Before you offshore, do some ranking

Thu, Aug 3, 2006


Okay, so you are convinced about the economic sense that offshoring provides in terms of costs as well as competitiveness. But do you know what jobs to manage in-house and what jobs to ship offshore? Lets have a look at this question.

In 2005, BCG & Gartner predicted that 50% of offshoring contracts assigned in North America between 2001 & 2004 will fail to meet expectations. Companies benefit from offshoring only when they pick the right processes, calculate both operational and structural risks, and match organizational forms to needs, states Ravi Aron and Jitendra Singh. They claim that companies tend to make three fundamental mistakes in offshoring:

1) They focus their efforts on countries, vendors, prices rather than identifying processes
2) They don’t account for associated risk
3) They concentrate on direct costs and fail to look at interdependencies of costs

How to Offshore Right

While identifying functions for outsourcing, it is very important to separate core functions from non-strategic functions which are important to the business, but not mission critical, says James Rowley. For example, P&G handles the most critical functions in-house – product development and marketing – and offshores the rest, including finance, accounting, HR, data centers and production manufacturing.

The secret of supply-chain leaders like General Electric, Emerson Electric, Continental, Honeywell, Siemens, etc. is their modular approach to offshoring, says Industryweek. Rather than moving entire factories offshore, these companies focus on individual functions and products when making offshoring decisions in a way that optimizes cost and effectiveness of entire operations.

According to John Berry, a good offshoring strategy should identify new capabilities that moving jobs provides directly. It should also free up in-house resources which can then be used for high value-adding work. In Getting Offshoring Right by HBR, the following approach is suggested for identifying processes for offshoring:

Step 1: Identify how each business process helps them create value for customers. Executives should seek answers to the question, “How crucial is each process (or sub processes) compared with others in creating value for my customers?” Rank each process as well. For example, the answer to this question in a consumer goods industry will rate product development processes higher then customer-service processes whereas in the hotel industry, the opposite is true.

Step 2: Executives should be able to answer the following question: To what degree does each process enable my company to capture some of the value that it has created for its customers? Again, rank each process accordingly. For example, retail banks may rank making money higher in terms of value capture than developing new consumer finance products.

Step 3: Add the two rankings for each process together to create a ranking hierarchy.The higher the rank, the more crucial is the process to the company’s strategy and hence, less important for offshoring. For instance, in a technology company it can be too risky to offshore the process of managing float for suppliers; even one error can hurt the company’s suppliers financially; whereas the process of invoice verification and payment authorization may be less valuable and hence, less risky to offshore.

Identifying processes is crucial when entering the offshoring world, which is huge and getting more crowded by the day with the increase in the number of vendors in different locations around the globe.

Get this exercise right, and half your offshoring job is done!

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