Being efficient is always good, but any company that's been inefficient in the economy of the last several years is lucky it has survived.
Any business that has a hope of continued survival will need to become more efficient and modernize.
Consolidation is especially important for a firm undergoing a modernization program. When you need to modernize, there are systems that you know must be replaced or tweaked, and if everyone in the company is running off the same processes and procedures, you can get that done much more efficiently.
In years past, there were certain geographic trends that were affecting businesses. Thirty years ago, there was a general migration of businesses to the Sunbelt. That's not necessarily the case anymore, though I do hear a lot about companies that are trying to leave California because of the regulatory environment.
If there's any trend at all, it might be that companies seem less place-bound and more willing to consider geographic options other than staying home.
Especially for businesses of the target size, $5 million to $50 million in annual revenue, private equity firms are out there trying to find a business model that is applicable across the country or multiple geographies so they can take that business model, multiply it and create a much bigger footprint.
You see a lot of companies right now that are zeroing in on the question, “Am I really focused on the key things I ought to be focusing on and am I getting rid of the things that are keeping me from focusing?”
Companies will divest certain operations which are not core to what they do right.
Let’s say I’m a software provider and I got myself into being a third-party administrator for companies that are using my software. Maybe I want to be focusing on developing software, not on the headaches of administering my software for companies. And that could be the reason I want to remove myself from this operation. Let me be a software developer. I want to focus my energy and my time on that. Let somebody else be the third party administrator.
The biggest trend affecting this subject is the aging of the Baby Boom generation. The oldest among this cohort have now reached the age of 68 and many have a desire to retire after surviving the downturn of the past five years.
Through our recent economy, the companies that have survived and grown are companies with a specific competitive advantage. Often, those firms have been able to respond to the marketplace with greater flexibility than their competitors. One way to build flexibility into your company is to reduce your inherent fixed costs of doing business.
The big benefit of outsourcing is that you can make what is otherwise a fixed cost into a variable cost and avoid the burden that large fixed costs can place on your company during an economic downturn.
Outsourcing started with IT and now has gone into other transactional activities within a firm, whether it’s payroll processing, invoice processing or purchasing. These are often administrative activities which may not be the core competency of a firm. To the extent that you can cut down the overhead, it can be a real benefit.
If you are creating a new business in this environment, you go to outsourcing just to save on the initial investment. You want to make your costs variable not fixed because you don’t know exactly where you’re going or how big your business is going to be.