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 valuation using correct formulas using dubious data

Every generation needs a revolution - an entrepreneurial revolution

This post was shown a due diligence report but reporting a valuation of only 6 number for a business

coughing out P4 - 5 million a year

Some errors were observed in the work purportedly a certified public accountant.  It was neither a due diligence nor a proper valuation report

1.  In the asset portion, the cash of the business totaling P8 m was totally disregarded?  What?  You are valuing the asset of the business and not considering if the cash will be dissipated or not

2  The consultant arrived at a Weighted Average Cost of Capital which was achieved only on the 5th year  And conveniently used this as WACC (ergo for the discounted cash flow the intrinsic method, a high 55% WAC would result in lower valuation

3.  In the intrinsic portion (NPV) analysis, there was no current year cash flow (and in actuality, the current net  cash flow amounts to P4.5 million

    1  In the projected cash flow for the next five years, 2023 cash flow is only P9,k

    2.  The WAC again of 55% erroneously computed is used as the discount factor.  The high %

         results in a very low valuation

PSE lists WACC at only 6.84 % and the 55% /5 is only 11%

Not every body understands business valuation    At entrepreneurship we teach  this skill

Negotiating/evaluating a school for sale

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
August 26, 2016

I was on a meeting Tuesday afternoon with the representative of a primary and secondary (with Senior High) in a MM city.  In the meeting were:  the President of the Company, a lawyer, a banker, and two representatives of the seller

Some issues:

1. The price is P50 million.  The appraised value of the property is P70 million.  So this is a good asset buy.  However, the school does not make money.

From a net income approach valuation, the price of the school is zero.

The audited financial statement says it makes a revenue of P24 million a year, or P2 million a month (misleading because the tuition payment is quarterly).  The direct cost is P21 million a year, and GA expenses is P4 million.   We learned from additional information given that part of the monthly expenses is interest payments made to dozens of the creditors of the School Director who amassed some P74 million in private debt (as no banks would lend to a school asset - they could not foreclose)  Without the debt service, the school could be profitable earning some P12 million  a year.


2.  Manner of payment:

Buying a business is like analyzing, reviewing a strama paper.

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
August 21, 2016.

Everything is so sudden. While I do not have the formal mandate yet that I would be an executive director of a holding company, a thick folder was sent to me to study the viability of buying a school.  (Elem to Senior High School)   There was a communication that contains a letter of intent to sell and the suggested closing is end of the month.

I reviewed the documents and found out that most of the information are for a loan transaction:  appraisal of the real property and FS (which I think looked funny)  If ever there is a valuation report, it has to be valuation of the business based on the FS?  They do not add up. Well the FS shows a school that is losing money.

If the purpose of the exercise is to buy the business, a lot more data is needed.  It is like a strama paper.   The objectives have to be defined and the strategy of how to make the school profitable, how to achieve ROI has to be defined.  A due diligence study has to be made before cogent decision can be made.

I did not realize that I am comfortable and at home in this kind of work.

These are the excerpts of my thoughts/communication to the Chairman of the Holding company:

Allow me to say some of my humble thoughts/comments on the paper which I read: 1.  The bulk of the information is for a loan transaction ie, the collateral and financials 2.  I could see a lot of discrepancy in the financial statements:   eg. the  income statement, the expenses (vs the worksheet) Have they made 100% correct representation on the data presented po Why are they selling?   Maybe they are not making money or enough However, I understand the plan is to buy the business and more information is needed to determine the viability of the business to be purchased: Internal Analysis: 1.   The main value proposition of the school, Primary Target Market 2   The competitive advantage 3.  Does the school possess the critical factors for success of the school 4.  Quality of management.  Shall the top management remain in case of sale, who shall remain, who shall resign/be retired?  Is this well managed 5.  Quality of the teaching staff/efficiency (the current ratio of staff vs students population is 1:10.  Is this an ideal ratio External analysis: 1.  Competitive analysis         of facilities      of teaching staff      of tuition fee.  Is the fee of P51,000 a reasonable tuition for a Las Pinas School (malapit na sa exclusive school fees)      enrollment 2. Why is their enrollment only 500? 3.  Where is their growth area?  Can the enrollment be increased? Strategy: Price 1.  How much is the just purchase price?   2.  Manner of payment Purpose 1.  What is the goal for the school?      Enrollment, revenue, , expenses,  Net income 2.  What is the strategy to achieve # 1. Operating the school: 1.  Who will run the school?  Shall we install a new dean (do we have a candidate now? Or shall there be a transition period until the purchase price is  completed 2. What changes must be made to make it generate cash flow for the holding company? .  My hypothesis is that:     If the enrollment can reach 1,000 ,reduce tuition to 35,000, there would be additional P11 million, and peg expenses to only say 12 to P15 m, then we can generate additional income of         P14 million for added revenues           10 million from cost reduction      the N.I can be 24 million or 40% ROI. vs purchase price of 50 million However, may I suggest that a due diligence be made. I talked to a school Dean CPA and I conclude that to properly know what to do with the acquisition and to validate this hypothesis