As Ben Franklin famously said, "In this world nothing is certain but death and taxes." We all have to buy the farm one day, but we don't all have to do our taxes -- many of us can and do pay others, like H&R Block, to do them for us. In that regard, companies are no different from individuals.
In addition to taxes, corporations often have regulatory hurdles to clear. These seemingly mundane tasks aren't exactly what top brass at a hot, cutting-edge tech upstart wants to focus on.
Thankfully, there are companies to handle these back- and front-office functions for them. These outsourcing (not to be confused with offshoring) providers serve thousands of companies, providing added expertise, shifting burdens away from key management, and helping firms manage their cost structures. While companies might pay a premium for such services, the firms providing them free their clients to concentrate on more vital matters. And for investors, these helpful companies can yield impressive returns.
Companies helping companies
If you work in a major metropolitan area, chances are you've seen an Iron Mountain
If you aren't sold yet, know that the company passes the "Oracle" test; it's one of Warren Buffett's top 30 holdings. While Iron Mountain is pricey at more than 40 times earnings, you can't help but like its growth prospects, given its greedy domestic market share and its proven ability to gain overseas footholds.
The business-services space offers a plethora of strong outsourcing companies. Names like Automatic Data Processing
Think outside the cube
Don't just think cubicles and mailrooms when looking for outsourcing names. Companies that service regulatory and back- and front-office tasks also come from several other areas including the medical arena.
Yet another name that helps companies in the medical field with compliance issues is Waste Management
The advantages of being helpful
Companies that provide outsourcing services often enjoy strong, defensible moats around their businesses. Many of these companies enjoy steady work, because larger corporations are less likely to tinker with contracts that aren't part of their core business, and small businesses often have nowhere else to turn. In addition, outsourcing outfits aren't likely to attract a great deal of competition, thanks to the sheer scale required to get such operations up and running profitably.
The downsides here are obvious and few, the biggest being that regulations can change. In the event of an economic downturn, outsourcing names that handle functions like HR could face cuts, or prompt smaller business to pare back their reliance on pricey external help. Still, these same companies are often best poised to handle changes in the regulatory environment, since they typically have more resources dedicated to tracking these changes, and more experience in understanding how to roll with them.
All in all, you could do worse than to think about outsourcing names and hunt for the ones selling at a bargain. Sure, they're boring, but as the old market wisdom holds, boring is beautiful. So is "helpful," I think.
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