Entrepreneurs grab a piece of the $100 billion outsourcing pie.
Jesse Ramos Jr. could have been just another victim of downsizing. When the large oil and gas company where he had worked as a controller for 25 years was sold, he was one of the first to get the ax. But Ramos, 54, didn't let it get him down, and he didn't look for another job. Instead, he started his own business--and turned his former employer into his first client.
Ramos, with three of his downsized co-workers--David Orta, Ikie Wilkins and Garrell Edwards--joined the growing ranks of outsource contractors, providing many of the same skills they had performed in the corporate world but now doing them on an independent basis.
Today, Ramos and his partners, who own and operate ROWE Energy Services Inc. in Houston, provide specialized financial services for companies in the oil and gas industry. By 1998, the partners expect to be pulling in more than $1 million in revenues--with very little overhead, Ramos adds.
Rowe is part of a growing trend. All around the nation, companies large and small are parceling out work to outsource contractors. The 1996 outsource contracting market was estimated at some $100 billion, according to The Outsourcing Institute. And the institute predicts that figure will soar to more than $300 billion by 2001.
Why is outsourcing growing at such an accelerated rate? The primary reason, according to The Outsourcing Institute, is that large companies are doing whatever they can to reduce operating costs. Eliminating full-time employees and finding outsource contractors to replace them is a large part of that strategy. IBM, Chrysler, AT&T and Microsoft are all hiring outsource contractors to perform work that was once done in-house.
At Coors Brewing Co. in Golden, Colorado, some 18 business functions--including custodial services, facility maintenance, payroll, benefits administration and information technology--are outsourced. And more outsourcing is on the way at the company, according to Steven Brown, director of corporate development. "We're looking for outsource contractors who are better at their businesses and have more capabilities than we would internally," says Brown.
Like Coors, companies are outsourcing jobs and projects in every imaginable field: finance, sales and marketing, administration, customer service, manufacturing and more.
And it's not just popular with big businesses. Small and medium-sized companies are jumping on the outsourcing bandwagon, too, hiring contractors to take care of accounting, marketing and other business tasks. Some companies seek outsource contractors to fuel growth without incurring the burden of hiring full-time employees.
"It makes sense," says Robert Jennings, author of Make it Big in the $100 Billion Outsource Contracting Industry (Westfield Press) and a management consultant in Westminster, Colorado. "If you're a one-person company, would you rather spend time doing what you do best or accounting?"
Getting Out
For enterprising professionals, this trend spells tremendous opportunity. Jennings says novice outsource contractors can use the knowledge and expertise gained from their professions to build businesses. Indeed, anyone from a janitor to an electrical engineer can become an outsourcer. And the number of potential clients is almost limitless.
Sound good? Don't jump in quite yet. Jennings suggests that before taking the leap into this industry, you should start building a client base. "You should have at least one contract before going out on your own," he says.
That's how Warren Wiggins broke into outsource contracting. In 1986, Wiggins, 41, was working the night shift as an electrician at General Motors, but during the day, he started doing some electrical trouble-shooting on his own. The next year, Wiggins quit his job and launched WW Contractors Inc. from the basement of his Randallstown, Maryland, home.
day, he started doing some electrical trouble-shooting on his own. The next year, Wiggins quit his job and launched WW Contractors Inc. from the basement of his Randallstown, Maryland, home.
"I was just a one-man company at the time," says Wiggins, "but I took out the biggest ad in the Yellow Pages and put a lot of phone numbers with different extensions to make it look like I was a big company." The ploy worked, and today, Wiggins' efforts include a five-year project worth $8 million for the Social Security Administration and a $2.2 million project for the city of Baltimore. Even though Wiggins now employs 49 people and boasts annual revenues of $4.5 million, he still runs his business from his basement to keep overhead costs in check.
Wiggins isn't alone. Many outsource contractors keep overhead at a minimum by working from home. And because outsourcing is often a service-based business, start-up costs aren't prohibitive.
For Jim McCalla and his wife, Jane, the desire to start a business with low initial costs and minimal overhead led them to outsourcing. "Outsourcing had a low break-even [point], it didn't matter where we were located, and it could provide a recurring source of income because the projects are ongoing," says Jim McCalla, former president and CEO of the Memphis, Tennessee, Boys and Girls Clubs of America. Using an office in their Cordova, Tennessee, home as their base, the couple launched Twenty-First Century Solutions in 1994 to provide attendance and payroll services to small and medium-sized businesses.
The McCallas run the business on their own, but with it growing at 150 percent per year, they anticipate a need for some help soon. "We're bursting at the seams," says Jim McCalla, 54, who plans to practice what he preaches by outsourcing the business tasks that aren't part of his company's primary focus.
Niche Hunt
In the world of entrepreneurship, outsource contractors start with some enviable advantages--usually they're already experts in their fields, the start-up costs are minimal, and they often have established contacts with companies that need their services. But even that head start doesn't guarantee success. Just because you're an information technology whiz or a star accountant from a Big Six firm doesn't mean you know how to market yourself, how to price your services or even how to define your target market.
The potential outsourcing market is enormous, but taking a shotgun approach and spraying the market haphazardly won't produce results. "You need to define your target market within that huge market," says Jennings.
Take Ramos and his partners at ROWE, for instance. They've homed in on the relatively narrow oil and gas industry for their financial services. By doing so, they've gained clout as experts within that field.
Once outsourcers have contacted a company looking for their services, they bid on the proposed project. This can prove tricky. Bidding often presents a hurdle for outsource contractors whose businesses are still in the infancy stage. Knowing how much to charge can be baffling, and quoting the wrong price can kill a business before it gets off the ground--bid too high, and you risk losing the client; bid too low, and you wind up losing money on the deal.
"The biggest mistake you can make is underpricing your service," says Jim McCalla. "In the beginning, you want the business so badly, you tend to underprice."
Determining the right price for your service may take some trial and error, but you should get a feel for what's an appropriate fee fairly quickly. When pricing, keep your overhead in mind as well as any materials you may need to furnish.
Although it's important to define a specific market for your services, don't turn down work because a portion of the project is beyond your expertise. You can parcel out portions of a job that don't fall within your realm of expertise and still compete for a wide range of projects.
ROWE Energy Services is doing just that. "We've formed alliances with engineers, land managers and lawyers, so if we have a project that is greater than we can handle, we know where to go to get the information we need," says Ramos. "No job is too big for us."
Want To Know More?
The Outsourcing Institute provides a variety of information and statistics on the types of services companies are outsourcing and the industries seeking outsource contractors. It also publishes a quarterly newsletter called The Source. For more information, write to The Outsourcing Institute, 45 Rockefeller Plaza, #2000, New York, NY 10111 or call (800) 421-676. You can also visit the institute's Web site at http://www.outsourcing.com
Author Robert Jennings gives tips on how to break into the outsourcing business in Make it Big in the $100 Billion Outsource Contracting Industry (Westfield Press). For more information or to order, write to P.O. Box 1186, Westminster, CO 80030-1186 or call (800) 990-7211.
Frances Huffman is a freelance writer in Pacific Palisades, California.
This story appears in the August 1997 issue of Entrepreneur. Subscribe »
