories:
- Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing. A substantial amount of upfront money is needed to fund initial product inventory for sale.
- Professional fees: Setting up a legal structure for a business (e.g. LLC, corporation), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, attorney and accountant fees for ongoing consultation.
- Technology costs: Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance, high-speed internet access, servers, security measures, IT consulting.
- Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets, etc.
- Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists.
- Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation.
Depending on the type of business (manufacturing, services or retail), these costs can amount to hundreds of thousands and even millions of dollars to just start a new business.
But there is a better way!
Virtually every internal business function can be outsourced to a firm that will provide the service to a start up company in many instances at a lower cost and higher quality than could replicated through inhouse resources.
Every business uses outsourced services. Many businesses don’t deliver products directly to the customer or do their own audits or taxes, or self-insure the business. Successful businesses outsource those functions which are not strategic but which must be performed to manage the business operations.
Consider outsourcing everything that is not strategic to the business. This includes Human Resource (HR) support functions, accounting, manufacturing, transportation, and even executive staff. Does a small company need a full-time CFO or controller, or would a “fractional” CFO or controller that is a shared resource with other companies work? The concept of a pay as you go billing and general no upfront investment costs make outsourcing non-strategic functions a compelling solution for new and emerging growth businesses.
Six Key Outsourcing Solutions
1. Manufacturing – outsourcing and on shoring
Building manufacturing plant and process is a significant endeavor. Purchasing a plant facility, manufacturing equipment and hiring workers are costly. For most U.S. companies, the trend to outsource and offshore manufacturing and assembly work to companies in China and other parts of Asia make significant economic sense. A company’s product can be up and running in no time due to the extensive expertise and facilities at the disposal of global manufacturing outsourcers. But things have began to change in the last few years as the economic recession reduced labor rates in the U.S. and labor rates in developing countries in Asia began to increase, leveling the playing field. Evaluate outsourcing the manufacturing process but don’t rule out the U.S.
2. Finance and Accounting – the concept of the fractional CFO
Many small businesses use very simple accounting packages or use QuickBooks, a very effective accounting software package for small and mid sized companies. But the biggest cost of finance and accounting is the people cost including hiring and retaining qualified people. Also, unless the company is a larger middle market business, it may not need a full time Chief Financial Officer. Consider outsourcing the accounting and finance function including a “fractional” CFO. There are many very qualified finance and “back office” accounting organizations in the market. The cost savings can be significant and management timesavings to focus on growth issues can be invaluable.
3. Technology – it’s in the cloud
Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the Internet) thereby obviating the need for capital investment in technology and use-based pricing similar to electricity usage. End users access cloud-based applications through a web browser or a lightweight desktop or mobile app while the business software and user’s data are stored on servers at a remote location.
Key advantages include:
- Achieve greater scale with fewer employees and little capital investment; cost is “by the drink.”
- Go global at an earlier stage by deploying Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) technology not previously available to mid-sized companies.
- Deploy on-line CRM and customer care to “re-personalize” customer experience and make relationships more “sticky.”
4. Administrative costs – the office
Next in terms of size to the cost of providing the product or service and the labor to produce it are fixed costs such as office rent, administrative and support costs, utilities, security, phones, office equipment and other costs. Many companies are moving to a shared location and shared administrative service concept in the form of executive office suites. These suites have full administrative support, do not require a long term lease, have offices already built out, are generally in several locations in a city and have worldwide facilities and are very cost efficient for new and emerging businesses. A business could be up and running overnight with multiple city locations.
5. Human Resources – the role of the Professional Employer Organizations PEOs are companies that can manage and run most of the human resource functions of a business. Most small and mid sized companies should consider outsourcing HR including hiring, benefits, management, HR compliance and a concept of co-employment where employees are essentially employed by the PEO and the company. A Professional Employee Organization (PEO) can help process payroll and offer employees a better offering of benefits. In addition, by pooling with other companies through a PEO, the company can get significant discounts on the cost of benefits.
6. Sales and Marketing – using social marketing
Websites, social networking, and LinkedIn usage can save enormous sums for marketing the company’s products. Look at the outbound marketing costs and see what can be substituted. Advertising budgets, trade show involvements, and general events are prime areas for trimming or eliminating while effectively using enhanced inbound marketing approaches. In addition to the very low cost of sales outsourcing using social media, there are many sales outsourcing companies that will run the entire sales process for the company including prospect contact, customer order, product fulfillment and Customer Relationship Management (CRM).
So the natural question is what is left if everything is outsourced. The answer is the company’s intellectual capital. Successful companies have long learned to focus on what they do best. Companies such as Apple do not manufacture their products – but focus on design and innovation. By not outsourcing everything that does not foster creativity and growth, new businesses may be facing an insurmountable barrier to attaining success.
Michael Evans is the Managing Partner for Northern California for the Newport Board Group.