Outsourcing could help solve middle market labor deficit, MMBI shows

Sustained levels of low U.S. unemployment have made finding and hiring qualified job applicants a struggle for companies of all sizes. Middle market companies are competing with their peers, as well as large-cap counterparts that sometimes can offer higher compensation and an arsenal of enticements. Recent RSM data shows, however, that there may be a clear opportunity for midsize businesses to close the gap for hard-to-fill roles with outsourcing.

Middle market organizations looking to hire face significant obstacles. Among those companies indicating a moderate or significant hiring need, roughly half in RSM’s second quarter Middle Market Business Index survey characterized staffing open positions as very or extremely challenging. One-third of survey respondents also indicated employee turnover as very or extremely challenging.

Despite these and other challenges, middle market companies exhibit a relatively low incidence of outsourcing, the MMBI data shows. Among respondents who found staffing open positions as extremely, very or somewhat challenging in the last 12 months, only 38% listed outsourcing as an action taken to address staffing issues—41% of larger middle market respondents ($50 million-$1 billion in revenue) and 36% of smaller midsize organizations ($10 million-$50 million in revenue).

Unfortunately, the shortage of qualified workers to fill open posts will likely continue. In fact, nearly two-thirds of middle market organizations (62%) claimed moderate or significant hiring needs over the last 12 months. While hiring has slowed in the sector, 47% of survey participants still say they added jobs in the second quarter, and 54% indicated they would consider doing so through the remainder of the year.

Companies exhibit a reluctance to engage in aggressive hiring, partially due to a reduced supply of willing and available workers—79% of survey respondents noted the shortage is a challenge. In addition, approximately 74% of middle market executives polled identified labor competition among employers as an additional issue. Competition is responsible, in part, for driving compensation higher.

Ultimately, the expanded use of outsourcing is a means to help overcome these hiring barriers, matching sought-after skills with demand, and providing more stability—and affordability—in hard-to-fill roles.

How the middle market now deploys outsourcing 

For companies in the survey that have utilized outsourcing in the last 12 months, the most popular strategies included customer-facing functions, including sales and marketing (31%) and customer service (25%). Future plans seem to be more operationally driven, as respondents who expect to outsource in the next 12 months are focused on manufacturing (24%) and distribution (22%), followed by customer service (22%), product assembly (21%), and sales and marketing (20%).

While there appears to be a slight shift in the types of outsourcing companies are utilizing, organizations may still be missing opportunities to take advantage of the solution in other key job functions, including finance and accounting, and information technology. In order to continue to grow and effectively respond to staffing concerns, middle market companies may have to adjust their strategies—and increasing the breadth of outsourcing could be an attractive and beneficial option.

“For many smaller companies, outsourcing is a significant change from how they got their start and began their trajectory for growth,” Harder said. “They have done it themselves all along, and it can be a radical change in thinking to not perform these tasks internally. It requires hard decisions if you have not been there yet.”

Why outsource?

Regardless of how a company leverages outsourcing, each solution typically has common benefits that can help offset the current labor challenges. Outsourcing is an efficient method to address staffing shortages and enables companies to bring in consistent, experienced resources. The predictable nature of outsourcing helps organizations break the chain of hiring, training and then hiring again if an employee leaves. That cycle is very common in the middle market—especially in such a competitive hiring environment—often resulting in significant lost time and inconsistent quality from key processes.

“It’s often a combination of factors that lead companies to realize they should consider outsourcing,” commented Harder. “Some are looking for cost savings and trying to increase margin to become as profitable as they can. Labor costs often only compound the issue—not being able to replace people in a timely fashion and then needing to wait for them to learn the business. That process gets expensive.”

Outsourcing opportunities for larger middle market companies

In the survey, larger middle market companies expressed staffing difficulties in multiple areas that could be effectively addressed with outsourcing. In fact, among larger middle market company executives who noted significant or moderate hiring needs in the last 12 months, the largest number of openings were in information and communications technology (58%). Additional significant hiring areas identified for outsourcing include finance or accounting (45%) and information services (38%).

IT outsourcing is arguably the most mature of all outsourcing services, providing resources that can supplement existing talent or fully maintain a company’s technology strategy and investments. A technology outsourcing agreement can bring several specific benefits to middle market companies, from introducing new innovation to improving the reliability of IT services, within the framework of a pre-defined service level agreement. In addition, outsourcing can strengthen a company’s cybersecurity posture and compliance with evolving data security standards.

Further, finance and accounting outsourcing platforms increase automation to streamline back office processes and provide access to real-time data to allow for more timely business decisions. FAO does not replace the finance function, but it seeks to integrate more effective technology solutions to introduce more comprehensive insights and reduce headaches around the close process. FAO provides an environment for digital finance transformation, reducing the time and resources spent on manual processes.

Finally, tax outsourcing or co-sourcing can help manage all regulatory responsibilities in a timely manner, but also provide value by identifying proactive planning opportunities. Tax compliance is complex, especially when considering specialty areas. Outsourcing or co-sourcing can provide a more effective balance of advice and solutions to enhance systems and processes and effectively resolve issues that can arise.

How smaller middle market companies can leverage outsourcing

Smaller middle market companies are experiencing some similar staffing issues as their larger counterparts, but they also have distinct challenges that could be solved through outsourcing. For smaller middle market companies that noted significant or moderate hiring needs in the last 12 months, finance and accounting was also a significant hiring target (36%), but line production, manufacturing and assembly jobs presented a larger staffing need (43%).

Hiring for line production, manufacturing and assembly positions currently presents significant difficulties for middle market companies. In the RSM survey, of executives who cited staffing challenges (extremely, very or somewhat) in the previous year, 76% described the challenge with staffing line production, manufacturing and assembly as major or moderate. In addition, among respondents who experienced extremely, very or somewhat challenging employee turnover in the last 12 months, 73% described the level of turnover in these positions as high or moderate—the highest of any job title evaluated.

Turning to outsourcing can bring more consistency and stability to this fundamental process. Companies can evaluate opportunities to move some or all of the production out of their organization, but still retain control over the function. Outsourcing can bring a higher level of automation to middle market production processes, increasing efficiency while also potentially enhancing quality control.

From a finance and accounting perspective, outsourcing provides many of the same benefits for smaller middle market organizations as for larger companies. However, FAO solutions can have a bigger impact at smaller organizations, providing new technology tools and applications, and budgeting and forecasting support that was not previously possible. Instead of full-time employees, FAO can utilize part-time employees with resources that can quickly scale with growth or as demand dictates.

Conclusion

As we continue to see middle market economic growth combined with historically low unemployment numbers, the hiring landscape will continue to be challenging. Companies are struggling to find employees that align with their needs, but many key positions still need to be filled. Therefore, expanding on outsourcing strategies can often provide several immediate benefits, filling key roles with experienced, consistent resources and enabling the company to capitalize on growth opportunities.

The power of outsourcing

Companies in all industries can take advantage of outsourcing to address labor concerns in several key areas of the business. Below are three examples of how RSM clients recently took advantage of outsourcing opportunities:

IT outsourcing: RSM implemented an IT outsourcing model for a midsize bank that experienced difficulty hiring and retaining qualified IT talent. The structure helped the bank gain consistency that it lacked in the past, leveraging technology solutions across multiple bank platforms instead of having multiple, problematic IT silos. Ultimately, the bank increased customer and employee satisfaction through IT outsourcing, with reduced expenses due to a common strategy and lower turnover in IT personnel.

Tax outsourcing: Our advisors recently worked with a manufacturing company that sought a flexible staffing arrangement that provided the resources it needed without the issues related to maintaining a large internal tax department. As the company’s needs and strategy changed, the relationship kept pace. At one point, RSM managed the entire tax department, and at another, we worked in conjunction with the company’s internal tax director. The outsourcing arrangement has encompassed the client’s full range of international, federal and state tax planning, compliance and provisioning needs.

Finance and accounting outsourcing (FAO): We recently helped a pre-revenue pharmaceutical company implement an FAO framework. The company had limited finance and accounting resources, instead focusing funds on strategic areas such as research and development, and preparing drugs for launch. Our advisors developed an FAO solution using advanced technology to enhance transaction processing, tax compliance and reporting while producing more reliable financial data. The platform aligned with the company’s current needs, but could scale with the projected increase of transactions after its drug launched.