by Richard H. Gamble

Let’s face it. Small companies usually are not innovative outsourcers.

Their main reason for farming out tasks is to devote as many resources as possible to deliver the product or service for which their success depends upon.

But the proliferation of small companies, many of them founded by sophisticated entrepreneurs with corporate outsourcing experience, combined with creative executives at companies organized to offer outsourcing services to small companies, has fostered innovative arrangements that are bringing new efficiencies and quality enhancements to America’s small firms.

Even so, for truly small companies, size can still be a barrier. Beyond the historically popular outsourcing of payroll, many small companies—those with less than $10 million in annual revenue—may have trouble finding an outsourcing provider because of their very small volumes, notes consultant Art Prifti, principal of APC Technology.

One solution would be for small companies to band together and pool their processing instead of trying to find solutions independently, he says. “Across 15 companies, there might be 150 people doing the same thing—telemarketing or manning help desks. If they pooled resources, that number could be cut to maybe 70,” Prifti suggests. “There has to be a common denominator; small companies won’t have identical business processes,” he concedes. That common denominator is bringing huge benefits in some industries.

What follows are a number of brief case studies on a number of innovative, new or different ways small companies are figuring out how to grow their businesses creatively with the help of outsiders. In some cases, they are even able to offer the illusion that they are much larger than they are.

Simulated Outsourcing

Tatum Partners knows outsourcing. The Atlanta-based company supplies temporary chief financial officers and chief information officers, mostly to small companies. Its 400 partners nationwide are savvy technology and finance executives.

One of the first things a partner does when he is brought into a company is to outsource a variety of tasks that other providers can do cheaper or better or both. The partners are familiar with providers who can help small companies with their technology, HR, finance and accounting, payroll, mail room and custodial services, to name a few.

But Tatum is itself a small company with its own need for support business processes. Take away the partners, and there’s a core group of 20-25 employees who aren’t executives for hire but are needed to keep the company running. Most of them provide marketing support, handle finance and accounting, or work information technology (IT), explains John Tatum, the company’s chairman. Tatum had all the right pieces to build a creative outsourcing solution for itself. And it did.

John Tatum calls it “virtual outsourcing.” He created a separate company called PartnerLink for those employees. He didn’t legally spin off this unit; it’s still a wholly owned operation of Tatum Partners. But he restructured it to operate like an independent company.

Gone is its budget. Instead it has its own income statement and operates as a profit center. “It’s simulated outsourcing,” Tatum observes. Because PartnerLink was not legally spun off, it is not truly independent and does not sell its services to other customers.

The move, launched in 2001, is paying off, Tatum says. “It saved us hundreds of thousands of dollars in the first year,” he claims. “There’s a big psychological difference between being given a budget and being given an income statement and an opportunity to generate a profit and share in that profit.” A budget is paternalistic; an income statement is entrepreneurial, he insists.

“When Joe Middlemanager becomes CEO of his own enterprise, a lot of things change,” Tatum adds. “It’s much more rewarding to increase profits than to beat a budget. It stops administrative creep, the kind of growth that afflicts companies with fixed costs that might not be absolutely necessary.”

Tatum even has a metric for measuring performance. “We call it PVA, process value added,” he says. “It has created incredible alignment. We’ve energized and directed that part of our enterprise that used to be overhead by becoming their internal customer instead of their boss.”

Can Do Anything in Cando

In remote, rural northern North Dakota, the 1,300 citizens of Cando can do almost everything at their local CountryBank USA that residents of Manhattan, Los Angeles or Chicago can do at the banking giants. There are investment reps in the lobby offering an array of mutual funds and annuities, ATMs, On-line banking with electronic bill paying, credit cards, home mortgages, home equity loans, mortgage refinancings, and, of course, CDs.

Are all these products and services supported by a busy operations center? Hardly. The bank has just 25 employees, 19 if you don’t count the six insurance agents who work in an affiliate that provides none of these banking services.

President and CEO Terry Jorde and her staff, customers and shareholders are beneficiaries of an outsourcing infrastructure that allows them to plug into sophisticated services and pay very competitive prices. Not the prices that one $36 million bank can command but the prices that several thousand independent community banks with hundreds of billions of dollars in assets can command with their aggregate size.

Working through their trade association, Washington-based Independent Community Bankers of America, CountryBank has negotiated favorable contracts with private service providers to support a variety of popular services. So Jorde’s bank is connected to many pipelines.

CountryBank, for example, can originate home mortgages and immediately sell them to Florida-based RBMG, which won a contract from ICBA Mortgage to be its conduit to the secondary mortgage market. The bank offers the same rates as its larger competitors, but instead of holding onto fixed-rate loans, it resells them, as well as the servicing contract, to larger institutions. It simply earns a modest fee and moves on to the next loan.

When CountryBank has funds to invest, Jorde uses a pipeline to ICBA Securities, which has a contract with Vining Sparks Securities, a Memphis broker- dealer, to buy and sell securities on behalf of participating ICBA member banks, again at competitive prices. When a customer wants a credit card, bankers in Cando use their pipeline to ICBA Bankcard, which has a contract with a provider that does all the servicing. A bank can keep the account on its books, take the credit risk and earn a small percentage of the card balances, or it can sell the account outright and simply assure its customers can get credit cards.

Another provider not connected with ICBA, Digital Insight, supports CountryBank’s on-line banking and electronic bill payment, while the two lobby reps who sell investments in Cando work for Investment Centers of America, which started as a family-owned, North Dakota company and is now nationwide. Investment centers has all the links needed to provide the basic investment products commonly offered by banks. ICBA now offers similar services through its Financial Services subsidiary, but it didn’t at the time that CountryBank signed on with ICBA.

How many employees would CountryBank have to hire to provide such services in-house? "There’s no number," Jorde says. "We simply wouldn’t be able to offer the services without our partners. We pool our buying power. They allow us to survive and concentrate on serving customers."

Seamless IT Outsourcing

Many small companies start with piecemeal outsourcing. Perhaps it needs the services of a local lawyer and accountant to get started. They may recommend other providers of business services. Eventually, an outsource provider takes over a broader process and is more flexible about meeting the small company’s needs. That happened to Larry Williams, president of Advanced Temporaries Inc., Tyler, Tx., who had trouble managing IT in-house. “A staff person can hold you hostage,” he says. “They control the critical infrastructure, and you’re in trouble if they ever leave.”

Advanced Temporaries had a staff IT professional for a while, but then tried to operate without one, using different vendors for different services, a haphazard piecemeal approach to outsourcing. “It was an internal car wreck,” he recalls. “ We were spending more than it would have cost us to have two full-time IT employees.”

Then the company outsourced the whole operation to Dallas-based MBD Network Services LLC, and its troubles ended. “I now have a no-thought, nofault, no-worry system,” he insists. “They monitor and maintain my system. If something goes wrong, they fix it immediately. I get e-mails notifying me that something was fixed before I even knew it was broken.”

Bob Mahon, MBD’s director explains that his market is any company in the Dallas-Fort Worth area with fewer than 150 computer terminals. “We have a process for managing computer networks, and we apply that process to every one of our customers,” he says. A company at the top end of that range might have two full-time IT employees. “I can do it better for 40 hours a month,” Mahon claims. “When companies calculate the cost accurately, they always save money by using us. We are 110% of their IT department. We do it all.”

Staying technically current is always a big IT issue, of course. Mahon says his engineers go to school every year to keep up with the latest developments. “It’s hard to justify that much training for an employee, and if you did it, they might job hop and take that training to another company that will pay them more,” he says. “We get urgent calls all the time from companies whose prized IT guru just walked out the door. Some small businesses think they have more control if they keep IT management in-house, but that’s not true. We can’t leave on less than 60 days notice, and the customer owns the passwords. They actually have more control if they outsource.”

MBD sells no hardware or software, but it works closely with Dell, the preferred provider for most small Texas companies. “ We go in and see exactly what hardware the company needs and recommend it,” says Mahon. “If management approves, we tell Dell exactly what to ship, but we never touch it. It’s never our receivable. We expedite the process.”

Cutting Fixed Costs

When Ken Reiser bought 83-year-old Meletio Lighting, he knew he had to address a problem. The Dallas-based electric distributor, with 50 employees, had always been family-owned and had fixed costs that were too high. So he started to make cuts. First, he canned the full-time janitor and hired an outside firm to come in and clean up.Not only were his offices cleaner, he halved his cleaning costs.

Next were the two trucks and two fulltime drivers Meletio had employed. Reiser permanently parked one vehicle and eliminated one driver. He intended to outsource half of the driving, making that cost variable instead of fixed. He had a pleasant surprise, however, when the remaining driver took care of almost all the deliveries, saving him $20,000.

He also outsourced payroll. But the big move came when he outsourced his IT operations to MBD. “A lot of our processes and procedures were not up to best practices, especially in technology,” Reiser notes. “We had a bunch of old computers held together with bailing wire,” he says. “Our software was out of date. Most of our staff was barely computer literate. We had one full-time IT person, but we had no way of knowing how good a job he was doing.”

Reiser says he saved between $20,000 and $30,000 a year by hiring MBD. Now he is trying to figure out what next to outsource.

HR Relief

PEOs have come to small companies. Professional employer organizations like StaffPay Inc., of Irvine, Ca. “take on the responsibility and liability of being the employer,” notes Vic Tanon, president.

StaffPay serves as the legal employer of its clients’ employees in many key ways. If there is a worker’s comp claim, it is against StaffPay. Employees get their pay checks and tax forms from StaffPay, which pays the employers’ Social Security taxes. StaffPay provides employees’ health and retirement benefits and enjoys the economies of scale they get from pooling the employees of their clients. StaffPay carries the insurance, negotiates claims, and would be the liable party in a lawsuit involving one of its client companies, drawing on insurance subsidiary, CompassPoint Insurance Services.

All client companies need do is participate in the hiring and firing of employees, set the compensation and supervise their actual work, Tanon says.

While the concept has been around for years, it’s certainly innovative in the world of small businesses, he reports. “Most of the people we talk to have never heard of PEOs. Their first question usually is ‘Is this legal?’ It’s definitely something that has to be explained.”

Specifically, StaffPay offers five core HR services: HR administration, workers comp, risk management, including safety training, benefits, and payroll. “We’re a supermarket of employer services,” Tanon says. “Our clients cut us one check per pay period, and we take care of everything else, leveraging our purchasing power, which saves them money.”

Team Tite Joint, of Downey, Ca. employs between 10 and 15 people to install finished wood products in high-end commercial locations like Cheese-cake Factory restaurants. It uses StaffPay to handle its HR and insurance needs.

“We had a situation in New York where a union tried to strong-arm us off a job,” reports Vera Snyder, general manager. “We called StaffPay, which called their lawyers and that was the end of that problem. They help me be a good employer. It’s not cheap, but we could never afford that much expertise if we had to hire our own staff.”

Since engaging StaffPay, Thomas Kiblen Associates, Long Beach, Ca., has seen its annual growth rate shoot up from 10% the first year to 30% the second and third years, reports Tom Kiblen, CEO of the Dale Carnegie training franchise that employs 8 full-time and 12 part-time trainers and just two administrative people. “Outsourcing HR makes us more productive,” he says. “We eliminated distractions and can focus on our clients.”