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So, how does a company find the right outsourcing partner? First is the question of whether one outsourcer can serve all of your current needs. After all, it’s already difficult in general for a mid-tier firm to wring out economies of scale and chopping up the work further doesn’t help.

Second, can the vendor grow with its client? “Many mid-tier firms don’t think about it much, but they need to be sure that their outsourcing vendor will be able to handle their needs in two to three years, particularly if the client expects substantial growth or significant acquisitions. The result is they will need a new vendor,” says Brown.

As more large vendors serve the middle-market, outsourcers will be more inclined to embrace bigger outsourcing solutions. “Mid-tier firms are often tactical in their outsourcing, but not strategic,” says Brown. “They’ll outsource payroll and 401(k) administration, but not HR benefits administration entirely. Taxes will be outsourced, but not all the general accounting and financial reporting. Big companies are outsourcing processes end to end in order to gain the efficiencies of simplified processes and single systems. Small and medium-sized companies have been far more reluctant to hand over entire processes or departments, and don’t get the same efficiencies as a result.”

One result of this is that some mid-tier firms’ BPO costs haven’t declined, and in fact, have started to rise. Payroll services, for instance, have been increasing in price, says Brown, spurring some firms to think about bringing payroll back in-house.

What companies need, but often don’t have available, is better information about their real internal and long-term costs. They also need benchmarking data for the cost of various processes when performed internally and by outsourcers for companies their size and in their industry. Acquiring this kind of information, however, is expensive—whether paying large sums for reports generated by consultants like Gartner or IDC Corp., for example, or ample employee time researching the topic.

Still, some small BPO providers insist they can offer big benefits to middle market firms, and remain a stable profitable operation. Coefficient Backoffice Solutions Corp. (formerly called LOR Management Solutions Inc.) offers mainly finance and accounting services based on Microsoft’s Great Plains finance platform to 35 clients at present with just 35 full-time employees. The firm can take over running the accounts payable and receivable function, the accounting and financial reporting department and all IT support for finance, or just pieces of finance.

“We’re seeing rapidly increasing interest from more mature, stable companies in the middle market that are looking into alternative solutions to historical problems in running finance departments, like high turnover, increasing IT needs and expenses, and the fact that finance is a cost center,” says Brian Regan, CEO and president of Coefficient. “The main fear is the loss of control of the accounting and payables process, but we actually increase the availability of information and simplify management of and accountability for transaction processing.”

Coefficient claims it has reduced the operating cost of it’s clients’ finance functions by 25% to 50%, depending on the client’s systems, scale and willingness to reengineer their processes. The company can whittle down accounting costs so dramatically because part of its processing operations is overseas in India, enabling the company to hire dramatically less expensive employees.

A few large-scale BPO providers are also trying to target the middle market, offering more scale and stability than smaller players can. Mellon HR Solutions, for instance, provides end-to-end HR outsourcing for big clients like American Express and the U.S. operations of German chemical concern BASF AG. Now Mellon is targeting some of its efforts at winning smaller clients, such as Certegy Inc. and Ciba Specialty Chemical Inc., (see A Defing Benefit).

“The value available to mid-sized companies from outsourcing is different from that available to large companies,” says Tony Martin, managing director for strategy and product at Mellon HR Solutions, in Fort Lee, N.J. “Because managerial and administrative tasks (at mid-sized companies) are often handled by some of the same people, it’s not as easy to peel off the administrative functions entirely and outsource them. Instead, many mid-tier firms look to bundle specific task groups like defined benefit administration or payroll and compensation plans, in order to tap into the latest technology and the best practices and risk controls that they would have trouble providing otherwise.”

Clearly, the path to outsourcing success in the middle market still seems to sport a bit of rough terrain. But for the firms that want to explore that trail, the rewards can make the effort worthwhile.

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