Warren Walborn – Cost Components of Outsourcing in the West
Pentwater Group president and CEO, Warren Walborn rejoins for a third episode with Derek Gallimore where he shares deeper insights and projections for the outsourcing industry.
Warren studied Economics at the Brigham University Cougars, went to the University of Chicago for his MBA, founded leadership and training program for the university’s business school, worked with Wall Street, managed private equity and capital funds, and now he is a successful entrepreneur.
- Warren found his way to the Philippines, when he married the love of his life. Thereupon he uncovered a potential goldmine in the outsourcing industry, prompting him to put up his own outsourcing services and consultancy company, the Pentwater Group.
- According to Warren, in some markets, the total employee cost can be as high as $75/hour. Outsourcing brings down the cost to around $6 hour, which translates to cost savings of 60%-80%, an average outsourcing cost of only 20%.
- Investors has identified the BPO industry as a major upcoming sunrise industry and a lot of private equity funds have invested in outsourcing companies. He projected that more private equity firms and so-called “tech companies” will be feasting in this megatrend.
- He foresees that as major players out compete, there will be compression of margins. However, it is customer value and service quality that will define success for a BPO or outsourcing company.
Hi. And welcome to another episode of the Outsource Accelerator Podcast. My name is Derek Gallimore, and this is Episode number 186. So today, I’m really excited to be joined by Warren Walborn of Pentwater Group. He joined us previously in Episode 178 and 182. Warren has an illustrious career in business, in academics, in Wall Street even, and entrepreneurial startups and funds. So, he got an incredible background and now finds himself here in the Philippines in the outsourcing space with his consultancy, Pentwater Group. It’s really an interesting conversation. We talk more broadly this time.
If you want to go hear his back story then listen to Episode 178, and of course this episode is really interesting and a good stand-alone episode where we discuss the opportunities in outsourcing for businesses in the West. If you want any of the show notes, if you want to get in touch with Warren, go to outsourceaccelerator.com/186. Enjoy!
Welcome back everybody. Today I’m excited to be joined again by Warren Walborn.
Hi, Warren. How are you?
Warren: Good Derek, how are you?
Derek: Good, good. Thank you.
We have had you on board with two previous episodes actually, it’s great and I encourage everyone to listen to those. I supposed for those that haven’t heard those, do you want to just introduce yourself Warren and let the audience know how you find yourself in Mindanao, now the whole place in down south the Philippines.
Warren: Yes, sure. We love it here in Mindanao. We are here in Davao, where the President of the Philippines is from, and so everybody here is so excited to have the first president of the Philippines from Mindanao and so it’s a vibrant place, its’ growing. And somebody said Mindanao is the second largest city, and I’m not sure how they measured that because Cebu is pretty large. But it’s a big market and lots of BPO people here, companies, and employees, and so the infrastructure is here. It’s very strong.
And yes, my background is Econ undergrad from Brigham Young University Cougars and got my MBA from the University of Chicago. I was the founder, co-founder of a leadership training program. I was actually able to teach while It’s pretty cool experience. And they were pretty happy as it turned out how Chicago rose in its business school ranking up to the number two spot, pretty low before then[?]. And then did Wall Street and sort of morphined to venture capital, private equity role, when I was working with several different private equity fund and actually got a ran[?] of corporate banks capital fund for one of the largest utilities in the States. It was a great experience, but with Enron, took a dive they decided they didn’t want to pursue that anymore because the mark was pretty tight, so I got the biggest check of my life to close that group and ended up starting up a couple of companies. A medical device then we sold to a publicly traded company. Had an energy technology company, and so then when I got to know the sweetest woman of my life, she was from here in the Philippines. I came over here to marry her. She convinced me to spend part of the year here for which I gladly agree because I love the weather here. We just felt in love with the Philippines. So, we are here half the year, and US half the year. And so, it enables us to be with our customers in the US. We oversee the operation while we are here. It runs by itself for the most part, but I got a good team here. Yes, we love the Philippines, it’s amazing place here.
Derek: Interesting and it’s you’ve had a stellar corporate and entrepreneurial background and across many different sectors including Wall Street and you’re now settling on outsourcing. Now partly I assume it’s because when in Rome you kind of “do what the Romans are doing” and outsourcing is such a strong industry here with such strong potential. But we were also talking before the forecast that it’s a strong industry and I think both of us agree that it has so far to go. And there’s so much potential out there for people in the West that just really aware of this thing. And I think we’re both enjoying playing in a sandpit where the water is rising. It’s an industry of high growth and good opportunity.
Warren: Well I think you put it well Derek, when you said that a lot of people see the benefit of this but they’re just not sure how to take that first step. That’s why you’re doing such a great job with outsource accelerator and when people call us they’re like a lot of times, “Hey, you know we’ve never done this before. Help us understand how this all works.”
Then we walk them through it. It’s mind numbingly simple because we take away from them the 20 or so cost components that are associated with employees. Not all of them, we’re not saying don’t have employees. We’re just taking away a lot of those cost components and replacing them with one cost component here which is a number that can be in many cases quite a bit less than what you spent in the U.S. And by the way those numbers we didn’t talk about this earlier on the extreme side we calculated that in some markets employee can cost $75 an hour, when you include everything, office space and computer equipment and I.T. support all that. And we do all of that for starting at around $6 an hour. So, it’s a stretch staggering difference than the number that most people use is they say that on average outsourcing costs from a 60% savings to 80% savings.
So somewhere between whatever the ratio is there, that’s an 80% savings you’re like looking at 1/5 of the cost here in outsourcing of those services. And that’s something that a lot of the private equity guys that have invested in outsourcing have been able to prove. By the way, I shouldn’t mention this much earlier but private equity has identified this as a major upcoming industry. So, there are a lot of private equity funds have invested in outsourcing companies. BPO companies, companies that do what we do.
Derek: [Crosstalk 00:07:44]
Warren: It is really a win and I take note at those because the private equity guys are very smart. They’re at the forefront of every industry they always know what’s going on, and where were those megatrends are happening. This is truly where the private equity guys identify, Derek. It’s a mega trend.
Derek: And It’s kind of a boom I think, kind of people when previously going to get into outsourcing will get into it because there’s a lot of money out there, and also multiples then increase. It’s kind of happy days, isn’t it?
Warren: Right. Right exactly.
Derek: But I mean it is a strange industry like I do look at the industry and I think it is really exciting and huge growth prospects ahead. But I also do see this side of the market maturing. There’s an increase in supplies which then inevitably means as markets mature, you have compression of margins. You have kind of everything being stripped down to bare bones. You have kind of price wars as suppliers are trying out to compete. Are you seeing these things within the market? And what kind of scares me about outsourcing is if the seas jump in. I hope they’re not kind of hoping for or expecting kind of tech or I.T. kind of multiples. Because it is fundamentally a kind of a human businesses, isn’t it? And you’re dealing with pretty sticky overhead structures and fix cost and, I mean that’s a very broad question but, do you see what I mean? It’s kind of an interesting industry that I think is going through a boom. But there’s a lot of competition coming into the industry and ultimately it still very much in an industry based on humans, isn’t it? And people and sentient beings.
Warren: It is. And maybe I misspoke earlier. There is a difference between VC and private equity. VC are those guys, they’re looking for the next piece of software that’s going to grow at ridiculous percentages. The private equity guys they’re looking to invest big dollars and get good returns. They’re not looking for 100% type deals. They want just to beat the stock market and yet it might take some higher risks and expect higher returns for that but they’re not looking for 50% type returns. So, if they can invest in a company or in an industry that’s growing, that’s got good margins, that’s providing unbelievably good product and service to a huge market. And if you identified that there’s 35 million companies out there that are going to be embracing outsourcing in the near future, that’s a big market. And that’s worthwhile but yeah, you’re actually right. We’re not talking about super, super, high multiples. We’re not talking about a piece of some new technology that’s patented. That’s going to take the world by storm. It is a human industry and it all relates to how well we provide our services. But it’s there’s so much need. There’s no proprietary nature to providing the employee over here. There are some things that make some of us better than others. And I’ll get into that. It’s mostly about really, truly the opportunity to provide such a great service. That’s truly needed.
Derek: I mean when you sort of present about that. I mean, I kind of mistook them in terms of the VC and private equity. But it really is a no brainer when there is this service called BPO outsourcing or whatever. And it’s really an arbitrage offering a $75 salary for $6. It’s this just unbridled potential there isn’t it? If it is properly disseminated into the corporate world that really is a boom in the industry, isn’t it? And, a private equity it’s creeping on to that. And as you see, the only sort of limitation varies. It’s not proprietary, so you’re going to get competitors springing up offering the same thing. But the fundamental is basically offering, and in that sense you don’t even need to offer good service. If you just offer like for like, and you’re able to kind of supply someone for a 70% discount. It’s the pricing that justifies the whole industry, isn’t it?
Warren: I think when people are going to do that they’re going to start getting price compression. That’s not necessarily what I think is going to be happening a whole lot between now and let’s say at least the foreseeable future. And I can see out the next five to seven years, which is really kind of the investment time horizon for a lot of those private equity guys. Mind you, they’re very smart. They make very wise decisions very well-educated decisions. And one of the things that they’ve all gotten past is some of these silly fears that certain people have about outsourcing which is well, “they don’t speak English”.
That’s not true in the Philippines because English is the national language here. If you’re going to set up a BPO company in Vietnam or China or India you might have an accent that you’re going to deal with but that’s not the case here.
My agents are unbelievably good with English. And people feel very comfortable talking with them. There’re other concerns that people have. Well, I’m not sure I want to send my money over to the Philippines. No problem our company is based in the U.S. So, payments everything takes place from a U.S. bank to a U.S. bank. Other concerns that people have include quality control. No problem. You can listen to literally every single phone call that any of your agents takes because they’re all recorded. We literally have every concern addressed that somebody might have about this. So, there’s really no reason not to do it.
When you have a particular task that is easily outsourced, things that can be done over the phone, over the Internet. If you talk about having a person that’s going to greet your guest at the front door obviously not going outsource that. But there’s so much more that the companies can really take advantage of. I mentioned earlier that there’s these tasks that just aren’t getting done.
I remember this as a CEO of a couple of my companies thinking. If I only had all resources, and I do this, I do this, I do this. And who among the CEOs of these companies out there don’t have all sorts of tasks that they wish they could do. But they don’t have quite enough priority to justify the cost that whether it’s 50 bucks an hour, or 30 bucks an hour, or $75 an hour, just doesn’t quite justify. But it’s six bucks an hour or eight or ten or twelve, it’s a much different game. Then you provide that value to your customer, that enables those companies to dominate their market.
Derek: Yes, it’s exciting stuff for us. And the real gem of outsourcing is that you can get your bookkeeping done for cheaper, and it’s not about replacing your roles for cheaper. It’s about getting those jobs you’ve always wanted to get done.
And it’s about entering new markets and it’s about finding new activities to do that can give you a competitive advantage and all of these things are kind of accessible because the incremental cost is not so great as having to hire another person at 150 grand a year in the U.S. It just cost you less to test. It cost you less to venture. So, it reduces risk. So, it’s super exciting in that regardless [crosstalk 00:16:07] it’s kind of driving business forward. It’s not just about saving costs.
Warren: Let me give you an example and that’s just kind of a fun example. I have a client they wanted to outsource their bookkeeping. We said, “Okay, I got an accountant.” I charge the client $400 a month. Does all of their bookkeeping and it’s all remote because it’s all on QuickBooks online and all the bank accounts all sync up together. And the bookkeeper doesn’t have access to any passwords or bank accounts or anything like that. Just the information syncs. So, there’s no risk of them having an attack or stuff turning like that. And so, compared $400 a month to the cost of a bookkeeper. I don’t want to put bookkeeping industry out of business in the United States. I want them to focus on more important things like what is it going to take to grow this business. And so that’s our main objective. One of the things that’s clearly well-stated in our Web site is this “outsourcing doesn’t put U.S. jobs aside”, it lets people who have careers in the US have more exciting careers because they don’t have to worry about mundane tasks. They don’t have to worry about data entry. They don’t have to worry about handling the mundane details of certain businesses that can be outsourced. They’re able to focus on the exciting things and the growth in making their companies great.
Derek: Yeah it enables a company to [inaudible 00:17:39] the value adding[?] doesn’t it? And concentrate on the kind of higher value higher quality leadership and directional team. All those task that’s supposed to kind of getting stuck in your bookkeeping at the end of the day.
Derek: Thank you so much Warren. If people want to keep in touch with and they want to carry on the conversation, and you know I really encourage everyone out there to at least consider outsourcing. If they want to keep in touch with you and check you about that, how could they do that?
Warren: My email is [email protected] and pentwatergroup.com is the web site.
Derek: Fantastic. Will have all of that in the show notes. Thank you so much Warren.
Warren: Thanks, Derek.
Derek: That was Warren Walborn of Pentwater Group. If you want to get in touch with Warren or want to know more about anything in this episode, then go to our show notes at outsourceaccelerator.com/186.
And, as always, if you want to email us, then you can send us an email at [email protected].
See you next time!