Deal Radar 2010: Rural America OnShore Sourcing ,Ohio,Kentucky

Rural America OnShore Sourcing, Inc. (Rural America) is a U.S.-based onshoring company. Through its offices in Ohio, Kentucky, and Wisconsin, it provides the same outsourcing services performed by offshoring companies, except it uses professionals based in rural parts of America instead of overseas, hiring these professionals for 25% to 40% less than the cost of U.S urban labor. The goal is to offer clients the advantages of using U.S.-based labor while reaping the cost benefits equivalent to offshoring.

The company was founded by serial entrepreneur Christopher Hytry Derrington and software executive Sunny Dronawat. Hytry Derrington stumbled onto the idea because of two personal experiences. He had tried to outsource work to India for one of his software companies but found that the quality was not satisfactory and the time zones impeded communication, problems that were compounded by differences in language and business culture. Around the same time, he was visiting family in Wisconsin and learned from a local economic development director the number of technologically proficient people needing work and the kinds of wages typically paid. He had been paying $13.57 an hour for labor in India; rural American talent was available beginning at a comparable $17 an hour.

At first, the proverbial light bulb did not go off. Hytry Derrington intended to hire the rural-based programmers only for his software company’s internal needs. He shared his discovery with his friend Dronawat, the Indian-born CEO of a software company in Louisville who had also met with similar dismal results outsourcing software projects. Dronawat proposed offering U.S.-based rural outsourcing services to other companies. The pair spent six months developing the business model foundation for building a national virtual company of rural-based professionals, trained in information technology and business process outsourcing.

The company now has professionals working in eight states. Employees have the opportunity to work from home, in a development center, or a combination of both. A proprietary cloud-based management system has been developed to integrate these widely dispersed rural professionals into a flexible and cohesive workforce. Every W2 (IRS classification for determining federal taxes on salaried workers) in Rural America is a shareholder: each person receives at least $500 in vesting stock options on his or her first day. The company has been adding regional outside sales staff since June 2009. A sales partner reseller program launched April 25, 2010, and there are partners in both the United States and Canada.

Industry experts state that labor arbitrage – arguably still the key cost-savings benefit of offshore outsourcing for many companies – will continue to drive sourcing decisions for the next 30 years. However, the current political and economic environment is affecting the industry. According to Gartner, the global business process outsourcing (BPO) market for 2007 was $173 billion, of which $24 billion was outsourced to offshore contractors. Annual growth is projected at 25% to 35%.

According to a recent IT services survey performed by Rural America, on average, the company’s information technology outsourcing (ITO) services are 17% more expensive than outsourcing to India. U.S. businesses are realizing that the shrinking financial labor arbitrage savings achieved from offshoring can be offset by the soft costs of lower productivity, cultural differences, poor communication, time zone gaps, and less intellectual property (IP) protection. Thus, Rural America’s value proposition is strengthening vs. offshoring. Additionally, urban India’s rate of increases in cost of labor is greater that the United States, further decreasing the labor arbitrage delta. Rural India has not yet caught onto the outsourcing bandwagon. When it does, it will pose a challenge to the cost structure for U.S. onshore vendors.

Rural America’s primary focus is on companies of $50 million or less in revenue. The key decision-makers are the “C” level executives – CEO, CFO, CMO, CIO, and CTO. A primary target segment is providing ITO, corporate development outsourcing (CDO), and BPO services to angel and VC-backed early stage companies. This segment is one of Rural America’s highest priorities for 2010. Virtually all of these portfolio companies outsource a significant portion of their early-stage needs. As these companies grow, Rural America wants to have an established relationship with them. The company says that the IP technical competencies that it brings to each engagement can position it as a preferred partner for future expansion.

Rural America was profitable its first full year of operation, and projected revenue for 2010 is $1.7 million. The company was capitalized for less than $25,000 by the founders. Through offering customers incentives to pay Net 7 (that is, paying seven days after the invoice date), and watching project profit margins very closely, growth has been self-funded. Derrington and Dronawat are big believers in starving a start-up until its “secret sauce” is developed, then “pouring gasoline on the flames” once it is ready to scale up. They are talking with several groups of private investors about an angel investment of $250,000 to $750,00 to fund another round of social media marketing talent and the expansion of the national outside sales force. The ideal investor brings either outsourcing or targeted industry expertise.

Rural America has served over 30 customers since launch, ranging in size from early-stage companies to national retail chains to Fortune 500 companies. Approximately 80% of its customers hired it to carry out ITO work and 20% for BPO/CDO projects. The company received its first outsourcing project in December 2008 from a British mobile phone anti-virus software company using LinkedIn marketing. Thus, the EU was offshoring to the United States. No print or electronic advertising is used to bring in customers; Rural America relies on Web-based marketing, targeted network campaigns via LinkedIn, social media marketing, and customized industry Web landing pages.

The founders know that competition will only increase. At present, there is direct competition from numerous rural-based entities including Rural Sourcing, which focuses on vertical opportunities in the healthcare industry in North Carolina and Arkansas; CrossUSA, which offers vertical IT services from Minnesota, and Systems in Motion, focusing on IT support.

Indirect competition comes from the thousands of software and BPO firms located in American cities and suburbs that provide services by utilizing urban programmers. These firms will need to revise business models and cost structures as labor pressure grows. Future competition will likely come from international firms establishing U.S.-based operations in Tier 3 rural communities and offering a blend of domestic and foreign professionals. They are already doing so in Tier 1 and Tier 2 cities, primarily to obtain Fortune 500 and government contracts.

Rural America’s founders positioned the company to aggregate rural-based U.S. talent located in Tier 3 or smaller communities into a national, virtual Company offering an expanding range of outsourcing services. Tier 3 is defined as communities and counties with populations of 50,000 or less.

Hytry Derrington and Dronawat created Rural America from the beginning to be an acquisition candidate; the founders’ strength is building early-stage Companies, not running them up to $100 million. Rural America anticipates a merger with or acquisition by one of its industry partners or by a potential competitor to obtain 1) its ability to acquire and aggregate rural-based talent on a national basis, 2) a proprietary mix of tools and processes to manage operations virtually nationwide, and 3) a strong financial business model.

Recommended Readings
Over the past few years, this blog has covered outsourcing, offshoring, labor arbitrage, creating jobs in the United States, and creating jobs in Asia and Latin America from a variety of angles and viewpoints. Of recent interest are my Forbes column, Indian Outsourcers Should Look At Rural Talent, and guest author Tony Scott’s continuing series, Is Outsourcing Dying Or Thriving? Tony interviews executives of companies that have used a variety of offshoring and onshoring solutions. Stay tuned for the next installment.

This segment is a part in the series : Deal Radar 2010