Yale Case. By: Narbe Alexandrian / A. J. Wasserstein
Introduction
ETA has become an increasingly popular pathway for ambitious professionals seeking to acquire and scale small businesses. However, the journey from acquisition to sustained growth is fraught with operational challenges. A recent study, “Exploring outsourcing in a Search Fund project”, published by Yale University, delves into the strategic role outsourcing plays in helping ETA CEOs streamline operations, optimize resources, and drive equity returns.
The challenges of scaling a SF Business
Once a search fund CEO acquires a business, they must rapidly learn its operations, assess employee roles, and implement improvements—all while managing investor expectations and an ever-ticking IRR clock. Scaling a business is not just about increasing revenue but also about building robust systems and processes that enable sustainable growth. Without proper infrastructure, rapid expansion can lead to operational inefficiencies and chaos.
1/ Why outsourcing matters for EtA CEOs
The study highlights outsourcing as a critical lever for ETA businesses aiming to scale efficiently. Outsourcing involves engaging third-party vendors to handle non-core functions, allowing the company to focus on its core competencies. Many SF businesses, such as commercial landscaping, vertical niche software solutions, and HVAC maintenance, already provide outsourced services to their clients—yet often overlook outsourcing as a solution for their internal challenges.
Key benefits of outsourcing
The study outlines five primary reasons ETA firms should consider outsourcing:
- Focus on core competencies: CEOs can devote their time and energy to activities that generate the most value, such as customer acquisition and service delivery.
- Enhance customer experience: Outsourcing non-customer-facing functions ensures that internal resources are aligned with what customers value most.
- Convert fixed costs to variable costs: Outsourced services often operate on a pay-as-you-go model, reducing the burden of high fixed costs.
- Access to best-in-class expertise: Specialized vendors bring deep expertise and operational efficiency that in-house teams may lack.
- Overcome talent constraints: Small businesses often struggle to attract top talent; outsourcing provides immediate access to skilled professionals.
2/ When to consider outsourcing
The report suggests five key indicators that signal it may be time to outsource:
- Rapid growth: As companies scale, outsourcing ensures operational continuity.
- Cost efficiency: If a vendor can perform a function more cost-effectively than in-house resources.
- High startup costs: Outsourcing can defer upfront investments and smooth cash flow.
- Speed requirements: External providers can implement solutions faster than in-house teams.
- Trial and learning phase: Outsourcing can serve as a test run before committing to internal development.
3/ Selecting the right outsourcing partner
Choosing an outsourcing partner is a long-term strategic decision. The study recommends evaluating potential vendors based on five criteria:
- Service Level Agreements (SLAs): Clear performance expectations and accountability.
- Pricing arrangements: Transparent cost structures to avoid hidden fees.
- Scalability: The vendor’s ability to grow with the business.
- Implementation costs: Both hard and soft costs of onboarding a new provider.
- Exit strategy: Understanding separation costs to maintain flexibility.
4/ Managing outsourced partnerships
To maximize outsourcing benefits, CEOs should:
- Treat vendors as strategic partners.
- Hold them accountable to agreed-upon SLAs.
- Foster strong relationships with outsourced personnel.
- Ensure financial discipline, including timely payments.
- Be a preferred customer to receive top-tier service and responsiveness.
5/ Potential pitfalls and how to avoid them
While outsourcing offers significant advantages, the study also cautions against potential risks, including:
- Underperformance: Selecting vendors without due diligence can lead to service failures.
- Cultural disruptions: Employees may resist outsourcing if not communicated effectively.
- Implementation challenges: Transitioning to an outsourced model can be complex and time-consuming.
- Dependency risks: Over-reliance on a single provider can reduce flexibility.
- Loss of control: Outsourcing inherently requires some level of trust in external partners.
Case study: Outsourcing in action
The study features a case profile of Narbe Alexandrian, CEO of Define Capital, who successfully leveraged outsourcing to rebuild the software infrastructure of a newly acquired company, Realtax. By engaging an external software development firm, Alexandrian avoided the complexities of hiring an internal team and accelerated go-to-market timelines. This strategic decision allowed Realtax to scale efficiently while maintaining focus on customer acquisition and service excellence.
Conclusion
Outsourcing is a powerful tool for ETA CEOs navigating the complexities of scaling a search fund business. By strategically outsourcing non-core functions, CEOs can focus on what truly differentiates their company, ensuring sustainable growth and long-term value creation. As the Yale study emphasizes, the key to success lies in careful partner selection, proactive relationship management, and a clear understanding of both the benefits and risks involved.
For SF entrepreneurs seeking to optimize their businesses, outsourcing presents a compelling pathway to efficiency, expertise, and accelerated growth.
