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Outsourcing: Why Onshore Vs. Offshore Isnít 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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User Rank: Apprentice
11/26/2013 | 5:40:14 PM
Re: Reshoring - A Key Factor In Solving Our Nation's Economic Problems
While I agree with Sandy that "Reshoring, producing more of what we consume, is a key element in solving our nation's economic problems", I am realistic enough to know that corporations exist only to provide a return to the shareholder and not solve the nation's problems.

The issue then is how can we provide a value proposition that makes the corporations "reshore". Here is one approach:

No matter which shore, managing software applications development projects continues to be challenging.

The biggest cost driver in app dev is the cost of finding and fixing bugs(i.e. scrap and rework). More than 60% in many studies. The impact of poor quality app dev processes are:

1.The work is not predictable. The buyer's costs for managing the vendor and the project escalate. Unfortunately, most organizations neither track these costs nor allocate them to the project.

2. A significant cost factor is in user acceptance test. Even modest size systems take months to go through acceptance test with most of the cost on the buyer's side.

3. A culture of "Deliver now, Fix later" resulting in almost 80% of the maintenance spend for corrective maintenance (fixing bugs found in production use).

Our company offers value to the corporations by:

1. Delivering extremely high quality on predictable cost and schedule

2.  Reducing scrap and rework cost to less than 10% of total app dev cost.

3. Staffing project teams with more than half the team members straight out of college and mentored  by our senior staff to do quality work

4. Providing guarantee that user acceptance test time and cost will be orders of magnitude lower

4. Providing  lifetime warranty against defects found in production use 


hst andre840
hst andre840,
User Rank: Apprentice
11/27/2013 | 1:10:55 PM
Compliance for OffShore vs OnShore
One other item - if you are dealing with governments both state and federal, you may be required to only allow US citizens to be able to access the associated systems and data.

This creates obviousl conflicts for companies employing offshore entities.
User Rank: Strategist
11/30/2013 | 10:10:54 PM
SMART Assessment
When you frist consider or even entertain the thought of outsourcing, it is because you or your organization lack the knowledge or resouces (facts, information, and skills). The goal then is to bridge the gap between the lack of and the desired outcome. The two main hurdles to me are:
  • Deficiencies of the individual enterprise staff involved
  • Incomplete or poorly designed processes/policies

Having clearly defined objectives and well designed processes / policies are a must. The process of outsourcing shouldn't be based on who's the cheapest and who will get something to you the quickest. The process should be based on solid business principles.. Yes the Overseas developer is $8/hr but is that a SMART decesion? The questions of:
  • What is the Project Goal or desired result (who, what, when, why and how)?
  • What is the timeframe?
  • How can quantify (numericallyor descriptively) completion?
  • What skills and resources are necessary?
  • Are you prepared to deal with the commitments, contracts, laws, ect.?

All these questions must be answered honestly. You have to be realistic in your assessment. How much will the $8 Developer really cost you if you have project overruns, a breach of contract or any other issue? Finally, the question of when will project be completed and fully functional?

SMART Sourcing is what you should consider.. I hope that's not a brand (Not endorsing them , if so). By SMART Sourcing, I mean you should source your project based on SMART Goals and Business Objectives. Don't be drawn in by "Rhetoric" (i.e. Made In America). If "Made In America" isn't best for your business and operation model, find what is most effective and efficient for you.

Case and point: https://www.healthcare.gov/ - I'm sure it was a good idea at first until the overruns and other issues started creeping up.
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