By: Ray Shehata, Director, FSO Services
Deciding whether the rewards of offshoring are worth the risk is a decision many organizations struggle with. Because there are strong financial and emotional arguments, it is important to use a methodology that balances objective and subjective factors to guide the decision process.
Beginning the assessment process should not automatically put an organization on the path of offshoring. Our firm has engaged in hundreds of offshoring assessments, and in as many as one-third of the cases, we recommend keeping the functions close to home. For many executives, a net cost savings of 15 to 25 percent is the typical threshold to go forward with offshoring.
Here are five tips for how to conduct an offshoring assessment, what to include, and how to identify true costs.
Create a scoring system. Organizations should create a scoring system to determine which processes are good candidates for offshoring. The scoring system should provide a high-level view of the portability and risk for each function, although ultimately, many other factors should also be analyzed to reach these basic conclusions.
Extend scoring downward. Portability and risk scoring for each function should be applied at the subfunction levels, including more specific processes with a department or unit. Our experience has shown that, while an entire function may not be highly portable, many of the composite subfunctions are indeed portable.
Develop a risk profile and mitigation plan. Functions that don't score well on the initial risk assessment should be analyzed to see if the risks could be mitigated with process changes. If the risk can be reduced enough to be portable, assign someone to be responsible for that mitigation plan and to track progress against the plan. Only after risk has been properly mitigated should the function be reconsidered for offshoring.
Set reasonable expectations. When contemplating an offshore program, set reasonable expectations with regard to transition timetables, seeking opportunities to bundle similar functions, and allowing time for risk mitigation. It is especially important to set reasonable expectations, timetables and budgets for training.
Understand the true net savings. The business case, which compares the cost of the offshored service to the current internal servicing costs as represented in the base case, is not always as straightforward as executives might think. The cost of the offshored service must consider not only the service provider charges, but also the retained costs, plus net new costs such as governance and "on-you" transition costs related to the project. The true costs of offshoring are not always obvious, so it is worthwhile to work with objective, experienced advisors who can provide practical data relative to your specific operations.
The difference between performing a function internally versus by offshoring is much more than the difference in labor rates between two locations. Understanding all the variables is essential to making an informed decision that will provide acceptable risk and sustainable benefits. TPI’s Financial Services Outsourcing (FSO) specialists can help you achieve your organizational goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. Contact Ray Shehata to learn more.