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Offshoring benefits and advantage, still the same

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Offshoring benefits and advantage, still the same

  1. 1. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?Following a decade of aggressive offshoring, many US companies have paused, reconsideringtheir outsourcing strategies. Companies have transferred parts of their organization’s activitiesfrom their company’s home country to captive centers offshore or to offshore service providersin countries with lower labor rates. Although offshoring may provide a company with certainbenefits, most desirably cost savings, the advantages may not be as beneficial once the hiddencosts are revealed and business risks are considered.Offshoring’s Current RealityGlobalization has inextricably linked the world’s major economies. The 2011 standard ofexcellence is no longer “best-in-class” but rather “best-in-world”. In the global economy, everycompany must compete against customer choices coming from everywhere and anywhere in theworld. Long before today’s internet existed, in 1979 Michael E. Porter wrote “How CompetitiveForces Shape Strategy” in the Harvard Business Review. Therein, he identified how the “Threatof new Entrants” drives business strategy. Today, barriers to marketplaces are dropping quickly,with new competitors just a mouse-click away from any customer.Offshoring’s ImplicationsSince the mid-1990’s, U.S.-based businesses have looked overseas to locate their manufacturing,business IT Applications Maintenance and Call Center and other operations in emergingcountries with strong labor forces, low wage rates and favorable business climates. This trendwas accelerated by Y2K and the IT industry’s need to rapidly build software maintenance“factories” to research, correct and test the “millennium bug”.The offshoring trend continued to evolve with the addition of Business Process Outsourcing(BPO) and Knowledge Process Outsourcing (KPO) featuring functions of Accounts Payableadministration, medical X-Ray interpretation and Legal Activities. However, in recent years,more and more companies are reversing course and moving Information Technology (IT)operations back to the U.S., a phenomenon known as IT Onshoring.Why Consider Re-Onshoring IT Outsourced Services?Four key reasons include: 1. IT offshoring savings are often not realized as assumed by their initial business case 2. IT offshoring has placed corporate reputations in jeopardy 3. US Federal, State and Local Governmental actions now prohibit or have created barriers to IT offshoring 4. IT offshoring business risks have arisen1. IT Offshoring Savings Are Often Not Realized as Assumed by their Initial Business CaseA sharp increase in wage rates in countries, such as India, that have experienced tremendouseconomic growth from years of job creation from multi-national companies, has occurred at aOffshoring Benefits and Advantage, Still the Same 1|Page
  2. 2. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?time when U.S. wages have risen at approximately the pace of inflation. Inflation in India, forexample, is more than double that in US. As offshore locations grow and westernize, prices andwages increase. India’s CPI was 10.9% (2009 est.).1Over the last three years, U.S. firms also had to contend with a weak dollar against foreigncurrencies, resulting in higher-than-expected invoices paid in U.S. dollars. For example, theIndian rupees (INR) per US dollar exchange has changed 13% in three years. (46.78 (2009),43.319 (2008), 41.487 (2007))2.In March 2010 Gartner reported: “India is also starting to face some challenges including wageinflation, local attrition rates, geopolitical issues and financial irregularities, which are openingopportunities for other countries that are also improving their capabilities to target local servicedemands of more-mature regional Asian clients.”3These same challenges are drivers to also re-consider IT Onshoring in 2011. These externalmacroeconomic forces, combined with “hidden cost” industry averages of offshoring lostproductivity (2 – 4%) and cost of Governance (3-5%4) bring into question any business case’sassumptions for outsourcing and offshoring that were written years ago.What are the Real Savings of Offshoring?On the surface, onshore vs. offshore general industry labor savings typically are 35 - 50%. Theoffshoring add-on cost (lost productivity, travel, communications, audits, etc) averages 25 - 50%offshore labor cost, often resulting in the average net savings of 0 -10%.Once having made an IT outsource decision strategy, decisions on vendor location should not bemade solely on the basis of assumed cost savings. Sourcing decisions should be included in alarger discussion on how the outsourcing IT supplier will enable the enterprise to meet itsbusiness innovation, simplification, statutory, brand, growth and profitability objectives. Thatdiscussion becomes a basis for finding the right supplier that can meet those goals and thatoutsourcing supplier may very well be located onshore.Factoids: "...60 per cent of organizations that outsource parts of the customer-facing process will encounter customer defections and hidden costs that outweigh any potential savings they derive from outsourcing..."5 “The truth is, no one saves 80 percent by shipping IT work to India or any other country.”61 https://www.cia.gov/library/publications/the-world-factbook/geos/in.html2 https://www.cia.gov/library/publications/the-world-factbook/geos/in.html3 http://www.gartner.com/it/page.jsp?id=13292134 International Association of Outsourcing Professionals, 20085 Gartner, March 2005, http://www.rttsweb.com/outsourcing/statistics/6 “The Hidden Cost of Offshore Outsourcing”, CIO Magazine, June 16, 2009, Jagdish Dalal , InternationalAssociation of Outsourcing Professionals – previously a CIO at United TechnologiesOffshoring Benefits and Advantage, Still the Same 2|Page
  3. 3. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001? “… 53 percent of customers have not realized business value/return on investment from offshore outsourcing.”7 "...the number of buyers prematurely terminating an outsourcing relationship has doubled to 51 percent while the number of buyers satisfied with their offshoring providers has plummeted from 79 percent to 62 percent."82. IT Offshoring Has Placed Corporate Reputations in JeopardyIn the opening scene of the new NBC comedy "Outsourced," lead character Todd Dempsyarrives at work to find the call center he is supposed to manage has been moved to India.Suddenly a brick flies through the window with an angry anti-outsourcing message attached.Todds boss laughs and adds it to a pile of bricks beside his desk.Companies are re-examining the impact of offshoring on their corporation’s reputation. TheAFL-CIO created a searchable database of U.S. companies that have shipped jobs overseas. Thatsource of information influences customer sourcing decisions. “Entire communities are affectednegatively as tax revenues fall, dependency on public assistance increases, and incomes stagnate.And as the offshoring and job loss spreads to sectors with higher technology and skills that driveinnovation and productivity, it puts the long-term competitiveness of the American economy atrisk.” 9“Young workers’ optimism has slumped over the past 10 years along with their financialcircumstances. Today, just over half of young workers say they are more hopeful than worriedabout their economic future - that’s a 22-point drop from 1999, when more than three-quarters ofyoung workers expressed more hope than concern about their economic futures.”10 These youngcustomers consider corporate brand reputations when making buying decisions.Similarly, judicious financial services customers seek reassurance that their data is safe, eventhough it is being maintained thousands of miles away in a nation that may be unstable at anytime. Stories such as Citibank’s are reality.“Three former call centre workers at Indian firm Mphasis, which Citibank uses for customerservice support, were arrested by police this week after four U.S. Citibank customers discovered$350,000 had been looted from their accounts. New reports in India today claim police haveidentified that another $75,000 was stolen on top of that.”11Incorporation of environmental, social and governance factors is considered a significant factorin business success. Companies now think twice about employing workers in countries withpoor human rights records or overly lax labor standards. In the case of customer service callcenters, some companies are deciding it makes sense to pay more for U.S. workers who may bebetter able to serve and communicate with customers. Some consumers simply prefer to do7 CIO Magazine, November 2008, http://www.rttsweb.com/outsourcing/statistics/8 DiamondCluster June 20059 http://www.aflcio.org/issues/jobseconomy/exportingamerica/outsourcing_problems.cfm10 http://www.aflcio.org/aboutus/laborday/upload/laborday2009_report.pdf11 http://www.silicon.com/legacy/research/specialreports/offshoring/0,3800003026,39129475,00.htmOffshoring Benefits and Advantage, Still the Same 3|Page
  4. 4. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?business with firms that commit to a domestic workforce. Add to this aforementioned examplethat high quality, affordable labor is available in smaller U.S. markets, it is not surprising that re-considering Onshoring is gaining currency.3. USA Federal, State and Local Governmental Actions Now Prohibit or Have CreatedBarriers to IT OffshoringHypothetical: US Federal Senate bill S. 3816 "Creating American Jobs and Ending OffshoringAct"12If this bill had been passed, if would have created a payroll tax holiday for companies that returnjobs to the United States from overseas, ended subsidies for plant closing costs, ended tax breaksfor plants that go overseas and had no penalty applied to moving jobs overseas, instead ofkeeping jobs in onshore.Reality: State of Ohio “Executive Order 2010-09S”August 2010: Columbus, Ohio--Ohio Governor Ted Strickland today issued an executive orderthat prohibits the expenditure of public funds for services provided offshore."Outsourcing jobs does not reflect Ohio values," Strickland said. "Ohioans have been among thehardest hit by more than a decade of unfair trade agreements and the trickle-down economicpolicies that promoted offshoring jobs at the expense of Ohioans who work for a living. We mustdo everything within our power to prevent outsourcing jobs because it undermines our economicdevelopment objectives, slows our recovery and deprives Ohioans and other Americans ofemployment opportunities.""Ohios policy has been--and must continue to be--that public funds should not be spent onservices provided offshore," Strickland says in the order. "Throughout my Administration,procurement procedures have been in place that restrict the purchase of offshore services.Despite these requirements, federal stimulus funds were recently used to purchase services froma domestic company which ultimately provided some of those services offshore. This incidentwas unacceptable and has caused me to redouble my commitment to ensure that public funds arenot expended for offshore services."13Two Examples:1. State Level The December 2010 State of Ohio Request for Proposal “ODJFS HATS II System – 0A1080” specifically states: “Data and work performed must remain within the boundaries of the continental United States for this Project.”12 http://dpc.senate.gov/dpcdoc.cfm?doc_name=lb-111-2-151 & http://www.youtube.com/watch?v=EvyIb8K1ju413 http://governor.ohio.gov/Default.aspx?tabid=1753Offshoring Benefits and Advantage, Still the Same 4|Page
  5. 5. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?2. Federal Level “The Justice Department yesterday said that ITT will pay a total $100 million penalty, one of the largest penalties ever in a criminal case. The company also becomes the first major defense contractor convicted of criminal violation of the Arms Export Control Act, the department said. ITT exported or caused to be exported defense-related technical data to China, Singapore, and the United Kingdom without having first obtained a license or written authorization from the State Department. The technical data included information about a laser counter measure known as a "light interference filter" for military night vision goggle systems.”14Statutory barriers to offshoring are real and their political momentum is growing. Managementsmust consider these factors when making or continuing offshore outsourcing decisions.4. IT Offshoring Business Risks Have ArisenIn addition to cost, reputation and legal barriers there other new risks associated with offshoreinitiatives which must be considered. These include:Strategic Risks: such as, loss of control over future business decisions, the stability of theprovider, etc. JPMorgan Chase’s decision to first outsource IT and then bring it back in-housestands as a cautionary tale for any CIO considering an outsourcing megadeal.15 A strategic riskis accepted when outsourcing offshore. The “losses” are even harder to recapture unless anonshore provider has a clear methodology for reversing and undoing the knowledge transfer thathas already taken place.Operational Risks: such as, its impact on the organization’s people, integrating the offshoreprovider’s processes into the business’s, risks from poor performance, security, data protectionand privacy, business disruption, etc. Companies whose own cultures embrace practices such asSix Sigma, the Deming Prize, the Malcolm Baldridge National Quality Award, EFQMexcellence quality standards such as ISO 9001, or service management standards such as ITIL,must integrate those with the culture and capability of the offshore supplier. Similarly,challenges of security and information confidentiality become more complex due to ambiguousprivacy laws overseas which subject companies at risk of intellectual property theft.Time zones and distance have proven this integration to be very difficult. Frequently, afterstruggling for months “to make it work”, the offshore supplier’s labor is simply brought to workonshore, as the customer’s initial outsourcing strategy devolves to become a simple labor coststrategy.Transactional Risks: such as, internal controls, termination clauses, dispute resolution, liability,indemnity, warranties, and asset transfers are more complex when offshoring. Sarbanes-Oxleycompliance, HIPAA, and Basel II Accords, etc. must be satisfied. The offshore supplier mustmeet these standards. One famous debacle was Satyam.14 http://findarticles.com/p/articles/mi_6712/is_58_233/ai_n29340678/15 CIO Magazine, September 01, 2005.Offshoring Benefits and Advantage, Still the Same 5|Page
  6. 6. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?Forbes reported: “Satyam Systems, a global IT company based in India, has just been added to anotorious list of companies involved in fraudulent financial activities, one that includes suchnames as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings andKidder Peabody. Satyams CEO, Ramalingam Raju, took responsibility for broad accountingimproprieties that overstated the companys revenues and profits and reported a cash holding ofapproximately $1.04 billion that simply did not exist.”16As a result, some customers terminated their relationship with Satyam immediately and had tofind alternatives for their own business’ continuity.Much has changed since the 1990s and Y2K. There are new and real drivers to Re-Consider ITOutsource Onshoring. Management should re-inspect old decisions and test their continuedcontribution to corporate results and new business strategies. Though offshoring may seemappealing at first glance, make sure to dive deeply into the cons, along with the pros. Whileoffshoring may provide the company with financial benefits, hidden costs and business risksoften outweigh them. Now, more than ever, it is only under the right circumstance whereoffshoring fully delivers upon the promised value proposition and the desired cost savings. Ifcost savings is your primary driver, think carefully about engagement governance, ease ofcommunication and other potential inconveniences that will have to be managed on a daily basis.Give consideration to domestic outsourcing as it may be the perfect fit for your outsourcingstrategy.16 http://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.htmlOffshoring Benefits and Advantage, Still the Same 6|Page
  7. 7. Offshoring Benefits and Advantage, Still the Same in 2011 as they were in 2001?About the author:H. Curtis Herge, Jr.Director, Solutions Development17177 Preston RoadSuite 300Dallas, TX 75248-1243www.cdi-its.com(585) 260-3261 Mobile(972) 728-8310 Dallas TX OfficeMr. Herges career has focused on leading the planning, design, implementation and use ofcomplex information systems to enable and support the strategic evolution of businessorganizations, products, markets and management processes.He is a Certified Outsourcing Professional (COP) having passed the requirements established bythe IAOP. He is certified by APICS in Production and Inventory Management (CPIM).Mr. Herge is responsible for delivering technology innovation and providing the backbone ofCDIs Consulting and Outsourcing group. Mr. Herge has also simultaneously performed as theActing Director of CDI IT Solution’s Application Lifecycle Management solutions deliveryorganization.Offshoring Benefits and Advantage, Still the Same 7|Page

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