Offshoring - how to get it right
Find out if it's right for your business - and the right way to do it
By Andy McCue
The debate about whether - and how - to send work overseas has moved out of the IT department and into the domain of top-level business executives and the board. Andy McCue speaks to the experts about best practices for all the various options.
Globalisation has had a positive impact on the way businesses can source products, services and skills in order to gain competitive advantage, cut costs and drive top-line growth - but many boardrooms still don't have a centralised and consistent strategy for sending work offshore, instead relying on piecemeal and uncoordinated efforts.
The model for using lower-cost overseas locations such as India for software development and call centre work has become a mainstream and widely accepted business practice over the last decade, led largely by the financial services sector.
That trend is only set to grow, both in volume and in the types of services that will increasingly be sent offshore. A study conducted last year by management consultants McKinsey and Indian IT trade body Nasscom predicts around $110bn of IT and business process outsourcing (BPO) services globally will be offshored by businesses by 2010.
But how does this globalisation - 'the world is flat' vision of Thomas Friedman's book of the same title - affect a company's sourcing strategy?
Devise a strategy
Phanish Puranam, assistant professor of strategic and international management at the London Business School (LBS), says best practice is to operate from a portfolio perspective.
He says: "People are increasingly looking at the whole portfolio of choices and saying 'let's look at the whole range of options'. A big trend has also been to centralise the services function so there is a common method for evaluating these decisions."
But in many boardrooms a complete shift in mindset is needed as the sourcing situation becomes more complex, according to Phil Morris, founding director and COO at outsourcing advisors Morgan Chambers.
Morris says: "The whole of the executive management needs to understand the impact of their response to the globalisation phenomenon on their organisation. Every executive needs to understand how different types of outsourcing can be woven into the organisation to make it more competitive."
One of the reasons for the need for a group-wide sourcing strategy is the range of services and processes that can now be offshored - aside from the obvious things such as software development and tech support.
Neil Hammond, head of IT at British Sugar, experienced the first wave of offshore outsourcing as head of IT strategy for Thomas Cook in the late 1990s when he offshored IT development work to India. He says globalisation and offshore outsourcing can no longer be ignored or sidelined by a business.
He says: "It must be a factor in any significant sourcing decision, new business development or process improvement strategy."
Analyst Forrester predicts that over the next few years organisations will centralise activities such as customer service, marketing, HR, and finance & accounting (F&A) and move non-core processes such as low-level HR or payroll activities to low-cost offshore destinations.
British Sugar's Hammond says: "[Offshoring] has moved beyond IT development and call centres into areas such as back office transaction processing, engineering and architectural design, bespoke equipment manufacture, through to buying and operationalising 'shell' factories."
Frances Karamouzis, VP of research at Gartner, says BPO adoption is just taking hold but that the pace of growth is picking up all the time.
She says: "The core focus in terms of volumes is HR followed by F&A. Beyond that it's procurement or CRM and call centre work."
KPO on the horizon
LBS' Puranam says: "Processes that would have been unthinkable a decade or so ago are now on the table and that's definitely the case in financial services companies."
Equity analysis and research is offshored by many Wall Street and City of London organisations, for example. The number crunching is done in Mumbai or some other low-cost location and then sent back to the bank for review and analysis.
According to Gartner's Karamouzis, while the numbers in terms of headcount involved in KPO are smaller than IT or BPO offshoring, the value is higher in payback and return on investment.
She says: "The per capita savings [for KPO] are around the 50 to 60th percentile. But the savings in absolute dollar amount also don't factor in productivity. You can get those [offshore] people to produce more in less hours and you can staff two or three people doing a deeper dive into the research," she said.
Pick a model
Other options include going down the captive route, which means setting up a wholly owned unit of the business in the offshore country. Several high-profile companies have done this including GE, HSBC and Tesco.
Then there are joint ventures or 'build, operate, transfer' deals where a third-party supplier sets up the offshore operation, gets it up and running and then transfers it to the company using it. All these different models have their own pros and cons and the decision will depend on factors like the size of the company and the type of service being offshored.
The rule of thumb is that large global companies looking to offshore work that is a core competency or closely regulated are best suited to setting up their own captive operation, otherwise it is difficult to justify the business case.
Brand is also an issue that many companies fail to take into account when setting up their own captive offshore operation. In countries such as India, where there is stiff competition for staff and high attrition rates, the company's brand reputation is key to being able to attract and retain talent.
Morgan Chambers' Morris says: "You need to understand how your brand will be perceived in the local market. If your brand doesn't stack up against Microsoft, Oracle etc you will suffer high attrition."
Crunch the numbers
In a recent Forrester survey of business and IT executives in European companies that use offshore providers, 45 out of 47 rated cost as the principal choice behind their decision.
The most important thing here is to be realistic about the level of savings once all the extra communication, management and travel time and resources have been factored into the basic return on investment equation, according to LBS' Puranam.
He says: "Instead of 30 to 40 per cent savings the business case is now being made on more like 15 to 20 per cent."
Beyond cost, British Sugar's Hammond says some of the issues to consider when offshoring are the management of a remote operation, ensuring you can gain access to sufficient technological and managerial expertise, and dealing with different cultural expectations and attitudes.
The lesson for boardrooms then is to look at offshore outsourcing within the context of a company-wide global sourcing strategy to ascertain which services and processes could be sent offshore and to make those decisions in a consistent framework. This means that while price is important it is also a balance against other advantages such as access to talent, and quality and process improvements.
As Morgan Chambers' Morris says: "Offshoring is not just a panacea on short-term labour arbitrage."
Source: Silicon.com, IT Services
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