Organizations that outsource operations to offshore environments consistently save money by taking advantage of lower labour costs. While that's not surprising, evidence increasingly suggests that most offshore initiatives could do much better at improving cost efficiency.
Compass analyses indicate that both captive and outsourced offshore projects are often poorly planned, shoddily implemented and ineffectively managed. As a result, cost savings from these initiatives fall far short of their potential. In many cases, the failures result not from a lack of capabilities, experience or resources, but from human foibles such as arrogance, laziness or greed. In other words, good old-fashioned sin is to blame. Consider the following scenarios.
Hubris Research shows that rushing through an offshoring project is counterproductive, yet surprisingly many executives seem to believe they're smarter than others and can therefore cut corners and abdicate the responsibilities associated with the implementation and ongoing management of an offshore operation.
Many organizations are unwilling to invest time at the outset to adequately plan and execute a project. They also wrongly assume they have the internal capabilities to govern an offshore operation. Whether out of hubris or not, they frequently underestimate the management overhead associated with setting up and then managing an offshore operation. Inadequate onshore management capabilities are a major contributing factor to poor productivity and communication, and to missed cost savings and performance-improvement targets.
Don't be too proud to learn from the mistakes of others. Avoid conceit and hubris. Invest the time to do it right the first time, and dedicate the resources to make the initiative successful throughout its lifecycle.
Sloth The most obvious manifestation of the sin of sloth is adopting the "lift and shift" strategy by moving an inefficient business process offshore - and achieving the dubious benefit of running the inefficient process more cheaply, thanks to lower salaries. However, Compass analyses indicate that even though individual salaries may be substantially lower in an offshored environment, the volume of resources required to do a given task increases by as much as 15 percent. This lower productivity is driven in part by the common belief that cheap labour justifies redundancy, and that the solution to inefficient processes is to simply throw more bodies into the mix. Moreover, distance and cultural differences compound process problems and further hamper productivity.
A decrease in individual productivity is a long-term and systemic characteristic of offshoring, even in so-called "mature" offshore environments. While a captive operation offers the opportunity to solve problems over time, an outsourced "lift and shift" approach complicates matters because problems must be managed through a third party.
Don't be lazy. Don't "lift and shift" and settle for a short-term cost reduction without considering the long-term implications. Baseline performance before offshoring, and address performance issues before moving. At a minimum, develop a performance improvement plan for the offshored operation. Better still, re-engineer the operation before offshoring. Invest in building solid processes and an onshore management framework, and offshore, invest in training and orientation to make offshore staff part of the global organization and to create a sense of belonging.
Avarice In the early days of outsourcing, organizations were seduced by outsourcing's promise of financial discounts in the neighbourhood of 25 percent, higher service quality, faster time to market for applications and ultimate flexibility. If it sounded too good to be true, it usually was. While costs generally decline in the first 18 to 24 months of outsourcing, they increase later as the outsourcer tries to recoup the losses suffered in the early years of the contract.
Similar financial patterns prevail today with offshoring, and we see client organizations repeating the sins of the past with unrealistic expectations of sustained cost savings.
Avoid avarice and take a long-term view. Don't try to maximize savings early on and sacrifice financial and service improvements down the road. Re-engineer processes early. Develop local resources and offer a career path. You'll reap the rewards later in higher productivity and lower attrition.
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