7 Sins of Offshore Outsourcing
Offshoring business operations offers the potential for cost savings of 15 percent to 20 percent, but Compass analysis show that organizations that properly plan and operate offshore initiatives can reap substantially higher rewards.
Organizations that focus on short-term cost reductions often rush through projects without adequate planning, due diligence or consideration of the long-term implications of the inevitable changes in business requirements or offshore market conditions. In many respects, the mistakes organizations make when implementing and managing offshore initiatives can be understood in the context of the seven deadly sins: pride, sloth, avarice, lust/extravagance, envy, gluttony and anger.
Many organizations succumb to the sin of false pride and plunge headlong into an offshoring initiative without performing due diligence. They assume they have the internal capabilities to create and govern an offshore operation, but they seriously underestimate the management resources needed to set up and run such an operation. This contributes to poor productivity and communications, and to missed cost savings and improvement targets.
It takes time, good planning and detailed execution to offshore successfully. An organization unwilling to invest time at the outset and do it properly cannot expect to reap the long-term benefits of offshoring. Don’t be too proud to learn from the mistakes of others, nor too arrogant to assume that you can cut corners in implementation and abdicate the responsibilities associated with the ongoing management of the operation. Acknowledge that your existing internal resources may not be adequate. Invest the time and resources needed to do it right the first time and keep it successful over the long term.
It’s lazy to move an inefficient business operation offshore and rely on lower salaries to run the operation at a reduced cost. This “lift and shift” strategy is seriously flawed: Although individual salaries may be substantially lower in an offshore environment, the personnel resources required increase by as much as 15 percent. Consider this real-life example:
The chart shows that a “lift and shift” strategy achieves short-term cost savings, but does not address underlying problems. When these problems are offshored, the solution is often to throw additional resources (people) at the problem. This strategy becomes unsustainable over time as offshore salaries increase and traditional offshore locations experience staff shortages and high turnover (up to 80 percent a year in certain sectors and regions). A decrease in individual productivity is common in offshored environments. While offshoring to a captive operation offers the chance to solve problems over time, outsourcing a “lift and shift” approach means managing problems through a third party.
Top-performing companies are shaking off laziness and adopting a “fix and mix” approach. This involves an analysis and improvement of operations prior to offshoring (fix), followed by a movement of specific functions offshore where appropriate (mix). Data shows that the investment in such initiatives is more than offset over the long term by increased savings.
In offshoring projects, avarice shows itself as a lack of concern for the fate of the business, as well as a disdain for the well-being of offshore development. Apart from the dubious morality involved, this approach eventually collides with the reality of staff-retention problems offshore, and the associated cost and quality problems. A long-term view focuses on investment in local resources, specifically in staff training, orientation and retention. Offering a career path will pay off in higher productivity and lower attrition.
The desire to solve a problem by taking on more, cheaper personnel is extravagant and wasteful and has serious implications for service quality. Many offshore operations have lower productivity and excessively high turnover, reducing cost savings.
Here’s a typical scenario: A problem is offshored, and additional lower-cost but highly educated staff are thrown at the problem, without any effort to find a solution. After awhile, employees grow frustrated and depart for more rewarding jobs, which means more staff must be hired. A vicious cycle is created: Service quality and cycle times suffer, and error rates increase.
Upward salary pressure in India and elsewhere is forcing organizations to seek new destinations, but the low-cost/low-efficiency model will likely be replicated in those markets. Although the salary differential between onshore and offshore workers remains substantial, the combined effects of lower productivity, increasing salaries, hiring/training replacement staff and managing problems associated with continuity will close the gap far sooner than anticipated. Fixing problems before offshoring enables organizations to reap the benefits of both lower salaries and an efficient organization.
Don’t give in to the impulse to compensate for low productivity with more bodies: It’s a false economy. Leading organizations apply the same continuous performance improvement mind-set to offshore operations as they’ve applied to onshore operations for years. Companies that have invested in technology, infrastructure and processes in their offshore operation continue to show improvements in productivity and cost savings.
Don’t succumb to envy and offshore operations because you think others are reaping huge savings. The discounts are not nearly as deep as touted: Claims of cost savings of 40 percent don’t account for the impact of lower productivity offshore, higher communications costs and the additional overhead for onshore governance. Actual savings are closer to 20 percent.
Analyses of onshore operations frequently identify cost-saving opportunities of 20 percent to 25 percent, attainable through the application of technology or improvements in business processes. In other words, offshoring may not be necessary to realize cost-saving targets. Before embarking on an offshoring strategy, a firm should gauge the current and potential efficiency of its onshore operations, and the investment needed to realize the potential efficiency.
Offshoring continues to grow, but concerns over the quality of customer service are driving some operations back onshore. This trend is particularly evident in call centers involved in product advice and direct sales. Companies currently repatriating some of their services have concluded that a client-facing operation onshore (and/or a customer segmentation strategy) can offer a competitive advantage.
Some organizations succumb to gluttony and offshore as much as possible, as quickly as possible, believing this will maximize savings. But companies have a limited ability to digest change—and an even smaller capacity to digest offshore change. Organizations that indulge in gluttony find their management focus will ultimately be directed toward firefighting.
The experience of IT outsourcing offers some lessons. Early ITO deals were characterized by a soup-to-nuts mega-deal approach as a way to achieve substantial savings and value-add. Over the past few years, this strategy has failed to deliver, and selective sourcing has emerged as an alternative.
IT outsourcing worked for companies that took a measured approach, designed an optimal mix of outsourced/insourced/offshored service delivery, adopted a best-of-breed strategy regarding service provider selection and built internal governance capabilities to manage their operations.
Resist the urge to offshore everything at once. Instead, take a measured approach, process by process. Monitor success and identify what works and what the management team can handle. Build confidence and experience by gradually moving the operations. Establish a track record and develop the governance capabilities to maximize potential benefits.
If a sourcing relationship goes awry, the business might be tempted to blame the outsourcer, but both parties are usually responsible for the results. Some clients mistakenly believe they can simply outsource major problems. Others have un-realistic expectations about the cost savings achievable.
If an offshore outsourcer has failed to deliver on expectations, don’t get angry. Acknowledge your contribution to missed goals and objectives. Channel your energies in a positive manner, work with your outsourcing partner to discover the source of the problems and chart a path to success.
Geraldine Fox and Nigel Hughes are senior executives at Compass, a global management consulting firm.