Beware Outsourcing Operations it's No One-Way Ticket to Financial Paradise

Offshoring of IT and business offers organisations the potential for significant cost savings, but it isn't the quick route to a fast profit that many think it is.

Some projects have shown impressive early gains, but wider evidence reveals that a lot of organisations are getting caught by a number of pitfalls and are therefore not maximising the achievable financial benefits.

The headline benefits of simple labour arbitrage alone (ie lower offshore labour costs) can deliver savings of 15 to 20 per cent.

Yet lower offshore productivity and rising labour costs in popular locations such as India (which boasts wage inflation of 15 per cent) are closing the gap.

Compass performance improvement studies of onshore operations frequently identify cost saving opportunities of 20 to 25 per cent, which can be delivered through business process improvements or increased automation. So offshoring may not be necessary in order to achieve cost savings alone.

In order to make the right decision, diligent management teams are gauging the potential efficiency of their onshore operations and the cost of improvements ahead of any offshoring decision. A thorough assessment of their operation defines the drivers of cost and performance and helps managers decide whether an offshoring decision will deliver benefits.

Regardless of the decision, Compass' studies suggest that further savings can be achieved if organisations manage the decision to move offshore more thoroughly and avoid the seven deadly offshoring sins.

1. Pride

Learn from the mistakes of others

Organisations are still rushing into offshoring without taking the time for due diligence, assessment of risks and consideration of alternatives. They cling to the conceit that their organisation is special and will succeed where others have failed, despite all the evidence to the contrary.

Managers assume they have the resources to implement and govern an offshore environment internally and that they can do it quickly, yet all experience shows that it takes time, detailed planning and skilled execution to move an operation and an experienced retained function to drive value.

2. Sloth

Avoid simply moving problems

Lazy managers are tempted to move problematic operations to countries with lower wage rates in the hope they will magically improve with a change of postcode. This slothful approach rarely delivers optimum results.

Indeed, when inefficient operations are moved, extra people are often deployed to help solve the problems. As wage rates rise, this approach becomes unsustainable.

3. Greed

Don't look to short-term gains

Greed can lead managers to put aside long-term service delivery and other business issues as they succumb to the promise of instant financial gratification that results from lower wage costs in far-off lands.

Compass has seen staff turnover rates of between 40 to 80 per cent in some offshore locations. Reluctance by avaricious managers to invest in the offshore location can contribute to staff retention issues, which in turn impacts service quality.

4. Extravagance

More people won't solve entrenched issues

Our studies of operations show that offshore productivity is considerably lower than equivalent onshore operations. When a broken process is moved offshore, additional lower cost personnel are often thrown at the problem. These highly-educated staff are soon frustrated and leave for more rewarding work.

So, the operation needs more new staff in a cycle of low cost and low efficiency that can impact on service quality, cycle times and error rates.

Instead of chasing the next best cheap location, high-performing organisations are showing prudence by fixing process problems before offshoring.

5. Envy

The grass isn't necessarily greener

Organisations should avoid the feeling they are missing out on benefits that those around them are enjoying. Offshoring is certainly fashionable and managers may be envious of the savings they hear others achieving but these factors do not mean it is the right choice. Claims of 40 per cent savings publicised by vendors are not sustainable and do not account for the drag of lower productivity, higher communication costs and governance. An efficient offshore operation is likely to deliver 20 per cent savings at most.

6. Gluttony

Do not try to offshore every operation at once

Having digested the claims of offshore vendors, some organisations succumb to gluttony and offshore as many operations as quickly as possible, in the belief this will maximise returns. Managers have a limited ability to absorb change and a feast of offshoring change can lead to corporate indigestion.

The best-performing companies have typically taken a more measured approach through selective sourcing that is delivered by an optimised mix of in-house, outsourced and offshore service delivery.

7. Anger

Be aware of the limitations of offshoring

When an outsourced offshore relationship encounters difficulties, organisations are often quick to anger and blame the service provider. Many clients mistakenly believe they can successfully outsource a major business problem. This is an abdication of responsibility and both client and provider share blame for the offshore difficulties that result.

Another source of anger is unrealistic expectations about cost savings. Compass analyses of offshored outsourcing contracts show that savings are much lower than in captive offshore operations. This does not mean that outsourcing vendors are doing a bad job. Rather, it confirms the obvious fact that outsourcing providers have to make a profit. It also suggests that clients should not outsource process problems which they have failed to solve themselves.

Geraldine Fox is leader of the global sourcing service line at Compass Management Consulting.

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