Strategic CIO // IT Strategy
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11/25/2013
01:00 AM
Andy Sealock
Andy Sealock
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Outsourcing: Why Onshore Vs. Offshore Isn’t The Right Question

Well publicized offshore outsourcing challenges, a narrowing labor-cost gap, and political considerations have some aggressively promoting onshoring. But they're missing the point.

Enterprises elect to bring offshore operations onshore or in-house for a number of reasons. While performance certainly can play a role, motivations also include strategic business reasons and a belief that the enterprise can perform the function better and more cost effectively than the offshore service provider. Or, maybe it’s convinced that the value generated by increased service quality (via shorter cycle time, reduced error rate, better customer satisfaction) that’s, in theory, achieved by performing functions in-house or via an onshore model will more than offset the increase in costs.

This cost gap might be closed further by the better productivity of onshore resources relative to offshore, eliminating the management overhead associated with offshore operations, and continued increases in labor rates in offshore markets.

Some enterprises are also driven by the public relations benefits and goodwill that can come by communicating that they’re creating jobs in the US instead of shipping them overseas. Apple’s recent moves are a prime example.

These are all potentially valid reasons for considering onshoring (either in-house or outsourced). However, a rational, defendable choice -- as opposed to emotional or “gut-feel” reactions -- requires an objective analysis and quantification of costs, risks, and value generated.

I’ll discuss how to go about that analysis, but first, take a hard look at whether your own house is in order, because that’s often the right question to ask.

[ Hey, you met budget! But, did you deliver value? See How To Budget Your Way To Irrelevance. ]

There’s no shortage of press on offshore outsourcing deals gone bad, and one of the most common reasons I hear for moving work back to the US is that the relationship with the current vendor or service delivery performance has deteriorated -- potentially to the point of contract breach.

While outsourcing relationship breakdowns are sometimes due solely to vendor performance, in most cases these situations are two-way streets, with plenty of blame to go around. Common causes for relationship breakdown include:

  • Deficiencies of the individual enterprise staff involved
  • Incomplete or poorly designed processes/policies
  • Gaps in the contract governing the relationship
  • The enterprise under-investing in the vendor management and governance function
  • Poor execution of the roles and responsibilities that the enterprise controls under the outsourcing contract

If these issues aren’t addressed, simply moving the function from offshore to onshore may do very little to address the performance problems but will most likely increase costs -- the worst of both worlds.

Percentage of Outsourced IT Operations

In my experience, most offshore provider staffers have adequate (perhaps even excellent) credentials and expertise. Most service-related issues stem from difficulty in managing these resources, especially problems in communicating requirements and offering feedback on quality. Blame a number of factors, including cultural differences, language barriers, time zone management, and attrition. However, take a hard look at what investments both the service provider and your own company have made in people, processes, and technologies to mitigate these obstacles. Have you done your part?

Managing offshore resources effectively and efficiently is admittedly a difficult task, but companies that work to address the problems can get access to quality services at price points that still cannot be matched with onshore resources.

OK, on to analysis.

The onshore and insourcing business case
To make a positive business case for onshoring, the effort has to create significant value (much of it “soft”) to overcome the “hard” and easily quantifiable cost advantages provided by offshore service delivery. Ask yourself:

  • Can you demonstrate that some onshoring costs will be mitigated by improved productivity-- more and better results from fewer people? This can be a particular challenge given stiff competition for the skilled personnel who will need to be hired, retained, and developed.

  • Will any remaining cost gap be closed by the bottom-line contribution of increased onshore service quality via reduced cycle time, lower error rate, reduced downtime?

  • Will the benefits of onshoring translate into increased revenue or cost reductions in other areas of the business? Examples are operations, marketing, sales, manufacturing -- think of places to generate margins, justifying the increase in net costs of moving from offshore to onshore.

  • Separate the overall outsourcing model from specific vendor performance. Maybe you just need a new partner, as opposed to bringing a function in-house.

  • Don’t forget to include one-time transition expenses as well as ongoing costs. Maybe you have to hire new talent, or run a search for a US service provider with the proper skills. My colleague Murali Sunkara discusses 6 pitfalls to watch for when bringing IT in-house.

The reality is that offshore outsourcing will remain a viable option for most enterprises. It represents a large base of IT operations, and it would require a massive shift to rapidly change that balance. Forrester’s 2012 Forrsights Services Survey showed 26 percent of companies plan to implement or expand the use of offshore resources for IT services. And Deloitte’s 2012 Global Outsourcing and Insourcing Survey shows 51 percent of respondents’ outsourced IT services were provided offshore, and 70 percent of future planned IT outsourcing would be provided offshore. These surveys are indicative of the continued acceptance by US enterprises of outsourced offshore operations even in the light of high-profile instances of insourcing and onshoring.

Decisions about outsourcing and offshoring are rarely simple or quick, and they won't get easier as CIOs get more options from SaaS and cloud. But don't lose sight of the real question: What's the optimum mix for this business need?

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RobPreston
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RobPreston,
User Rank: Author
11/25/2013 | 9:41:50 AM
Gone Bad
There's no shortage of press on onshore outsourcing deals gone bad either. As the author suggests, problems with offshore providers can arise because of time zone and cultural/communications differences, but when outsourcing relationships fail it's usually for more complex reasons. 
Lorna Garey
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Lorna Garey,
User Rank: Author
11/25/2013 | 10:18:22 AM
Sabotage?
Judging from the heated response of IT pros to any discussions of sending jobs offshore (or H1-B), there seems to be a 'fox guarding the henhouse' angle.

It must be tempting for an on-staff IT pro to at least downplay the quality of offshore partners, at worst actively seek to sandbag these relationships. Maybe it's fear their jobs will be the next to go, maybe just general prejudice. Either way, if done in a subtle way, that must be difficult for business management to detect.
cheader
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cheader,
User Rank: Apprentice
11/25/2013 | 11:24:16 AM
RealityCheck
With a population of 1.2 million, India does not have one university ranked in the worlds top 300 universities so in other words your outsourcing your work to Devry Institute caliber worker. This is why most outsourcing projects fail
shathcock750
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shathcock750,
User Rank: Strategist
11/25/2013 | 1:04:45 PM
Re: Sabotage?
Ms. Garey,

I do believe you're views have some merit but as an experienced IT professional I do take exception to the "fox guarding the henhouse" comment.  IT has many functions, and when it comes to our corporate systems we must guard the henhouse whether you're a fox or a chicken. 

I've seen first hand how outsourcing works.  Through my own customer service experiences with our local electric utility to software vendors who have gone almost exclusively offshore.  Quality suffers, communication suffers, and eventually your business will suffer.

In the case of my electric utility, I finally got fed up with the inability to understand the individuals who were answering the phones, I have to admit to having a Texas accent but can understand people from Hawaii to Maine with ease, I finally dumped them and went with a competitor not only for the better cost but because their customer service was far superior. 

The software vendors are difficult as well to work with due to the various time zones and the churn of email responses that can take an issue that could be corrected in hours to weeks.  Cultural differences are an issue as well, what may be an emergency on your part isn't viewed as such in other cultures.

Lost productivity, poor customer service, poor communication skills all add up to bad business and has caused many people to question our need for these services when we have more than capable graduates coming out of our own universities that can't find jobs with a livable wage.  This is because those jobs are now done by someone in a foreign country living on their cost of living and a salary that is far inferior to our own.  Yes it costs more but you get what you pay for.

Are there exceptional individuals in countries outside the US? Absolutely, but not enough of them to outshine the ones who aren't.
Brian.Dean
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Brian.Dean,
User Rank: Ninja
11/25/2013 | 3:58:06 PM
Re: Sabotage?
I feel if we look at any economy then they will be a population distribution where technical capability falls into a set percentile, if graphed then we will see the bell curve. Some economies might have for example 100,000 individuals in the 99th percentile while others might have 200,000 individuals with the same technical skills.

If a firm only has enough resources to hire local/technical capable individuals of the 50th percentile, finds an offer that will result in 60% saving by off shoring and ends up hiring individuals that fall into the 20th percentile, then yes money will be saved but service would be gone. However, if the same firm found an offer that resulted in a 1% saving but individuals were of an equal capacity or higher, that's when things work out, complicated yes, but definitely possible if done right.

Countries that have developed economies are all trying to get these savings. Recently, I have seen France and Germany (among many others) reach out to South Asia and elsewhere, Germany's Ambassador even said that for every $1 earned by export, 60 cents where from importing services and material. Firms in an economy are also competing to get their hands on cost efficient products and services. If everything is ignored then the business next door or the country next door will continue to be better off.

 

 
Brian.Dean
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Brian.Dean,
User Rank: Ninja
11/25/2013 | 4:10:13 PM
Re: RealityCheck
Cheader, I think you mean 1.2 billion. And yes firms that manage to get the equation right are successes, whereas firms that just offshore for the act of off shoring are just a random success or failure. And it is exactly these limiters for example the availability of good universities in developing countries that is keeping off shoring limited, and they are many limiters, but if these limiters disappear then off shoring would only speed up.
Lorna Garey
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Lorna Garey,
User Rank: Author
11/25/2013 | 5:28:26 PM
Re: Sabotage?
Re "I do take exception to the "fox guarding the henhouse" comment."

Would it help if I said I am a fan of foxes? They're clever and adaptable creatures that live by their wiles. Sounds like some IT pros I know.

Hens, on the other hand ...
ChrisMurphy
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ChrisMurphy,
User Rank: Author
11/25/2013 | 5:47:52 PM
Re: Sabotage?
The question I hear a lot is "can this outsourcer innovate?" The outsourcer's incentive is often to keep status quo and not to re-invent a process in a way that slashes staffing and costs.
SandyMontalbano
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SandyMontalbano,
User Rank: Apprentice
11/26/2013 | 10:55:03 AM
Reshoring - A Key Factor In Solving Our Nation's Economic Problems
Reshoring, producing more of what we consume, is a key element in solving our nation's economic problems. Reshoring has grown rapidly since 2010 and offshoring is slowing to the extent that the two processes are about in balance for the first time in decades!

Many companies that offshored originally didn't really do the math. As many as 60 percent of the decisions were based on miscalculations.

Most companies tended to make sourcing decisions based on the wage rate or the landed cost, and leave out 20 or more other categories.

In analyzing offshoring, firms must get beyond calculations focused on short-term profit such labor cost and incorporate the total cost and risk of international supply chains.

The not-for-profit Reshoring Initiative's free Total Cost of Ownership software helps corporations calculate the real P&L impact of reshoring or offshoring.  In many cases companies will find that, although the production cost is lower offshore, the total cost is higher. TCO Estimator  http://www.reshorenow.org/TCO_Estimator.cfm

Readers can help bring back jobs and increase profitability by asking their companies to reevaluate offshoring decisions. Suppliers can use the TCO software to convince their customers to reshore. 

You can reach Harry Moser, founder/president of The Reshoring Initiative, at harry.moser@reshorenow.org  | www.reshorenow.org

Read ReMaking America AAM's new book on howmanufacturing may see a new dawn in America along with wealth and growth opportunities. http://americanmanufacturing.org/remake-america/ Harry Moser wrote the chapter on Reshoring.

 
RobPreston
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RobPreston,
User Rank: Author
11/26/2013 | 5:04:31 PM
Re: Reshoring - A Key Factor In Solving Our Nation's Economic Problems
First there was offshoring, then onshoring, now there's "reshoring"? What next -- dinahshoring?
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