14/11/2007
While the impact of offshoring on the structure of the U.S. 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.

But success in offshoring is not preordained. Of those initiatives that fall short, most do so for reasons that have little to do with offshoring and everything to do with a failure to practice the fundamentals of change management (e.g., enlisting executive support and aligning individual incentives with project goals).

Where change management is not at issue, the difference between success and failure can be boiled down to just a handful of key decisions. These are described below in the form of a series of do’s and don’ts.
The Do’s

• 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.
  A “bias toward outsourcing” does not mean that companies should never consider building their own offshore operations, a core competency of many sophisticated global enterprises. An increasing number of companies, though, are happy to let vendors deal with the complexities of offshoring whenever possible.

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A ‘ bias toward outsourcing’ doesn't mean
companies should never consider building
their own offshore operations.
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• Select the right location. Selecting a location with a long-term commitment to maintaining world-class levels of performance in a business process can help ensure satisfaction with the decision to offshore long after wage differentials have disappeared.
  The classic example is India and information technology (IT), where companies now look to India as much for the quality of its IT professionals as for the price of its labor. This wasn’t always so, but Indian business and educational leaders in the 1990s teamed up to promote the idea that India should become an IT powerhouse.
  Early movers into offshoring that were able to discern this long-term commitment reaped the benefits of wage arbitrage in the early years and world-class levels of performance more recently.
• 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 great as all other sources 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 that might not have otherwise been possible to overcome.
• Experiment. High performing organizations see offshoring not simply as a way of improving the way existing tasks are performed, but as a way of changing the way they do business. Moving offshore frequently increases demand for existing services, as costs go down. With lower costs, the business case associated with new services and other creative ideas may be fundamentally altered as well.
  A readiness to experiment will help companies squeeze the maximum potential benefit from offshoring.

The Don’ts

• 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 and naturally 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 cut corners on knowledge transfer. Investments in knowledge transfer, including substantial travel for both onshore and offshore personnel, will pay large dividends in the form of quicker implementation and better quality. Things that are intuitive to U.S. or European residents, as consumers of a wide variety of products and services, may not be as intuitive to offshore professionals who are not themselves consuming at western levels.
• 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 the organization is in flux and methods of operating have yet to become entrenched. The price of the additional implementation time and effort will prove worth paying.
• Don’t neglect business continuity. Each offshore location comes with a unique set of risks and challenges. These may be different from the challenges typically faced in developed economies. Events such as general strikes and power outages, as well as the consequences of official corruption, may need to be contemplated in business continuity plans alongside more traditional considerations.
  Advance planning is the key to making sure that offshore locations are no more exposed to unplanned business interruptions than those onshore.
• 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.

A company setting up its own offshore captive should plan on employing individuals with one foot in each culture to help bridge the gap.

Offshoring can be a daunting subject, particularly for executives considering the possibilities for the first time. Keeping these few “do’s 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, with over 20 years experience consulting for companies throughout North America and Europe. Previously, he was a principal for Renaissance Solutions, the company that pioneered the Balanced Scorecard as a strategy implementation tool. He began and spent the first decade of his career with Andersen Consulting (now Accenture) serving as a senior manager and as a director in the company's research and development organization.