Sins 5 through 7By Geraldine Fox and Nigel Hughes | Posted 2008-09-02 Email Print
Know the Risk: Digital Transformation's Impact on Your Business-Critical Applications REGISTER >
The mistakes organizations make when implementing and managing offshore and outsourcing initiatives can be understood in the context of the seven deadly sins. Offshore outsourcing, offshore development and moving jobs offshore can have significant cost reductions when 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).
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.