Why is outsourcing/offshoring such a good business idea

Every generation needs a revolution - an entrepreneurial revolution

BPO has been a great business driver in the Philippines for the BPO business itself office buildings for the BPO, transportation, rental housing units for the workers, for leasing companies (for computers and office equipment) and real estate companies.

Many of the billionaire companies have huge office complexes for the BPO especially RLC and SM

Why, what are the benefits for BPO

     1.  Lower cost as much as 100% cost reduction for labor.   A P20,000 starting pay for call center agent is less than $400.00 at P58+ exchange rate

     2.  The one outsourcing is freed of the increasing cost of labor:  health insurance, retirement

     3.  It can focus on its core business.  

     4.  It frees up real estate in the expensive properties for other more value added activities.  For example

          in a hospital, a laundry room will be used for board and lodging  if laundry was outsourced

     5.  Above all, it window dresses the ROI as per Du Pont Formula

         Net income/Sales     /    Total sales/Total Assets    x    Total Assets/Total Stoch holders Equity

        As you can see, reducing the total assets increases the quotient for Total Sales/Total Assets

        Resulting in over all ROI

        The method for the asset reduction would be  something like this

        An FMCG company just bought a computer system worth  $300 million.  It sells back the 

        computer to the supplier and enters into long term contract to outsource the computer work

        at an X amount per transaction say $050 or $1.00.  

       How much increase in ROI (the Du Pont formula would result if $300 million were removed  from

        its books.   It would be $300 million wealtheir

      How would this affect the analysts perception of the company?   How would it affect the valuation

      of the company if it was cash rich

Business is about ROI, making seeds grow to bear fruits

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
April 9, 2017

1.  The basic equation for any investment in business is ROI - return on investments, return on capital. That is why we have the Dupont Formula

             GP/Sales   x   Sales/Total Assets   x     Total Assets/Stockholders Equity

              (Patong)               (Paikot)                         (Laway)

              Margin                  Turn over                     Leveraging

            When we cancel sales, and total assets, we are left with GP/SHE  which is the formula
            for ROI (we have to fail an MBA student in a panel defense, who cant have the correct
            formula for ROI)




               Our SEC requires Du Pont Analysis:

     1.1 To have ROI it is thus important to have sales, and asset turn over

          Margin (patong refers to efficiency) cost reduction.   You cant have  margin, if the basic business model is wrong, ie sales - cost = GP.  No matter how high your sales is, if your are selling less than your cost, you can never have patong.  It is the goal of every business thus to:

          Increase sales (through marketing and sales efforts)

          Reduce expenses, through efficiency, and canvassing lower cost of inputs

   1.2 Paikot

        Your working capital must be turned around.  It must produce sales several times over.  If it only turns one round, or less than that you cant expect ROI

       How do you increase turn over?

      1.  By having more cash sales  (how do you do this?  By offering cash discounts)

      2.  By having shorter collection period

      3.  By having dedicated collectors

    LEVERAGE (Laway)

  1.3  As much as possible, you cant spend 100% of your equity in your business.  You must employ OPM (other peoples money) or borrow.  Many top execs or industry leader, disdain using their own money.    May I call this the Meralco or Tony Garcia (of Philchem) formula.   Meralco was bought by the Lopez after the end of Laurel Langley agreement from GTU using the cash flow from operations to pay off the installment on the balance.  The cash flow from operations paid the equity.   the IPO paid off the loan for the D/P.   Tony Garcia showed me how to do it, when he bought a school using practically nothing of the money of the investor

    This is only possible if you recognize the risk, ie that the business would be profitable enough, generate the cash flow  to meet the agreed repayment period.  I had several deals early on when we had terms, and the cash flow from the business sales paid off the balance.  You must be decisive enough and bold to generate cash when the payment time comes.   During high interest regime, we cant have much of 1.3

The biblical stories and parables support ROI