Why Onshore vs. Offshore Isn’t the Right Question

Outsourcing 3d conceptWell publicized offshore outsourcing challenges, a narrowing labor-cost gap, and political considerations have some rethinking how to approach outsourcing.

Enterprises elect to bring offshore or outsourced operations in-house for a number of reasons. While performance certainly can play a role, motivation also includes strategic business reasons and a belief that the enterprise can perform the function better and more cost effectively than the 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 will more than offset the increase in costs.

This cost gap might be closed further by better productivity of in-house 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 moves to do more on-shore development are a prime example.

These are all potentially valid reasons. 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.

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 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 under the outsourcing contract

If these issues aren’t addressed, simply moving the function in-house may do very little to address the performance problems and 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, when taking a hard look at what investment the client made in people, processes, and technologies to mitigate these obstacles, there may be gaps.

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 in-house resources.

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 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.

The reality is that offshore outsourcing will remain a viable option for most enterprises 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 there are more options from SaaS and cloud. But don’t lose sight of the real question: What’s the optimum mix for the business need?

(This article was originally published on Information Week – http://www.informationweek.com/strategic-cio/it-strategy/outsourcing-why-onshore-vs-offshore-isnt-the-right-question/d/d-id/1112689)

Andy Sealock

Andy Sealock 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, he 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 asealock@paceharmon.com.

Andy Sealock
Andy Sealock 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, he 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 asealock@paceharmon.com

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