| Introduction | | | | upgraded at both ends to facilitate seamless |
| Offshore outsourcing has transformed the way U.S. | | | | integration of the two work sites – the customers |
| companies do business and global consulting firm | | | | & the offshore vendor location. For example |
| McKinsey predicts global offshore outsourcing spend | | | | additional networking equipment may be needed to |
| to hit $110bn by 2010. The attraction to offshore | | | | provide data connectivity between both sites. Or |
| outsourcing is primarily the resultant cost savings that | | | | additional software tools or licenses may be needed |
| happen due to it. However, many companies fail to | | | | the because, now there is an additional location (the |
| recognize that there are additional soft costs that need | | | | vendor’s facility) and more often than not the |
| to be incurred over and above the direct contract cost | | | | same tools/licenses cannot be shared across two |
| of the offshore outsourcing engagement and these | | | | different locations. In some cases |
| costs can undermine the success of the engagement, | | | | additional data communication costs may need to be |
| if not factored in at the start of the offshoring process. | | | | incurred where companies have had to dedicate |
| These soft costs include time involved in vendor | | | | separate “communication pipes” in order to keep |
| selection, process transition, training and monitoring | | | | the offshore and local data bases synchronized. In |
| operations in offshore locations, and in overcoming the | | | | addition, there is the cost of voice communication, |
| challenges of working in a foreign country including | | | | video conferencing, e-mail and chat sessions. You |
| communication challenges, low-skilled workforce, | | | | need to measure the increase in communication cost |
| unfamiliar laws and regulations, and infrastructure | | | | to attribute the incremental additions to the total cost |
| constraints. These factors directly affect the outcome | | | | of offshoring (TCO). |
| of the offshoring process, and along with the direct | | | | While the vendor usually agrees to take care of the |
| contract cost constitute what can be termed as TCO | | | | cost at their end, the company may need to absorb |
| – Total Cost of Offshoring. Investment in these | | | | the cost of infrastructure at their end, unless the |
| needs to be made upfront, even before the actual | | | | vendor agrees to invests in that too, and amortize its |
| work gets underway. | | | | cost over the period of the contract. |
| This article analyzes the soft csts mentioned above | | | | Reasons for failure or mid-way abandonment of |
| and recommends that companies budget for these in | | | | projects |
| advance to make their offshore outsourcing endeavor | | | | Unrealistic assumptions on cost savings |
| truly successful. It also tries to bring up some reasons | | | | You have to ensure that there are clearly defined |
| for failure or mid-way abandonment of offshoring | | | | goals and final expected outcomes from the project. |
| engagements and suggests ways to overcome them. | | | | Many companies that outsource work offshore, |
| This article is of use to companies that plan to | | | | wrongly assume that labor arbitrage will yield savings |
| offshore work and also to offshore service providers | | | | on a person-to-person basis (i.e., Since a full-time |
| (vendors) who can use the observations to educate | | | | equivalent employee in India cost 40% less, the savings |
| prospective clients. | | | | will be in the same range!) without regard for the |
| Cost of Vendor Evaluation & Selection | | | | hidden costs and differences in operating model of the |
| The first step in an offshoring endeavor is to | | | | offshore vendor. In reality, most organizations save |
| determine which functions are best suited for | | | | 15-25% during the first year; by the third year, cost |
| offshoring. While some tasks can be performed | | | | savings often reach 35-40% as both the sides move |
| efficiently even when done remotely, other tasks may | | | | up the learning-curve and the client modifies their |
| necessarily need a face-to-face interaction. In their | | | | internal operations to align to an offshore model. |
| article “The Rise of Offshoring – It’s not wine | | | | Lack of well documented in-house processes |
| for cloth anymore” Gene Grossman & | | | | Documentation is a time intensive and often neglegted |
| Esteban Rossi-Hansberg of the Department | | | | activity. It is observed that most internal processes are |
| Economics, Princeton University, share the paradigms | | | | only about 30% documented. However, before |
| set forth by various scholars to classify tasks on | | | | offshoring a process the documentation level should |
| these lines. For example Edward Learner & | | | | be at around 90% and should include mapping of the |
| Michael Storper distinguish between tasks that require | | | | current process, putting down the transition strategy, |
| codifiable information and those that require tacit | | | | evaluation for all risks of failure and a documented |
| information. The former can be done remotely | | | | contingency plan. High risk or exposure might deter the |
| because they can be expressed as a set of symbols, | | | | company from outsourcing offshore; or it might shift |
| be they mathematical, linguistic or visual. The latter | | | | the outsourcing strategy (e.g., from a single vendor to |
| non-codifiable tasks require that both parties have a | | | | multiple vendors); or it might actually give a greater |
| broad common background to “know” each | | | | thrust to offshoring if the vendor(s) seem better |
| other well enough; the doer needs to interact | | | | equipped to reduce risks while keeping the costs low. |
| face-to-face with the receiver of the service to | | | | Though the results of risk analysis vary between |
| perform such tasks. | | | | companies, documenting the risks & preparing the |
| After determining whether the function in question are | | | | contingency plan are important. |
| amenable to be offshored, the next step is to identify | | | | Poor Expectation Management |
| the vendors that can match your needs by defining | | | | Outsourcing engagements have a supplier (vendor) |
| the relevant skills and experience needed for the | | | | and a recipient (client), and both will have different |
| function being offshored. After this a first cut analysis | | | | expectations from the relationship. That the service is |
| of the shortlisted vendors will need to be made. All | | | | delivered from offshore complicates it further, and |
| these steps can cost anywhere between 0.2% to 2% | | | | expectations mismatch become problematic. |
| of the Direct Contract Cost (DCC) because of the | | | | An expectation gap may arise when you are in doubt |
| additional time incurred on the following activities: | | | | about the vendor’s capability and hesitant to |
| - Evaluation of the in-house functions to determine if | | | | offshore anything beyond a specific task, while the |
| they can be offshored | | | | service provider expects greater chunk of “higher |
| - Documenting the specifications, skill-sets required and | | | | value” work and might feel unchallenged by dealing |
| the scope of work in the RFP | | | | only with standard, unchallenging tasks. If this |
| - Identifying potential vendors, sending out the RFP, and | | | | expectation gap continues, the vendor may over time, |
| managing the responses | | | | accord low importance to your project or may even |
| - Bids evaluation and negotiation | | | | want to get out of the relationship as soon as a higher |
| - Due diligence of the vendor capability | | | | value-add work comes their way. |
| - Travel expenses to the overseas location | | | | Similarly, you may expect the vendor employees to |
| The vendor evaluation and selection process may | | | | come up to a level of understanding that matches that |
| need an in-house resource working full time on this, in | | | | of your in-house staff, but they may not be able to |
| addition to other resources chipping in with time & | | | | think or perform beyond the task that has been |
| domain expertise. Travel is recommended to get the | | | | outsourced, and may ask questions that may seem |
| actual feel of the vendor’s staff capabilities, rather | | | | ‘silly’, resulting in frustration at your end and |
| than evaluating just the paper bids or basing it on your | | | | possibly an early termination of the contract. |
| interactions with a limited set of people on the vendor | | | | You should chart out a growth plan for the outsourcing |
| side (usually the sales team and the operations head), | | | | relationship so that the service provider have their |
| and is an essential part of the due diligence process. | | | | eyes set on the next target in terms of new |
| Cost of Transition & Training | | | | processes coming their way. Knowing this growth |
| The process of transition & training can take | | | | path, the vendor and their employees will try to gain |
| between 3 months to a year before work can be | | | | deeper insights into your business, thus resulting in |
| completely handed over to the offshore team. | | | | superior results during the initial ‘unchallenging’ |
| Typically this is the most expensive stage in the | | | | stages of offshoring too, and a stronger sense of |
| offshoring process and can cost an additional 2% to | | | | loyalty to their relationship with you. |
| 3% of the DCC. | | | | Also ensuring continuous knowledge transfer to the |
| The costs here will typically be those incurred due to | | | | vendor’s employees working on your project, |
| travel & temporary relocation of the vendor’s | | | | make feel as a part of your extended organization |
| project team to the client’s office(s) in the home | | | | and perform better. |
| country, so that they can learn the intricacy of the | | | | Failure in Bridging the Cultural Gap |
| functions from the in-house staff that has been doing | | | | Most of the offshore workers will not have an |
| them for years. | | | | exposure to the Western way of life and to the |
| Also there will be a cost of reduced productivity of the | | | | Western work culture. Therefore besides the training |
| in-house staff because of their time spent in training | | | | related directly to work, your in-house staff may need |
| the vendor’s team. To offset the costs at this | | | | to spend time in acquainting the vendor’s |
| stage it can be negotiated that the cost of travel and | | | | employees with the cultural nuances of the |
| relocation be borne completely by the vendor. | | | | organization and that of the your company’s home |
| Cost due to lower productivity of the offshore | | | | base, be it Europe or US. For example although English |
| workers | | | | is an official language in India, pronunciation and accents |
| Once the project or function is completely offshored, | | | | can vary tremendously. Though many service |
| you will realize that the offshore team lags behind due | | | | providers put their employees through accent & |
| to a variety of reasons that range from work culture, | | | | language training and have cultural education programs, |
| lack of good understanding of the business of the | | | | inherent differences due to culture, religion, social |
| company, bad ergonomics at the place of work, lesser | | | | activities, way of dressing, and even the way a junior |
| work experience (staff of most offshore companies | | | | interacts with a senior colleague will not be easy to |
| are typically graduates or post-graduates with 5-7 | | | | overcome. Something that’s common sense to the |
| years experience as opposed to an average of 10-15 | | | | Western worker may be a completely foreign |
| years in the US), long commute times to the place of | | | | concept to an overseas worker. |
| work, underdeveloped civic amenities, unstable political | | | | Similarly your senior management & your in-house |
| environment, and many more. Therefore though you | | | | staff directly involved in the transition process need to |
| may paying say $10 per hour for an offshore worker | | | | acquaint themselves with the culture of the country |
| as against say $40 per hour for an in-house employee, | | | | where the vendor is located to communicate |
| you can end up incurring twice the cost due to his | | | | effectively with them and be able to understand the |
| reduced productivity. Hank Zupnik, CIO of GE Real | | | | soft aspects of doing business with them. This avoids |
| Estate, who has overseen numerous projects | | | | issues that can arise due to misunderstanding the |
| outsourced offshore for over a decade, observes that | | | | ‘language’ at either side. Mutual visits to the |
| because of these differences you cannot assume that | | | | other country are very helpful for effective working |
| one offshore worker can simply replace all the work | | | | relationships as they help in drastic improvement of |
| done by one American worker. | | | | each others understanding and in the quality of work. |
| Another reason for low productivity is the high turn | | | | Some companies may try to save the travel cost by |
| over at offshore vendors. With attrition rate as high as | | | | communicating over the phone or using video |
| 30% in some industries, companies spend time | | | | conferences, but in the long run this proves to be more |
| re-training everytime critical resources leave the | | | | expensive because of the delay related to transitioning |
| vendor to join another offshoring outfit. | | | | the process overseas and the longer time taken to |
| Thus it needs to be understood that lower productivity | | | | get the expected quality or performance from the |
| of offshore workers can offset the assumed savings | | | | offshore team. |
| by a factor of 3% to 10% of the Direct Contract Cost. | | | | Disaffection of in-house staff |
| Cost of lay-offs & reduced output of in-house | | | | Extensive knowledge transfer and training are required |
| staff | | | | prior to and during the transition of work to the vendor, |
| Companies should also be ready to factor in | | | | and this needs to be consistently supported by the |
| productivity dips of the in-house staff after the | | | | in-house staff. However layoffs can cause major |
| offshoring transition has been completed. This is | | | | morale problems among the in-house "survivors," |
| because of the low morale of the employees due to | | | | leading to disaffection and work slowdowns. Internal |
| their colleagues suddenly losing their job, and extra | | | | people may refuse to transition to the offshore model |
| workload on the existing in-house staff. The | | | | because they have a certain comfort level, or they |
| severance package of the laid-off employees also | | | | don't want their co-worker to lose his job. Some of |
| needs to be factored in the cost of the offshoring | | | | your staff may also start proclaiming, that offshore |
| endeavor. Also some ex-employees may also initiate | | | | outsourcing is not saving money to the company after |
| legal action against the company, thereby adding a | | | | all and that it was a bad idea, which futher lowers |
| legal expense to the cost of lay-offs. | | | | morale of other employees. Sometimes your in-house |
| Communicating with your current staff on the impact | | | | project management team may need to work into the |
| of outsourcing and planning ahead for redundancies | | | | night and arrive at work in the early morning to |
| that are necessitated after the outsourcing transition | | | | manage the offshore team, and their perception about |
| can avoid some of these costs. | | | | who is benefiting and who is hurting becomes personal. |
| Cost of managing the ongoing project | | | | You have to set aside management and employee |
| An offshore project needs to be managed differently | | | | time before, during and after the offshore transition to |
| than a in-house processes, and you may need to | | | | talk to your employees about the whole proposition of |
| invest the time to develop a project plan; something | | | | offshoring and how it will help the company to become |
| that may not have been required all this while when it | | | | more competitive in the long term. A consensus needs |
| was an in-house processes. Once fully offshored, one | | | | to be built among all employees favoring the |
| of the key people you will interface with are the first | | | | company’s offshoring efforts. Without this kind of a |
| level leaders of the team offshore; they may be called | | | | mandate, offshore endeavors are doomed. |
| by various titles – team lead, tech lead or project | | | | Backlash from customers as a result of poor quality |
| manager. These people tend to be more technical or | | | | control |
| operational and less “project management” | | | | The cost savings resulting from offshoring is the |
| oriented - you cannot assume that they know | | | | primary motivation for businesses to engage in the |
| “project management” the way you may | | | | same. It is often realized late in the process that quality |
| envision it just because of their titles. Someone from | | | | is an important factor for a successful offshore |
| your in-house staff, say the functional head or the | | | | engagement. Poor quality of service delivery will have |
| department head will need to take on the additional | | | | a negative impact on the performance and the |
| responsibility of resource planning & allocation and | | | | reputation of the company may suffer in the eyes of |
| management of the offshore team. | | | | their customers. A lack of adherence to the quality |
| Over and above the direct project management cost, | | | | norms by the vendor and lack of monitoring of their |
| there's a significant amount of time taken up in handling | | | | output can result in considerable rework, and |
| invoicing & auditing of the offshore work – e.g. | | | | associated follow-up costs. |
| ensuring that cost centers are charged correctly and | | | | KPIs (Key Performance Indicators) of the offshore |
| manhours are appropriately recorded without inflating | | | | engagement should be defined in the beginning itself, so |
| the hours. | | | | that the performance can be measured objectively |
| It is also observed that a 100% offshore model (all | | | | during the tenure project and mid-course corrections |
| resources working from offshore) is very challenging | | | | are done wherever needed. It is also advisable to |
| for both the service provider and the client. Interactions | | | | institutionalize regular satisfaction surveys that |
| and exchange opportunities are missing which often | | | | measure the “perception” of the engagement |
| leads to functional, technical, and cultural | | | | across several stakeholder levels. |
| misunderstandings. Frequent exchanges or a policy of | | | | Conclusion |
| maintaining 10-20% of the service providers team on | | | | Offshore outsourcing is a phenomenon that’s here |
| your site is recommended. | | | | to stay. Companies that are adopting this are learning |
| Finally it will be realized that though vendors use certain | | | | operate in a global business environment, and will |
| standard baselines and assumptions when costing the | | | | benefit in the long run as they gain insights into other |
| project, there is a “scope creep” in most | | | | countries and their way of conducting business. |
| projects and the actual work varies from estimates | | | | However a failed or abandoned offshore outsourcing |
| initially provided to them. If the cost of the project is | | | | venture may set back the company by both the |
| escalates due to this, the vendor will expect the client | | | | money spent and the willingness to take up such |
| to bear the incremental cost. | | | | opportunities in the future. It is therefore important to |
| Summarizing the above, the additional cost are those | | | | study and analyze all factors that will affect the |
| on account of (a) time invested in developing the | | | | offshore endeavor and ensure that steps are taken to |
| project plan; (b) putting additional in-house manegerial | | | | overcome the pitfalls well ahead of the offshore |
| resource to manage the offshore project; (c) | | | | transition. |
| accounting & auditing of the ongoing project; (d) | | | | References |
| having 10 – 20% vendor personnel onshore; (e) cost | | | | Dean Davison; Top 10 Risks Of Offshore Outsourcing; |
| due to change (or addition) in scope of work during the | | | | 8.pdf |
| project. | | | | Fleming Parker; Key Success Factors for Offshore |
| Cost due to upfront investment in infrastructure | | | | Outsourcing to India; |
| Besides the manpower cost, there is a cost of | | | | Gene M. |
| infrastructure that may need to be installed or | | | | |