Offshore Outsourcing, a Sound Business Strategy?
October 10, 2007 by Raj Sheelvant
Is Offshore Outsourcing good Corporate Business Strategy? If the objective is cost savings due to labor arbitrage then in the long run organizations will fail to achieve that objective. But, if diversification of labor is the objective (read my blog Globalization of Labor) only then offshoring begins to make sense.There are two kinds of offshoring:
- Captive Offshoring: Organization setting up its own shop in a different country.
- Third Party Offshoring: This is outsourcing to the third party that are in offshore location.
According to the article Captive Offshoring Centers Are Imploding recent survey shows that the captive offshoring has failed to achieve cost savings for many organizations. The reason for the failure is that no one knows the overhead cost to start a Captive Center. All organizations go by only one number – labor arbitrage: difference between costs of labor in two countries. But there are several overhead costs like setup, management, attrition, communication etc that are never factored into calculating ROI. There are some intangible costs like time zone impact, language impact and impact of cultural differences. Then, does Captive Offshoring ever make sense? Yes, only if the organization plans to expand their market in that country. For example: Boeing is looking towards India to expand its market share in the next five years. It makes perfect sense to have labor allocated closer to the market. But for organizations that are regional and are not planning on expanding to India it makes no sense to have a captive offshore center there.
Outsourcing to pure play offshoring unit like Infosys or Wipro any better? Again, in the long run as wage differential begin to narrow, third party offshoring will also begin to loose advantage because of labor arbitrage. But large offshoring organizations can take advantage of economies of scale to streamline business process. In an effort to be lean in this hypercompetitive environment the companies should outsource / offshore tasks that is non-core. I think any business activities/processes that are not core competency or enabler of that core competency for the organization is a candidate for outsourcing. But, organizations need to look at offshoring as one of the many options. The other options that are available are near shoring and in shoring. Organizations should carefully evaluate and align their vision with the outsourcing organization before building the partnership. The Corporation should also factor in the overhead cost for retraining their employees that are impacted by moving the job elsewhere. So, the bottom line is: Careful analysis of offshoring to pure play in the context of other outsourcing strategy is very important.
In short, Offshore Outsourcing is becoming viable model for businesses to stay nimble and adapt to changing competitive environment. Organizations need to look at offshoring as a long term strategy in:
- Managing Talent
- Diversification of Labor
- Penetrating new market.
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