Tweet
There is a party going on that you might hope you won’t be invited to. Across the country, countless number of companies are joining the party with the hope and prayer that they can squeeze some more profits from their businesses. What’s the party and what music are they playing? Well…it’s called the outsourcing shuffle. Why outsource?
1. Focus On Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of purchasing in a very short period of time; Outsource purchasing.
2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
Example: A small doctor’s office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.
3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Example: Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand. Outsource some simple operations in order to reduce the need for office space. For example, outbound telemarketing or data entry.
4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Example: An information technology department that has too many projects, not enough people and a budget that far exceeds their contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.
5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Example: An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.
6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Example: The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.
7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.
Example: A company needs to embark on a replacement/upgrade project on a variety of custom built equipment. Your engineers do not have the skills required to design new and upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set.
I would be nice if we didn’t have to outsource people. It would be nice if companies could nurture their employees so that they get better, come up with new ideas which in turn will make the company better. But I guess that doesn’t happen. Instead, everyone is outsourcing.
So..who is making money from outsourcing? Lot’s of companies are! One such company that is making buckets of money is Syntel.
Today I bought Syntel (SYNT) at 38. I will sell it in 4 – 6 weeks at 43.80. Here is why I like Syntel:
The main reason I like SYNT is that its stock is going up:
In fact, SYNT has gone up 135% in the last 5 months. That’s a clip of 27% per month. If it continues on this trend, which I think it will, it is a great momentum stock to own.
Why will it continue on this trend? Earnings earnings earnings….
Syntel is an earnings monster. And why not?. In today's world of high-speed communications and videoconferencing, Munbai, India, is no farther away than Santa Fe, N.M. Unlike most smaller players, which send project support teams to customers' sites, Syntel mixes onsite with offsite service. It uses videoconferencing and high-speed data and communications links to tie its U.S. and Indian techniciansto customers' sites. This approach boosts efficiency, ensures seamless execution through different time zones, and cuts down the wear and tear staffers feel when being continually moved around. Because wages in India are much lower than in the U.S., Syntel is able to retain good talent at a lower cost - and pass those savings on to customers. It’s not a happy forecast for US employees, but it may indeed be the way of the world.
SYNT has grown its revenues annually since 2004, with average growth of 30% per year. Earnings have followed, also growing annually over the same period at about the same clip. With the monkey see monkey do philosophy pervasive in American business, the growth model is with SYNT for years to come. The most recent earnings for SYNT confirmed this trend with revenue of $100 million and earnings of $0.61/share. There is zero debt on its balance sheet. SYNT is clean as a whistle and surged for growth with no encumberances.
The management effectiveness stats for SYNT back this up. Profit margins are 25%. Return on assets is 22%. Return on Equity is an astounding 40%! This kind of growth and performance would normally be associated with a stock like Apple or Google which has a HUGE market premium. But SYNT has a very modest PE of 15.5. Yea..it’s cheap.
ANAL-ysts project 2009 revenues of $404 MM with earnings of $2.42/share. $$$MR. MARKET$$$ is not buying it. 2009 revenues will be in excess of $450 MM and earnings will be $2.95/share. These guys have surprised on the upside by an average of 30% for each of the last 4 quarters. That trend will continue. By banking, $2.95/share and applying the PE of 15.5, you get a calculated share price of $45.72/share, which is in excess of my sell target price.
While the future may not be so bright for the American IT worker, SYNT will certainly sop up the profits in the meantime. Just ask their boss, Keshav Murugesh:
“Syntel was encouraged by improved stabilization in the marketplace and the increasingly positive discussions initiated with our clients during the quarter, while discretionary projects remain sidelined, customers are beginning to once again look at cost reduction initiatives which are aligned with their longer-term strategic objectives."
"The timing of new project starts and changes in the marketplace are uncertain going forward. However, based on today's economic environment and our current visibility levels, we believe that the second quarter revenue run-rate represents a minimum level for the balance of 2009. Syntel will continue to focus on driving key investment initiatives and proactive cost management in the second half of the year with the objective of properly positioning the company for long-term sustainable growth."
If you can’t beat em, join em.
I am HUGE!
$$$MR. MARKET$$$
www.mrmarketishuge.com
1. Focus On Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of purchasing in a very short period of time; Outsource purchasing.
2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
Example: A small doctor’s office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.
3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Example: Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand. Outsource some simple operations in order to reduce the need for office space. For example, outbound telemarketing or data entry.
4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Example: An information technology department that has too many projects, not enough people and a budget that far exceeds their contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.
5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Example: An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.
6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Example: The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.
7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.
Example: A company needs to embark on a replacement/upgrade project on a variety of custom built equipment. Your engineers do not have the skills required to design new and upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set.
I would be nice if we didn’t have to outsource people. It would be nice if companies could nurture their employees so that they get better, come up with new ideas which in turn will make the company better. But I guess that doesn’t happen. Instead, everyone is outsourcing.
So..who is making money from outsourcing? Lot’s of companies are! One such company that is making buckets of money is Syntel.
Today I bought Syntel (SYNT) at 38. I will sell it in 4 – 6 weeks at 43.80. Here is why I like Syntel:
The main reason I like SYNT is that its stock is going up:
In fact, SYNT has gone up 135% in the last 5 months. That’s a clip of 27% per month. If it continues on this trend, which I think it will, it is a great momentum stock to own.
Why will it continue on this trend? Earnings earnings earnings….
Syntel is an earnings monster. And why not?. In today's world of high-speed communications and videoconferencing, Munbai, India, is no farther away than Santa Fe, N.M. Unlike most smaller players, which send project support teams to customers' sites, Syntel mixes onsite with offsite service. It uses videoconferencing and high-speed data and communications links to tie its U.S. and Indian techniciansto customers' sites. This approach boosts efficiency, ensures seamless execution through different time zones, and cuts down the wear and tear staffers feel when being continually moved around. Because wages in India are much lower than in the U.S., Syntel is able to retain good talent at a lower cost - and pass those savings on to customers. It’s not a happy forecast for US employees, but it may indeed be the way of the world.
SYNT has grown its revenues annually since 2004, with average growth of 30% per year. Earnings have followed, also growing annually over the same period at about the same clip. With the monkey see monkey do philosophy pervasive in American business, the growth model is with SYNT for years to come. The most recent earnings for SYNT confirmed this trend with revenue of $100 million and earnings of $0.61/share. There is zero debt on its balance sheet. SYNT is clean as a whistle and surged for growth with no encumberances.
The management effectiveness stats for SYNT back this up. Profit margins are 25%. Return on assets is 22%. Return on Equity is an astounding 40%! This kind of growth and performance would normally be associated with a stock like Apple or Google which has a HUGE market premium. But SYNT has a very modest PE of 15.5. Yea..it’s cheap.
ANAL-ysts project 2009 revenues of $404 MM with earnings of $2.42/share. $$$MR. MARKET$$$ is not buying it. 2009 revenues will be in excess of $450 MM and earnings will be $2.95/share. These guys have surprised on the upside by an average of 30% for each of the last 4 quarters. That trend will continue. By banking, $2.95/share and applying the PE of 15.5, you get a calculated share price of $45.72/share, which is in excess of my sell target price.
While the future may not be so bright for the American IT worker, SYNT will certainly sop up the profits in the meantime. Just ask their boss, Keshav Murugesh:
“Syntel was encouraged by improved stabilization in the marketplace and the increasingly positive discussions initiated with our clients during the quarter, while discretionary projects remain sidelined, customers are beginning to once again look at cost reduction initiatives which are aligned with their longer-term strategic objectives."
"The timing of new project starts and changes in the marketplace are uncertain going forward. However, based on today's economic environment and our current visibility levels, we believe that the second quarter revenue run-rate represents a minimum level for the balance of 2009. Syntel will continue to focus on driving key investment initiatives and proactive cost management in the second half of the year with the objective of properly positioning the company for long-term sustainable growth."
If you can’t beat em, join em.
I am HUGE!
$$$MR. MARKET$$$
www.mrmarketishuge.com
Comment