Hewitt Associates (NYSE:HEW) recently acquired RealLife, a mid-market human resource outsourcing company, while BT (NYSE:BT) has taken over Basilica Computing, again a mid-market IT service provider.
Action in the mid-market company segment has been showing a sustained increase in the recent past, and large global vendors are shifting attention to the outsourcing needs of this segment. Estimates suggest that only about 30 percent mid-market companies have taken to outsourcing as yet, while the others are expected to follow. However, there are unique problems and challenges that need to be addressed first.

Mid-market business is different
Definitions vary by industry, but usually companies with sizes ranging from 2,000 to 10,000 are considered to be in the mid-market area. The main drivers for outsourcing for this segment are much the same – reduced costs, focus on core activities, access to manpower, etc. – primarily to increase competitiveness. However, the lack of scale on offer is a pertinent difference. It may not be very cost-effective for smaller companies to set up captive centers or explore multi-location delivery models either. Third party vendors therefore assume prominence.

Mid-market companies in general tend to go to vendors of a similar size– they may not necessarily outsource to the large global vendors. A common grudge is that smaller companies do not get adequate attention from larger vendors. Smaller or mid-market focused vendors allow them greater flexibility, which larger vendors find difficult to offer.

Although the potential in terms of number of companies is huge, each client cannot individually provide much scale in business. Moreover, mid-market companies would tend to be more cost conscious and therefore vendor margins may be lower than those from large company deals. As a result, the mid-market segment remains under-served by the larger vendors.

Differentiated offerings
The intensifying action now is a result of two separate developments:
1)    Outsourcing from the mid-market is getting more and more mature. Mid-market companies got into outsourcing starting from IT functions, moving on to non-core back-office and human resource outsourcing. However, with growing maturity, this sector is beginning to show demand for higher-end services, including knowledge process outsourcing.
2)    Growing competition is forcing the larger vendors to seek out more business opportunities. Globally, competition is heating up as the larger global vendors are being challenged by low-cost delivery models of vendors from countries such as India. Moreover, the enterprise space is showing some signs of saturation, and new services / segments / geographies are being continuously traced.

It is clear that the two markets – large and mid – are discrete and vendors will need to have highly targeted and segmented offerings if they want to look at both simultaneously. Marketing strategies, delivery capabilities in terms of scale, the level of interaction, client engagements, etc. have to be different too. This, given that viability and profitability vary widely for the two segments.

Strategic acquisitions of vendors focused on the mid-market space are gaining traction to achieve the balance, and preserve the ‘premium’ image of the parent. This allows the ‘branded’ players to provide high-margin, bundled services to larger companies, and relatively lower-margin, customized offerings to medium-size companies.

Going forward
The mid-market segment is nascent and much lower on the maturity curve compared to large global clients who recognize the ‘value’ in outsourcing beyond mere cost savings, indicating that the differentiated offering strategy may be a wise provision for the transitional stage.