The Ins and Outs of Outsourcing

While the impact of offshoring on the United States and global economies is a source of much debate, any argument over the potential benefits to individual companies is largely over. Offshoring, commonly known today as "global sourcing," is regarded as a proven tool for achieving competitive advantage by business leaders seeking to cost-effectively meet -- and even exceed -- customer expectations.

Success in offshoring is not preordained, however, and the difference between success and failure generally rests on just a few key decisions, as described below.

The Dos of Offshoring

  • Have a Bias Toward Outsourcing. There are two ways for a domestic company to tap into the global talent pool. One is to go it alone and build an offshore captive; the other is through outsourcing. Companies should give serious consideration to outsourcing functions not central to the pursuit of competitive advantage as an alternative to building an offshore captive. Outsourcing enables a company to take advantage of the scale and experience that vendors have to offer, at substantially lower risk than building a dedicated captive. This is especially true for small and medium-sized businesses with limited experience operating globally.
  • Select the Right Location. Selecting a location with a long-term commitment to maintaining world-class levels of performance in a business process will ensure you are happy with your decision to offshore long after wage differentials have disappeared. As an example, companies now look to India as much for the quality of its IT professionals as for the price of its labor.
  • Baseline Existing Performance Levels. An accurate baseline helps the offshore organization to set reasonable, achievable performance targets. Inflated opinions of existing service levels can be a barrier to consideration of offshoring, implementation, and ultimate satisfaction.
  • Standardize. In many organizations, the standardization and centralization that accompany offshoring initiatives are a significant source of benefit, perhaps as significant as all others combined. A willingness to make painful compromises in the interest of standardization is a key to maximizing benefit. Offshoring can be a great forcing device, breaking down barriers to standardization, breaking down barriers to standardization that it might otherwise not been possible to overcome.

The Don'ts of Offshoring

  • Don't Offshore Highly Interconnected Processes. The best candidates for offshoring are self-contained processes with minimal "surface area." The overhead associated with offshoring activities that cannot be easily decoupled from activities that will remain onshore generally exceeds projected savings from wage arbitrage. Adding an unnecessary handoff for purposes of offshoring also increases the chances of error or miscommunication.
  • Don't Leave Process Improvement Entirely to the Offshore Organization. "Lift and Shift" has an intuitive appeal because it leaves offshore resources, often less expensive and more highly motivated, to make improvements that onshore resources have presumably failed to make for years. Despite Lift and Shift's intuitive appeal, experience suggests that the best time to make process improvements is in the transition from onshore to offshore, when new methods of operating have yet to become entrenched.
  • Don't Assume Local Culture Can Be Finessed. Local culture impacts everything from how best to motivate people to methods of dealing with disagreement and conflict. One frequently cited example relates to conflict avoidance. Where people in developed countries tend to view a certain amount of conflict as inevitable and even desirable, people in some developing countries will seek to avoid it at all cost. The result is that issues are raised and resolved more slowly.

Offshoring can be a daunting subject, particularly for executives considering the possibilities for the first time. Keeping these few "Dos and Don'ts" in mind will go a long way toward ensuring a successful offshoring effort.

Russell Pass is a founding member of Bridge Strategy Group. He has 25 years of experience consulting for companies throughout North America and Europe. Hemant Kashyap is a consultant with Bridge. He has nine years of experience working with multinational companies on issues related to strategy and operations.

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