There are several interrelated decisions that have to be made when deciding to offshore the whole or part of a business process. A fundamental question is what functions should be offshored. Subsequent but related decisions depend on the organization’s strategy and objec- tives (broadly classifiable as lower costs, superior service, or flexibility); the attitude to risk and public criticism; its relationship with its workforce; and the intensity of competition.
Intense competition may force the organization to use offshoring to reduce costs regardless of other considerations. We summarize the methodology and describe the steps in detail only where offshoring (as opposed to on-shoring) raises additional issues.
Many writers have proposed overviews, methodologies, checklists, and lists of critical success factors. Some of these are Ho, Torres, and Vu (2004); Keane, Inc. (2004); Ker, Murphy, and Valle (2000); and National Computing Center (2004). Cronin, Catchepowle, and Hall (2004) compare the costs, benefits, and risks of implementing and using offshor- Table 5. Evidence of the growth of offshoring
(McKinsey & Company, 2003, p. 5) “Offshoring is expected to grow at ... 30 to 40% per year over the next five years.” “Forrester ... the number of U.S. jobs offshored will grow from 400,000 to 3.3 million by 2015.”
(National Computing Center, 2004, p. 3) “Growth in offshoring has been in the region of 30%
in monetary terms ... ”
(Dieffenbach, 2003) “A recent report by TowerGroup… forecasts a 46%
annual growth rate in U.S. financial companies’ use of offshore outsourcing ... ”
EBS (www.ebstrategy.com/outsourcing/trends/
statistics.htm) contains quotes from many sources, some of which are repeated here.
“International data Corporation (IDC) has predicted that the global IT-enabled services market will account for revenues of $1.2 trillion by 2006.”
“Meta group predicts that offshore outsourcing will grow by more than 20% annually ... from $7B in 2003 to $10B in 2005.”
“McKinsey and others forecast that the Information Technology and Enterprise Solutions (ITES) market in India will reach $142B by 2009 and that it would cost
$532B to provide those services in the USA.”
“According to WR Hambrecht, the offshore PPO market is expected to grow at a CAGR of 79% through 2008.
The offshore IT service market is expected to grow at a CAGR of 43%.”
(Information Technology Association of America, 2004, p. 1)
“Spending for global sourcing of computer software and services is expected to grow at a compound rate of almost 26% p.a. ... ”
ing and outsourcing arrangements. Moore (2002) discusses the risks, costs, and rewards of offshoring. Several writers, for example, Overby (2003a) and Ho, Torres, and Vu present successful or unsuccessful examples of offshoring.
The.Outsourcing.Cycle
The term “outsourcing cycle”, mentioned by Beaumont and Sohal (2004) and perhaps im- plicit in some texts, for example, Sturm, Morris, and Jander (2000), denotes a sequence of stages into which an outsourcing project can be broken; analogous approaches are espoused by Franceschini, Galetto, Pignatelli, and Varetto (2003) and Momme (2002). The concept is often used in industry. In common with other methodologies recommended for change projects (commonly pertaining to quality improvement), and software development projects;
outsourcing methodologies tend to emphasize the broader business aspects such as ascertain- ing business requirements, motivating staff, and monitoring the anticipated performance improvements. Cyclicity is often emphasized: Once a project is completed, other change opportunities should be sought.
The outsourcing cycle presented here is derived primarily from project management meth- odologies and comprises the following steps:
• Identify a process that might be advantageously offshored.
• Define objectives.
• Choose a vendor.
• Negotiate a service level agreement (SLA).
• Implement the agreement, that is, transfer the process to the vendor.
• Monitor vendor performance.
• Incrementally modify the agreement.
• Renew/cancel the arrangement.
Identify a Process That Might be Advantageously Offshored
Only some kinds of work can be taken offshore but the scope is increasing, especially as overseas workers acquire new skills, communication costs decline, and new technology is deployed. Customer relationship management, telephone selling, and medical tourism (see below) exemplify emerging applications.
Several writers give selection criteria, identify suitable processes suitable for offshoring, and give examples of offshoring (McKinsey & Company, 2003; National Computing Center, 2004; Robinson & Kalakota, 2004). Classic applications are: call centers and help desks;
back-office operations that have not been wholly automated (these include processing ap- plications for loans, mortgages, and insurance claims; debt collection, processing employee expenses (Edwards, 2004); data entry, analysis of x-ray images; creating databases of, for example, newspaper articles); architectural or engineering design; and computer program-
ming. It may be appropriate to offshore running legacy IT systems, releasing domestic staff for work on new systems (National Computing Center, 2004).
Edwards (2004) identifies three layers of services. The top layer, comprising services tai- lored to individual businesses, is unlikely to be outsourced. The bottom layer, comprising processes common to all business, is very likely to be outsourced. The thick middle layer comprises services that are capable of being standardized, then outsourced. Enterprise resource planning (ERP) packages such as SAP, are accelerating standardization and the potential for outsourcing. That standardizing internal processes may facilitate accessing lower costs through offshoring is itself a force for standardization (Gere, 2003).
Karmarkar (2004) notes the huge size, increasing automation of, increasing self-service in, and growth of the global services market, and suggests that certain categories of services can be offshored. A complex service can be expressed as a sequence of services, some of which require face-to-face contact (e.g., doctor and patient), but some of which might be automatable and executable offshore. The potential is enormous; an authority estimates that the world’s companies spend about $U.S. 19 trillion on expenses, of which only $U.S. 1.4 trillion is outsourced (Edwards, 2004). ADP (a firm providing payroll services) paying one in six private sector American workers is a harbinger.
There are a number of constraints on what processes should be offshored. Processes such as sales calls or medical consultations that ostensibly require face-to-face contact cannot be offshored. However, many of the back-office processes (such as identifying potential clients or analyzing x-ray images) preceding or following a consultation can be advantageously offshored. Some transactions that used to require face-to-face contact can now be mediated by computers; many sales transactions are consummated on the Web. It is possible for an Indian salesperson to present to an American customer by video link.
Quinn and Hilmer (1994) suggest that non-core processes and common business processes should be outsourced, and that processes giving strategic advantage be retained and im- proved, although identifying core processes may not be straightforward. Mechanical aspects of business processes can be outsourced provided the client precisely defines the work which vendors do and monitors vendors’ performances. Customer relationship management manifest in call center services can be outsourced provided that the client precisely defines and controls the selection criteria and training used and the dialogues that call center staff are to use on its behalf.
Organizations might be reluctant to outsource, let alone offshore, some business processes.
Obstacles include concerns about the reduced flexibility inherent in a three-year agreement, and creating dependence on a supplier. Mechanizing processing of individuals’ tax returns might conceal opportunities for better service that would be revealed by expertise or first- hand knowledge of a customer’s circumstances. A more practical concern is that a large organization’s systems might have so many interfaces and entanglements with each other that it is not safe to run one of these systems independent of the others (see Table 2).
Define Objectives
The objectives of an offshoring project should be clarified. The prime objective will prob- ably be to reduce costs; direct and indirect, tangible and intangible costs should all be
considered. Offshoring is probably a good way of reducing direct costs, but there may be long-term advantages in using offshoring to access expertise, improve quality, or strip out routine activities, thereby allowing management to concentrate on and exploit expertise (see Table 1).
Choose a Vendor
Robinson and Kalakota (2004) cover this issue thoroughly. The time taken to select and become comfortable with an overseas vendor is longer and more costly than for an onshore vendor. Large Indian vendors have front offices in the USA which may contribute to confi- dence. Field (2002) describes the pros and cons of using brokers to choose foreign vendors.
Overby (2006) compares 26 countries offering offshoring services, noting each country’s overall rating, its geopolitical risk, English proficiency, and average programmer salary.
Selection processes may be less thorough for “tactical” (mostly short-term) than “strategic”
(mostly long-term) relationships (National Computing Center, 2004).
Executives selecting an onshore vendor would probably have access to informal informa- tion gleaned from colleagues, the media, and acquaintances. That network will not help when selecting an offshore vendor. The possible delays and misunderstandings caused by differences in culture, time zones, and language mean that an offshore project requires more careful planning than an onshore project.
Negotiate a Service Level Agreement (SLA)
A service level agreement (SLA) is a contract precisely defining the services to be provided by a vendor, and minimum acceptable levels of service; procedures for measuring performance;
payments and penalties for underperformance; and procedures for resolving differences and renegotiating the agreement itself. SLAs are “formally negotiated agreements that enable IT organizations (and vendors of other services) and their customers to collaboratively identify, discuss, and manage ... service expectations” (Karten, 1998, p. 1.7).
The contents and negotiation of an SLA are discussed in Beaumont (2006) and elsewhere (Anonymous, 2004; Davies, 2004; Karten, 1998; Kobitzsch, Rombach, & Feldmann, 2001;
McLaughlin, 2003; Robinson & Kalakota, 2004; Sturm et al., 2000). Negotiating an SLA is vital and difficult. Only in the SLA are the services to be provided, prices, performance criteria, penalties, and scope precisely defined. Negotiations between parties from different cultures (see The Effect of Cultural Differences) and countries can be impeded by:
• Language.differences: The parties may have different masteries of English and dif- ferent understandings of important words and technical terms; an oral “yes” may be interpreted as agreement, but intended as an acknowledgment. Ironical or facetious comments may be interpreted literally. English is becoming the universal business language, and non-English-speaking countries may have fewer offshoring opportuni- ties (Karmarkar, 2004; McKinsey & Company, 2003).
• Misinterpreted.body.language: Asians consider Americans staring at a speaker to be rude and aggressive. Indians’ body language may wrongly suggest to an American that an audience is uninterested. A nod may be interpreted as agreement whereas “please continue” is intended.
• Modalities.and.signals.may.be.misunderstood.or.misinterpreted:.The other nego- tiating team may not comprise decision-makers but minions who take instruction from decision makers between sessions. The negotiation process may be an entertainment for one party, much more interesting than routine work. Handshakes may signify agreement and commitment in one culture, mere polite acknowledgment in another.
Signing a document may signify commitment in one culture, a form of noting progress in another. Americans may be baffled by making no progress for several weeks, then experiencing a sudden breakthrough when an Asian team reaches consensus. Ameri- cans may be frustrated by Asians (perhaps prudently) insisting on a perfect document rather than agreeing on broad principles and letting subordinates and lawyers fill in the gaps. Asians may resist American “man-to-man” approaches, hiding behind formal manners, and attempts to resolve issues behind the scenes.
Transfer the Process to the Vendor
The differences between offshoring and onshoring are not marked, except that the number of employees displaced by offshoring back-office processes or call centers may be larger than usual with less opportunity to move to the vendor’s employ or be transferred to other of the client’s functions.
Gere (2003) cogently notes that effective exploitation of an offshoring relationship may entail changes to the client’s structure, strategy, systems, culture, and staffing. The vendor may require the client to use the vendor’s forms, software, and procedures. Outsourcing requires managers to get results through negotiation and co-operation with partners instead of instructing subordinates. New internal skills will be required, for example, in writing and negotiating service level agreements with vendors. If the IT function is outsourced, a small IT group must be retained to monitor and liaise with the vendor, monitor advances in technology, anticipate future IT needs, and negotiate the contract’s renewal or the reabsorb- ing of outsourced processes.
Monitor Vendor Performance
There should be no difference between offshoring and onshoring so far as tangible perfor- mance measures are concerned. Because the operation is distant, it may be slightly more difficult to monitor intangible measures such as the recruitment and training processes used that may have a long-term effect on service quality. Different cultures may have very different understandings of, for example, the term “empathy” and how much empathy help call center operators should display.
Modifying, Canceling or Renewing the Agreement
The associated negations may be impeded by distance and the cultural differences affecting negotiation.