Market expansion services, rather than traditional distribution, is the best outsourcing model for speciality chemicals companies aiming for growth in Asia, say DKSH and Roland Berger Associates

Companies these days want to focus on core competencies and farm out everything that others can do more efficiently. This is nothing new. But what started out as the outsourcing of isolated processes, such as IT or payroll accounting, has now evolved to encompass entire front-end activity packages, including marketing, sales, distribution and customer care.

The day of market expansion services (MES) has dawned and Asia is its epicentre, according to a new report by Roland Berger Associates. The report was carried out in partnership with DKSH, a MES provider headquartered in Zurich but with a focus on Asia, where 600 of its 680 business locations are to be found.

The company’s DKSH Performance Materials business unit distributes speciality chemicals and ingredients, while also providing MES in such fields as pharmaceuticals, personal care, food and beverage and general industrial applications.

Outsourcing originally grew out of companies’ desire to concentrate on their core competencies and, in so doing, to cut costs. When companies also began to exploit cost differentials by sourcing materials and production in emerging markets, for example, globalisation became another take on the same theme.

The growing prosperity of emerging markets in general and Asian ones in particular, coupled with stagnation and market saturation in industrialised economies, subsequently added a new variable to the equation. Global players realised that emerging markets were not simply ‘extended workbenches’ but lucrative sales markets, too. Since then, emerging markets themselves have begun to turn the tables and are increasingly selling their own goods throughout Asia and beyond.

These developments have particularly compounded the need for MES. Companies engage MES providers to help them not just to understand local practices, market specifics, local regulations, legal issues and cultural differences but also to execute on the ground. MES providers can also assist in overcoming language barriers, gaining access to local customers, and providing inside market knowledge.

In theory, companies could manage these tasks themselves, if they had the necessary time, experience and resources but often they do not. The risks associated with entering unfamiliar, far-flung markets are dishearteningly high.

MES providers offer value by easing companies’ entry into these markets or by further developing existing business. They provide front-end processes in areas such as marketing, sales, distribution, customer services and support and logistics, areas in which customer proximity is essential.

As companies pursue entry and growth in new and existing markets, MES providers organise and run their entire value chain for their products. MES are now recognised as an established industry in its own right.

It is important to clarify exactly where traditional outsourcing ends and MES begin. Traditional outsourcing has three categories:

  1. Business process outsourcing, involving the outsourcing of specific business processes, such as payroll accounting
  2. IT outsourcing, for instance outsourcing IT-related processes, such as IT maintenance services, software engineering and software testing
  3. Knowledge process outsourcing, involving outsourcing R&D, analytical tasks, legal services and services in the area of market and/or clinical research

Traditionally, providers offer outsourcing services in one or more of these categories. Their value proposition is that they can cut clients’ costs by carrying out certain tasks more efficiently.

MES providers go beyond their traditional counterparts in their aim to reduce costs and at the same time improve revenue for clients. They ease their clients’ access to new markets and assist them in exploiting markets in which they are already present. Their point of focus is front-end processes, such as marketing and sales or customer services.

With their help, companies are able to increase their market share, improve market coverage and enhance their market penetration and simultaneously cut fixed costs and reduce operational complexity. In this way, MES providers do considerably more than companies providing only traditional outsourcing services.

An integrated service offering

With the help of MES providers, companies can broaden and deepen their market penetration. By offering understanding of the local market, spotting sales opportunities and supporting with physical distribution, MES providers help companies to increase their existing market share and expand into new territories. Above all, MES providers help companies by delivering front-end business processes that involve a substantial level of direct customer contact.

Examples include marketing and sales, logistics and distribution and customer services. These activities are predominantly driven by specific local needs, such as cultural factors and regulatory requirements that companies must take into account when entering new markets.

There are also industry-specific services, such as scouting for suppliers and testing products in regulated markets. Since most MES providers deliver services across the entire value chain, they can be considered full-service providers.

Although there are a variety of different MES provider profiles, they all focus on integrating numerous end-to-end services. This distinguishes them from single-service contractors, like market research firms, sales agents and pure-play logistics providers, who each focus on a specific link in the value chain.

While MES providers offer wide-ranging service packages, many also give companies the option of selecting modular services, which allows them to compete with more traditional single-service contractors as well.

These two business models – single-service contractors and MES providers – differ in terms of their value propositions. MES providers help companies to reduce complexity and cut their coordination costs. Moreover, by providing a one-stop shop, they channel information from customers to the company, often giving the company new market insights.

Always a step ahead

To stay competitive as outsourcing partners for their clients and customers, MES providers must engage in service innovation. In the long term, a company will find it feasible to outsource steps in the value chain only if its MES provider continuously stays ahead of the game and maintains high operational benefits through innovative service offerings. Generally speaking, new and innovative services are the primary factor driving long-term success in any service industry.

Service innovation is therefore the key lever for business growth in the MES industry – and for MES clients (companies expanding into new markets) and customers (retailers, wholesalers, industrial customers and even consumers in local markets). It leads to organic growth, business development and efficiency gains.

With service innovation, the provider, client, and customer can develop new service offerings, reach out to new clients and customers and eventually achieve additional sales and profits. It delivers more than business growth, however: it also creates a competitive edge based on a long-term client-customer relationship and a more tailored, needs-focused service offering.

Future importance of MES

Speciality chemicals are often sold in lower volumes and at higher prices. They require a capillary network and specialised services, such as testing, formulation, product innovation, compliance management and application support. Therefore, they are an important industry for MES.

Unlike traditional outsourcing, the focus of MES is on sales growth and increasing market share. Chemicals companies these days prefer to work with a partner who can offer them the complete package, rather than having to work and coordinate with multiple partners. It is very likely that this model will have a bright future in the chemical distribution sector, too.