Lessons Learned for Successful Offshore Strategies

As offshoring models have gone through several iterations, the value proposition and resulting benefits from outsourcing and offshoring have also evolved. The domains have changed from their origins in manufacturing in the late 20th century to information technology, business & knowledge process outsourcing (BPO/KPO) and research & development. Similarly, locations associated with offshoring, with India emerging as the front runner in the offshore IT and BPO/KPO market, now include China, Canada, Eastern Europe, South and Central America, and the Philippines, among others. Companies are no longer looking for just cost savings from labor arbitrage, but instead are seeking productivity gains through process improvements, revenue enchancement, speed to market, innovation and greater efficiency. This CEO Topic examines the lessons learned in our work with our portfolio companies and lists the factors for a successful offshore strategy.

Offshoring is a major and complex change in the delivery model within an organization and requires strong managerial will and capability to execute. Because it implies a significant appetite for change management within a firm, one cannot underestimate the involvement and role of senior executives to champion these initiatives and the needed board support. The success of the offshoring effort is highly dependant on the time and effort invested up front in planning the entire initiative and the quality and consistency of execution.

Offshoring involves a fundamental change in the operating model of the company, which can generate management challenges from within the organization and at the offshore location. Often, companies require the assistance and support from external consulting firms who have specialized experience in various aspects of offshoring (from the development of the business case to the selection of the vendor, or the organizational model for offshoring, project management, assessing effectiveness and enhancing efficiency). Getting the right advice and support can fundamentally alter the timing and ultimate benefits from offshoring.

Given the upfront investment in capital, time and managerial resources, offshoring can generate negative returns in the first 1-2 years before generating significant financial run-rate benefits thereafter. As with any business initiative, there are risks in offshoring, ranging from strategy and policy to geographical, environmental, or operational issues. As management calculates the ultimate return on investment, it is essential to consider timing, ability to scale, and risks involved. Ultimately, the benefits from offshoring increase with scale and/or moving up the value chain, i.e. through a gradual move from activities being sent offshore to end to end processes being delivered from offshore locations with increasing levels of complexity.

Benchmarking of performance (with the baseline and with external peers) and governance of the offshore initiatives are crucial to ensuring success of the offshore initiatives. Lack of effort on this front has often resulted in failure or delay in execution of the offshore projects. Different organizations have adopted various models towards offshoring, with varying degrees of success. A longer term perspective with focus on superior/efficient IT enablement, improved productivity, and increased control, beyond the immediate labor cost arbitrage, has resulted in greater success in offshore initiatives, e.g. IBM, GE, Dell, Citigroup, American Express, etc.

Based on these findings, the key elements of a successful offshore strategy include:

1. Buy-in and involvement from the senior management and the board and the requirement that offshoring be part of the overall corporate strategy
   
2. Resource commitment for planning and execution of the offshore strategy – both human and financial resources in adddition to the time commitment and including outside expertise
   
3. Planning well prior to the commencement of execution. The planning phase should focus on the main drivers of offshoring for the company, the selection of processes to be sent offshore, the model, partner, transition, and stabilization plans (including time-frames, contracting, setting base-line performance metrics, training, knowledge transfer and oversight)
   
4. Ongoing internal and external communication to deal with customer impact and employee issues
   
5. Understanding and dealing with the key supply side issues / dynamics, such as hiring & selection, training, retention, management depth, as well as the regulatory environment, external infrastructure issues, etc. Much of this may evolve over time, based on the experience
   
6. Focus on bridging differences: the cultural, geographic and time-zone disparities between the business location and the delivery location
   
7. Strong ongoing governance model which would include performance monitoring, audits & reviews, controls, benchmarking, reporting, etc.
   
8. Staying connected to the offshore environment as much as one would stay connected to the domestic business environment
   
9. Sensitivity to the people issues involved in offshoring including management, employees and customers
   
10. Long term objectives which go well beyond cost and productivity to value added benefits such as speed, flexibility, innovation, revenue enhancement, efficiency, etc.

To help companies assess and improve the performance of their offshore centers of delivery, McKinsey has introduced a 360 degree benchmarking with a diagnostic framework which covers 5 key metrics, such as cost, quality, speed and flexibility, innovation and productivity and risk.

While there is no foolproof formula to ensure success in offshoring, keeping the success factors above in mind will help achieve positive long term results. For more information or assistance with your offshoring efforts, please contact your GA team.

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Kaushik Mazumdar is a Vice President working from GA’s Mumbai office. Kaushik focuses on the GA’s portfolio companies with the objective of identifying opportunities for process improvement, reengineering and globalization. He has extensive experience in operations and business process offshore outsourcing, having worked in Citibank NA for fifteen years in the area of operations across Corporate, Investment and Consumer/Retail banking businesses. He was instrumental in setting up the consumer operations of E-serve, the BPO subsidiary of Citibank in India.