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.

Andy Sealock, Partner, Pace Harmon

November 25, 2013

5 Min Read

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.

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?

About the Author(s)

Andy Sealock

Partner, Pace Harmon

Andy Sealock is a partner at Pace Harmon, an outsourcing advisory services firm providing guidance on complex outsourcing and strategic sourcing transactions, process optimization, and supplier program management. He has over 15 years of experience in leading large, complex outsourcing transactions and strategic sourcing programs. In managing projects for Fortune 500 clients, including several deals in excess of a billion dollars in value, Andy has been instrumental in helping clients innovate and maintain competitive advantage. He has a Bachelor of Science in electrical engineering from Virginia Tech University and an MBA from Seton Hall University. He can be reached at [email protected].

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