Small and medium-sized enterprises in India suffer multiple handicaps — poor access to credit, inadequate managerial resources, a low technology base, lack of marketing expertise and a complex regulatory regime. CRISIL SME Ratings Director Yogesh Dixit explains to Rajiv Shirali why SMEs would benefit immensely by outsourcing their non-core functions. Edited excerpts:
Theoretically, outsourcing enables management to stay focused on core functions. But, given the disadvantages that Indian SMEs suffer from, how practicable is it?
Running an organisation in India is a daunting task, considering the complex regulatory and compliance regime or creaky infrastructure. In such an environment, outsourcing is indeed the most practical solution for SMEs, provided the entrepreneur is adept at negotiating well with service providers for favourable service charges and conditions of contract. It is simply not possible for the management to spread itself thin on a whole range of issues.
SMEs in India are thought to be opaque in their functioning. Can outsourcing be an answer to this?
I am convinced this is changing fast and my conviction is based on my interactions with several entrepreneurs and bankers across the country. The change is also being driven by a tighter compliance regime (particularly on the taxation side) and the desire to break free from the complex web of opaque control structures. People have started believing that wealth can be generated while still being compliant, as the opportunities in most sectors look attractive owing to strong latent demand. Another factor driving this change is the younger generation of business owners. Although I would not call outsourcing a tool that will usher in transparency, it will definitely help create an environment for better business and corporate governance and drive openness. In the longer term, things may start looking more direct and professional.
In which operational areas can an outsourcing strategy be expected to bring SMEs the greatest benefits?
The finance and HR functions in mid-sized companies devote as much as 87 per cent of their time in processing routine transactions. Outsourcing of accounting back-office, personnel management, technology development, helpdesk, etc. are some areas that enterprises could focus on outsourcing to third parties. Many SMEs now outsource HR functions like hiring, training, managing the performance management system and payroll processing. This not only frees up their internal HR team’s strategic bandwidth, it gives them access to the state-of-the-art systems and processes used by large corporations at an affordable price.
SMEs are also increasingly looking at having an outsourced chief financial officer (CFO) — a more economical solution than having a salaried CFO keeping an eye on cash flows. An external CFO can focus on complex compliance procedures and give key inputs to drive accurate financial information to support business decisions.
It is argued that cloud-based solutions can provide SMEs IT at a low cost. Aren’t Indian SMEs yet to be convinced about the all-round benefits of adopting IT?
I don’t think that’s necessarily true. There is awareness among small businesses that IT is a critical business enabler and differentiator. We don’t see companies shying away from adopting technology. But, as with other types of outsourcing, IT outsourcing is a new concept here and will take time to gain ground. It is in their interest to do so for a number of reasons.
Enterprise technology is a fast-changing area and it may be difficult for smaller enterprises to keep up with the latest developments. Secondly, in some sectors, it is risky to make large IT investments, since newer technologies tend to make the previous ones obsolete at an alarming rate. Thirdly, outsourcing helps save costs, as companies don’t have to spend on their own data centres, networks and software. Our analysis shows that by adopting cloud-based solutions, an enterprise can cut its IT expenses by around 40 per cent.
Creditworthiness and access to credit are among the biggest problems of SMEs. What impact can an outsourcing strategy have on these issues?
An organisation’s creditworthiness depends on its business performing capability and financial strength. By outsourcing time-consuming and expensive processes and functions, the top management of an enterprise can create more bandwidth to focus on things that really matter and make the organisation more cost-efficient, better-organised and result-oriented. All these play an important role in improving business performance and financial strength — key factors considered by lenders in determining an organisation’s creditworthiness.
