Strategic Offshoring

During the past 15 years, companies have outsourced to a handful of cities in India, China and Eastern Europe for offshore service functions with hopes to reduce costs and gain a strategic advantage. Unfortunately, many companies have experienced mixed results as there are several problems facing these popular spots. However, companies can benefit when they pick the right processes to outsource, assess operational and structural risks and match organizational forms to their needs.

Rank Processes by Value

Many companies focus their efforts on choosing countries, vendors and negotiating prices, but do not spend time evaluating which services they should and should not offshore. Without a standard methodology for differentiation, it can be difficult to distinguish among products that companies should control in-house and those that they could obtain from overseas vendors. It is essential to determine how each product helps companies create value for customers as well as capture that value for themselves. Products, which vary among businesses, should be ranked between these two criteria and then added together to arrive at a total ranking for each.

Using this methodology allows businesses to create a value hierarchy- the higher the ranking, the more crucial it is to the company strategy. This provides managers with proper information to determine the most desirable products or processes to be considered for outsourcing.

Identify and Manage Risk

Many organizations fail to take into consideration all of the risks that accompany offshoring. A simple cost/benefit analysis is often not enough as it ignores many of the latent risks involved. It is essential for companies to be prepared to tackle the major risks, operational and structural, that could affect their overseas plans. Operational risk can stem from offshore service provider’s employees requiring a great deal of experience or knowledge of the product to perform successfully at the necessary level. These issues can often be overcome, however, through thorough documentation that specifies exact steps and procedures that should be performed in each situation. Other operational issues involve the metrics companies use to measure the quality of the outsourced work. In many situations, companies will formulate metrics for the first time when choosing to offshore or will fail to establish any metrics at all. The best solution is for companies to create metrics, measure the quality of their processes, and use continuous improvement in-house before deciding to offshore.

Structural issues arise when companies assume vendors will act in ways to maximize both groups’ interests. Unfortunately, service provider’s actions sometimes diminish the desired savings from offshoring. This occurs when vendors are inefficient in training or employ those not qualified as was discussed during negotiations. Moreover, service providers can alter the terms of the contracts after processes have been turned over to them. Companies can minimize structural risks, however, through supervising work and tracking providers’ efforts in real time. Although there is no definite way organizations can fully deter from all risks, planning ahead and following