Contractor Management Buyout Opportunities – How to make big money

1st May 2019

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Contractor Management Buyout Opportunities

There are ways to big money for contractors via contractor management buyout opportunities. A management buyout is when the existing management at a company buy out the existing shareholders. Sometimes a company decides that IT is not a core function and decide to hive it off to an outsourcing company. They can decide to hive it off to an onshore outsourcing company or an offshore outsourcer. However, there are sometimes contractor management buyout opportunities – if they know how to take them.

Offshore Outsourcing

Offshore outsourcing is when companies in the UK or elsewhere send an IT project or their entire systems department to an offshore location like India. They usually do this because of price factors.

Every week it seems we read about another company outsourcing, with some of it going offshore. Is there any need to take this so meekly? Is there something that we can do?

Yes, I think that there is – and I‘m surprised that more people don‘t attempt this.

IT Department Contractor Management Buyout Opportunities

I mean by this a Management Buy-Out (MBO) of the IT Department – including contractors.

You very seldom, if ever, hear of the management of an IT department bidding against the offshorers for a contract. Yet it makes perfect sense, and it would make a lot of sense for the company that wants to outsource.

By Management Buy-Out, I mean where the management of a company or department raise finance from Venture Capitalists to buy out the company or department from the existing owners.

Would Venture Capitalists be Interested?

Would Venture Capitalists go for this?

Damned right they would.

Management buyouts are just about their very favourite type of project to invest money in.

The reasons are that there is an existing income stream, there are existing profits (probably), and there is an existing management structure with experience and knowledge of the market and the customers.

They would be much happier to invest in this than some star-up scheme. The risks for their venture capital are far less.

Would Companies Be Keen on Contractor Management Buyout Opportunities

Would the existing owners, who are determined to outsource, be keen on a management buy-out?

The answer is that some would and some wouldn‘t.

It depends a lot on the reasons that they are outsourcing. If they feel that someone can run their IT department better than they can, i.e. someone whose core competency it is, then they may want to outsource their IT capability to someone like EDS, Accenture or IBM.

However, there is still a chance here, because they could still be convinced that their existing IT management, when motivated by having a stake in the new company, could manage the IT department better than is being done at the moment.

Management Buyout Would Cut Costs

If they are outsourcing simply to cut costs, then a management buy-out could definitely be on.

There are certain advantages that the company could have in outsourcing to their own IT management rather than an outsourcing company.

1. Motivated Team

The outsourcer company normally take on board the staff members of the outsourcing company. However, they would be looking to get rid of some of them down the line to save costs, and perhaps move some of the work to India or elsewhere.

The outsourcing company would know that their current staff would be much more motivated by working for themselves rather than being handed over en masse to an outsourcing company, especially as their futures would no longer be secure.

2. Cost Reductions

Most companies are looking to save money by outsourcing. If they outsourced to India they might be able to cut 40% to 50% of their costs. If it was to a UK or US outsourcing company they might be looking for cost savings of 15% to 30%.

A truly motivated management team, working for themselves could easily increase productivity and cut costs by those amounts.

They know who the good people are and who the not so good people are and could use this knowledge to cut some of their costs. They could also forego some salary as they now have a stake in the business.

They could also increase productivity.

In a survey on our site, a large percentage of people said that they could more than double their own productivity if they were working for themselves.

I could well believe it!

3. Keeping the Team Together

Just because someone‘s job has been outsourced and they‘ve been handed over to another company, it doesn‘t mean that they have to stay with that company. There are high attrition rates for those who have been outsourced. It‘s usually the best people who go as well.

Why would they stay when their jobs and career have suddenly become much more uncertain?

They would be much more likely to stay if they now had a share in a new IT supplier company that was supplying their old company.

4. Retained Loyalty

The outsourcing company would be able to count on some retained loyalty from staff who were given this opportunity. They would not get much loyalty from either the outsourcing company or the staff that they have handed over to them. They would have no one to rely on when it comes to getting advice about whether system changes are good or bad for them, or fairly priced.

Best of Both Worlds

This means that the company can still have their IT work done by motivated people who have good systems and business knowledge of their company.

In fact it could be best of both worlds for many a company. They can pass over the management of something that is not a core competency to someone else and get it done much more cheaply, whilst at the same time cutting the risk by having all the best people that they had continue to work on their systems – and a highly motivated workforce to boot. The knowledge wouldn‘t be fleeing the company.

Why Are Contractor Management Buyout Opportunities Not Taken?

So why are contractor management buyout opportunities not taken more often?

I think that it is mainly because most people who work in IT don‘t know that this option is available to them, and also because they have little contact with Venture Capital companies nor do they know how they work and what they are interested in.

Contractor Management Buyout Opportunities are going a-begging here, both in terms of making more money from IT, and in saving more IT jobs from going offshore.

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