Why do organisations outsource and offshore?
There are 3 basic imperatives behind an organisation’s decision to outsource and offshore.
- Cost reduction & Financing benefits
- Service Improvement
- Strategic Benefits
Cost reduction & Financing benefits
Traditional on-shore outsourcing has relied on economies of scale and an assumed improvement in efficiency provided by vendors to deliver cost savings. However, for many deals costs savings were not as great as hoped for and efficiency often came hand in hand with reduced flexibility. For this reason often heard advice was “Do not choose to outsource for cost savings alone.”
With the emergence of off-shoring, the cost reduction element of the business case has been greatly strengthened. Underpinning all cost reduction benefits is the availability of skilled labour at a far lower cost in overseas locations. Even with the much publicised wage inflation in overseas locations, the differential is still significant and looks likely to remain so for the foreseeable future.
Financing is often another reason for outsourcing. For example a vendor might take on asset ownership and in so doing allow the organisation to obtain a cash injection from the transferred assets and smooth its expenditure profile in future by removing the need for large periodic capital expenditure.
Service Improvement
Companies that specialise in a service area tend to deliver better service in that area than companies that do not, hence outsourcing to a specialist vendor can be expected to deliver service improvement. IT outsourcing vendors are large enough to support best practice management, processes and training, can support best of breed toolsets, can retain a higher skilled workforce through provision of better career opportunities, and can leverage a greater breadth of experience.
Strategic imperatives
Of course the object of any strategic initiative is to improve the viability of the organisation through cost reduction or service improvement. However the emphasis of a strategic imperative is usually to achieve these results through a management, organisational, technology or risk restructuring.
Outsourcing can be used to help an organisation’s management refocus on its core competencies rather than support functions, or used as a means of achieving IT rationalisation and transformation. It can even be used to significantly alter the risk profile of the business, for example sourcing IT as a pay for use service that allows the organisation to reduce costs in response to a reduction in their customer demand.
How do organisations choose what to outsource/offshore?
What an organisation chooses to outsource/offshore is dependent on their risk profile. Most organisations exist within a competitive environment, subject to pressures from customers, competitors, technology, suppliers, governments and changes in society. Successful organisations recognise that they must constantly change to improve their position in their market, but with all change comes an associated risk.
Each organisation needs to assess these risk factors against the potential benefits. These factors will be different for each organisation and will be dependent on such factors as the service they provide, the profile of their customers, the role of IT within the organisation, and their staff competency profile.
What are the typical options available to organisations when outsourcing/offshoring?
The major dimensions for any outsourcing/offshoring solution are:
- Resource Responsibility
- Managerial Responsibility
- Vendor portfolio
- Risk responsibility
- Onshore/Offshore
- Service scope
- Transition timeline
- Transformation requirements
Resource Responsibility
Responsibility for resources, either staff or assets, can be retained by the organisation or can be transferred to the vendor. Traditional outsourcing has often encouraged a full transfer of staff and assets, turning IT or Business Processes into a ‘black box’, fully externally delivered service. Tailored co-sourcing, where organisations retain responsibility in accordance with their risk perceptions and existing skill and experience, is now becoming increasingly popular.
An organisation may for example retain responsibility for assets, and staff responsible for all business and customer facing functions.
Management Responsibility
An organisation must take a view on how much management responsibility they intend to move to the vendor. Clearly direct management of offshore staff is the domain of the vendor, but all other aspects can vary depending on the organisations circumstances and perception of risk.
A complete outsourcing deal would have all aspects managed by the vendor, whilst at the other end of the spectrum, all management, including team leaders and project managers could be retained by the organisation.
Vendor Portfolio
Organisations may choose to engage multiple vendors for different aspects of their service. The rationale here is to encourage competition amongst vendors to ensure value for money. In practice, this arrangement is reserved only for organisations with the largest of outsourcing potentials.
Risk responsibility
Most arrangements involve some change in an organisations risk profile such as adding the ability to decrease headcount at short notice reducing the organisations potential salary liabilities. On a grander scale some organisations have outsourced return on investment risks by contracting vendors on a pay for use basis of their IT infrastructure. This is particularly relevant for companies with large E-commerce infrastructures where heavy investment in the infrastructure required to support a large customer base can severely affect the organisations viability should there be a downturn in customer demand.
Onshore/Offshore
Sending jobs offshore offers significant cost savings for businesses, and robust communication, the internet and remote management capabilities of modern systems are continuing to increase the areas for which this is viable.
However, face to face interaction is still a practical requirement of many business facing aspects of any service such as management, requirements gathering and physical hardware intervention.
For this reason, most engagements will contain a significant element of on-site IT presence.
Service Scope
Organisations may choose to retain responsibility for certain service aspects. An example would be lack of vendor presence in the location of a small remote office, for which management of a few outsourced staff might be seen as problematic. Another might be lack of vendor expertise in particular business or technical areas.
Vendors will often be willing to take on problematic areas, so it is typically an organisation’s reservations that determine service areas to be excluded from scope.
Transition Timeline
The timing and staging of transition to an outsourced/offshore steady state will vary from engagement to engagement. Staff knowledge transfer, technology issues, risk perception and commercial considerations will all play a part in determining an appropriate timeline and staging strategy.
Transformation requirements
The scope of outsourcing engagements will typically involve transformation as well as the transfer of the “as is” operation. Vendors should aim to deliver business value to customers through a continuous improvement process. This could be technology based or process based such as implementing best practice management and procedures within an organisation.