A Sinner’s Guide to Offshoring

By Geraldine Fox and Nigel Hughes

Organizations that outsource operations to offshore environments consistently save money by taking advantage of lower labor costs. While that’s not surprising, evidence increasingly suggests that most offshore initiatives could do much better at improving cost efficiency.

Compass analyses indicate that both captive and outsourced offshore projects are often poorly planned, shoddily implemented and ineffectively managed. As a result, cost savings from these initiatives fall far short of their potential. In many cases, the failures result not from a lack of capabilities, experience or resources, but from human foibles such as arrogance, laziness or greed. In other words, good old-fashioned sin is to blame.

Consider these scenarios:

Hubris

Research shows that rushing through an offshoring project is counterproductive, yet surprisingly many executives seem to believe they’re smarter than others and can therefore cut corners and abdicate the responsibilities associated with the implementation and ongoing management of an offshore operation.

Many organizations are unwilling to invest time at the outset to adequately plan and execute a project. They also wrongly assume they have the internal capabilities to govern an offshore operation. Whether out of hubris or not, they frequently underestimate the management overhead associated with setting up and then managing an offshore operation. Inadequate onshore management capabilities are a major contributing factor to poor productivity and communication, and to missed cost savings and performance-improvement targets.

Don’t be too proud to learn from the mistakes of others. Avoid conceit and hubris. Invest the time to do it right the first time, and dedicate the resources to make the initiative successful throughout its lifecycle.

Sloth

The most obvious manifestation of the sin of sloth is adopting the “lift and shift” strategy by moving an inefficient business process offshoreand achieving the dubious benefit of running the inefficient process more cheaply, thanks to lower salaries. However, Compass analyses indicate that even though individual salaries may be substantially lower in an offshored environment, the volume of resources required to do a given task increases by as much as 15 percent. This lower productivity is driven in part by the common belief that cheap labor justifies redundancy, and that the solution to inefficient processes is to simply throw more bodies into the mix. Moreover, distance and cultural differences compound process problems and further hamper productivity.

A decrease in individual productivity is a long-term and systemic characteristic of offshoring, even in so-called “mature” offshore environments. While a captive operation offers the opportunity to solve problems over time, an outsourced “lift and shift” approach complicates matters because problems must be managed through a third party.

Don’t be lazy. Don’t “lift and shift” and settle for a short-term cost reduction without considering the long-term implications. Baseline performance before offshoring, and address performance issues before moving. At a minimum, develop a performance improvement plan for the offshored operation. Better still, re-engineer the operation before offshoring. Invest in building solid processes and an onshore management framework, and offshore, invest in training and orientation to make offshore staff part of the global organization and to create a sense of belonging.

Avarice

In the early days of outsourcing, organizations were seduced by outsourcing’s promise of financial discounts in the neighborhood of 25 percent, higher service quality, faster time to market for applications and ultimate flexibility. If it sounded too good to be true, it usually was. While costs generally decline in the first 18 to 24 months of outsourcing, they increase later as the outsourcer tries to recoup the losses suffered in the early years of the contract.

Similar financial patterns prevail today with offshoring, and we see client organizations repeating the sins of the past with unrealistic expectations of sustained cost savings.

Avoid avarice and take a long-term view. Don’t try to maximize savings early on and sacrifice financial and service improvements down the road. Re-engineer processes early. Develop local resources and offer a career path. You’ll reap the rewards later in higher productivity and lower attrition.

Envy

Talk of offshore savings in the range of 40 percent may stir envy, but such estimates don’t accurately account for the impact of lower productivity. Realistic savings in offshore environments are more often closer to 20 percent.

What’s more, Compass analyses of onshore operations frequently identify cost-saving opportunities in the area of 20 percent to 25 percent, attainable from application of technology or improvements in business processes. In other words, offshoring may not be necessary to realize cost-saving targets, particularly when considering the costs of finding an offshore partner or building capability offshore, the cost of transitioning activities, the cost of building new processes, training and orientation of staff, and costs associated with offshore governance. Before implementing offshoring as a strategy, gauge the current and potential efficiency of onshore operations, as well as the investment required to realize the potential efficiency. Such an assessment makes it possible to understand the costs required to reach the desired end state, and whether offshoring is the best way to get there.

Don’t succumb to envy and follow the herd chasing the newest, hottest craze. Offshoring is a good-news-and-bad-news proposition, so consider all your options before taking the plunge. Don’t assume that cost savings are automatic, particularly if you want to retain the same level of customer service. Consider your opportunities for onshore performance improvement and, more importantly, consider the implications for your customers and your business model.

Gluttony

Given the potential cost savings involved, some organizations succumb to gluttony and offshore as much as possible as quickly as possible, believing this will maximize benefits.

What results from this approach is what happens when a python swallows a pig. The corporate body has a limited ability to digest change, and an even smaller capacity to digest offshore change. A bacchanalian offshoring feast generally leads to indigestion. If you indulge in gluttony, you will find that your entire management focus will be directed toward firefightingwasted energy.

Gluttony is always a bad strategy; resist the urge. Don’t try to offshore everything at once. Pace yourself and test your management capabilities in bite-size pieces. Take a measured approach, process by process. Monitor successidentify what works and what the management team can handle. Build confidence and experience by gradually moving the operation in manageable chunks. Establish a track record, gain experience and develop the necessary governance capabilities to reap the maximum potential benefits.

Wrath

If a business offshores through outsourcing and the outsourcer fails to deliver on expectations, the business might be tempted to be angry and blame the outsourcer. In reality, both parties are responsible for the result, and the client organization must consider its contribution to failure. Common shortcomings on the client side include unrealistic expectations and the belief that a problem can be outsourceda belief that amounts to abdication of management responsibility.

Compass analyses indicate that offshore outsourcing achieves lower cost savings than offshoring in a captive environment. While this might suggest that outsourcers are doing a bad job, it more likely reflects the fact that organizations are outsourcing problems they have failed to solve themselves. As a result, the outsourcers face a greater challenge to begin with.

Be calm, kind and understanding with your outsourcing partner. Anger will only obfuscate the issues. Work together to find the source of the problem and address it.

Geraldine Fox is Compass service line leader for sourcing; Nigel Hughes is Compass service line leader for IT value and strategy.