Q: What is offshoring?

PM: Offshoring is just the latest wave of globalization - but with a particular focus on business services. In previous phases of globalization, technology and liberalization have allowed an increasing range of commodities and products to flow more freely around the globe. Now with decreasing telecoms costs, and the growing maturity of collaborative technologies, the global sourcing of services such as IT applications development, customer contact or finance and accounting is becoming a commonplace business practice.

Q: Is offshoring the same as outsourcing?

MM: No - offshoring can be outsourced, but equally it can be carried out in-house via 'captive' facilities. Where firms have sufficient scale and expertise, they may feel able to set up and operate an offshore facility in-house. On the other hand, outsourcing service providers often provide best practice, experience and competitive pricing. In practice there are a range of additional operating models for offshore services, such as joint ventures and 'Build/Operate/Transfer.'

Q: When did offshoring start to take off?

PM: A few pioneering multinationals such as General Electric and American Express have been globally sourcing services for decades. However, offshore services really took off during the late 1990s in response to shortages in technical IT skills in Europe and North America, particularly those required for 'Y2K' and Euro conversion programmes.

This spike in demand could not be entirely serviced by local talent pools, so companies needed to look overseas. In many ways this was the first major showcase of the potential of offshoring. Since then offshoring has accelerated rapidly, into new sectors and geographies.

Q: What are the benefits of offshoring?

PM: Offshoring is a tool for building corporate value. In many organisations so far, the most obvious way of using offshoring to do this has been to generate cost savings. In many projects, locating services in IT or other back office activities to a lower cost location can reduce operating costs by up to 45-50%.

In addition, by offshoring high volume but low value activities, companies can free up their 'onshore' staff to work on more value added activities. For example, in the case of finance and accounting, financial analysts can be freed up from the task of number crunching and report preparation, to spend more time on interpreting the data.

MM: By tapping into new locations with untapped pools of talent, offshoring helps companies to enhance their capabilities, not just cut their costs. This is reinforced by the fact that in many cases, offshore facilities can be better in terms of quality accreditation (such as Six Sigma or CMM) and staff qualifications. And offshoring does not just relate to low value roles - it can apply to sophisticated roles in R&D, analytics and medicine.

Q: What can be successfully offshored?

PM: Not all business activities can be sourced globally, although a wide range of functions have well-established offshore sectors. Traditionally, offshoring works best for processes which were easily documented, but increasingly more complex and that do not require direct face-to-face contact to be effective. This chart shows the main functions that can be sourced globally and their maturity in the marketplace.



Q: What are the main pitfalls of offshoring?

MM: Offshoring offers a range of benefits for businesses, but there are also many issues that need to be understood and addressed. We find that most of these problems relate to companies underestimating the complexity of setting up and managing offshore projects.

One of the biggest dangers is not getting all of the stakeholders on board. It is key to the success of an offshoring project to identify all the stakeholders, both internal and external, core and peripheral. It is crucial to identify how to involve and engage them in the project.

Secondly, offshoring requires detailed solution design. Businesses tend to work in silos and do not have a clear view of end-to-end processes and associated responsibilities. The management has to understand not only the specific process to be offshored, but also how it impacts the remaining organization. A detailed assessment of the end-to-end process, roles and responsibilities, and systems needs to be rigorously performed.

Thirdly, companies do not invest enough in knowledge capture and transition. When setting up an offshore center - either outsourced or captive - transition must not be remotely managed. An experienced management team must be onsite, to train the new facility in company-specific processes and culture.

Finally, corporations often misunderstand and fail to manage risk. A proper risk assessment and mitigation plan should be prepared - for operations, governance, people & organization, legal & regulatory, financial, and reputational risk.

Offshoring is a great opportunity to boost corporate value, especially now that the practice of global sourcing is becoming more mature and professional. However, offshoring remains a complex challenge, and needs to be undertaken in an informed and structured manner.

Q: How can I find out more on these issues?

Please send your questions on offshoring to paul.morrison@alsbridge.com or Meritxell.macia@alsbridge.com.