Of course off-shoring is a very sensitive area these days since it is perceived as taking away US jobs. Lately there is a lot of press about major firms, such as Dell and Lehman Brothers, pulling back on their off-shore outsourcing efforts for business customer service. Is Dell viewing off-shoring as politically incorrect? Or is it because the company was truly not seeing the economic gain?

First off, very few companies will admit to their off-shore strategy for political and PR reasons. Many of us in the industry believe that companies are actually increasing their off-shore activities - both through the establishment of company-owned, captive-shared, service centers in low cost locations and through outsourcing.

My understanding is that the problems Dell experienced were driven by factors that could have occurred in South Dakota or Southern India. Business drivers forced the deployment to be rushed and Dell didn’t have time to do proper training of the employees. Our view is that Dell and other market leading companies will increase their off-shoring through a “right location” approach that mixes on- and off-shore tactics. Based on the nature of these technical support calls and the level of expertise that is needed, calls are routed to the right people with the right expertise, in the right country, with the ability to relate to the call or business need.

Are there “hidden costs” associated with outsourcing off-shore that companies are not including in their initial business case? And if so, what are some of these costs?

The biggest “gottcha” is that companies don’t scope the complete cost of migrating the work. Time zones. The shear distance to move teams around. The overlap of managing the current work while moving to the off-shore environment. These all cause a variety of complications that will drive up costs. Effectively you end up with an extended period of double costs during migration. Again, this additional upfront cost is offset by the future savings, but you need to be careful to manage the migration or the business case can be destroyed.

You referred earlier to “captive shared services”. Can you define this and identify how the benefits differ from traditional outsourcing?

"Captive shared services" describes a strategy used by companies to bypass the outsourcing provider and directly hire and train a work force, and fit out their own in-source centers in the various low cost regions (India, Philippines, Czech Republic and others). A number of data points say that over 60% of the jobs moved offshore by US companies are in fact not outsourced but off-shored in a captive client owned center. The mission of these captive shared services centers is to provide various IT, accounting and HR services using the same low cost labor that is tapped by a third party outsourced provider. Clients choose this strategy most often for reasons driven by control and intellectual property concerns.

Obviously, captive shared service arrangements are made only by very large companies with significant volume and scale to make this cost-effective. Captive shared service models are becoming even more prevalent than outsourcing over the last few years, which is putting pressure on offshore outsourcing providers to drive down their costs even further or provide access to skills and processes that otherwise would be difficult for companies to access.

The major difference in ROI comes from the risk and control trade-off between the two options. In the case of captive shared services, you have complete control and an implied view of better security. You have theoretically eliminated paying the profit and overhead of an outsource provider. In theory, that should be the cheapest implementation scenario based on the assumption that there is such a ready pool of labor that you can just “go do it yourself.” But there is extra risk involved - particularly if you are going to operate in another country. You need to build out the facilities and plant, as well as establish legal status in that country. This adds 3-6 months to the process. Then you have to hire not just the US manager, but also a local management team that knows how to manage the operation on your behalf.

With traditional outsourcing you have access to a team that knows how to operate in the country they are in. They understand local tax requirements. They know how to standardize and migrate the work. The business case may look better for captive shared services on paper, but rarely will companies really achieve those savings. The question at hand is execution of a plan, not theory. In most cases, companies will not be able to execute the business case as well. They may have access to the local labor pool, but they won’t necessarily have access to leadership. Careful analysis is required and risk adjusted scenarios should be run to make a prudent decision to outsource or run your own captive shared service center.

What kind of economic return do you see for the different types of Business Process Outsourcing? (e.g. on-shore, off-shore, captive off-shore)? And how do you know which is right for you?

Most companies can save money no matter which strategy is adopted. The off-shore option is clearly a better business case, if you can manage the risk. Once you have chosen to go off-shore the company needs to decide if the soft factors such as control and process retention are more important than having access to the professional management team provided by an outsourcing provider.

Ben, our research indicates that many companies are following an outsourcing strategy that is staged. That is, they start slow with outsourcing a few functions and then gradually build out, depending upon the success of the outsourcing projects. What do you think of this approach? Does it impact the expected ROI?

How you deploy an outsourcing arrangement has tremendous impact on the real ROI of a project. Timing and scale are big drivers once you have made the decision to outsource. I can guarantee that you will make a flawed decision if you don’t start with a complete business case that assumes the full scope. You can always stage the implementation, but you should plan and negotiate for the complete scope. You will get a better price and a better solution if you sign a larger scoped deal even if the deployment is staged.

The biggest flaw in going with a staged business case is that it is often based on the results from a pilot process. These results are not representative of scale, and therefore, are not representative of real costs. Very often companies start outsourcing processes that require the lower levels of expertise. The real cost savings come when you replace the mid-grade workers.

Another common belief is that off-shore outsourcing is always being done in India. What other countries do you see becoming prominent in the off-shore outsourcing landscape and how are they different? How do you decide which location is right for a company?

Clearly it's not just India. There are numerous alternative countries to evaluate and there are different reasons to choose each one as a target location, based on specific company-unique drivers. The main issue is the availability and quality of labor. Based on English speaking graduates per year, India is the highest at around 2.1 million per year. The US produces about 2 million and the next highest is the Philippines with 350,000 per year. The remaining countries are statistically irrelevant talent pools in terms of English speaking, reasonably high-skilled labor. Sure you can set a center in almost any country based on cheap labor. But can you find English-speaking accountants who understand Sarbanes-Oxley reporting requirements? Depending on your needs, we like Singapore and Malaysia in Asia. In Europe, there are another 4-5 core countries to look at as potential locations for outsourcing: Hungary, Czech Rep, Poland, Slovakia and Romania. And another 5 or so are just over the horizon as far as being ready to provide substantial off-shore services.

Is the answer different for a US English language driven company when compared to a global company with far-flung operations in Europe and Asia and the US?

Clearly a US company has to look to a single or cluster of Asia countries to meet its needs. Asian locations can provide the lowest cost English language based process work.

We think the global company's outsourcing and offshore answer to getting the best cost and span of control is what we call the “2-1/2 center” solution broken down as follows. For the non-English European work it is best to source the work with a center located in Eastern Europe. The English speaking work should go to a major pan-Asia location that has a large English speaking labor pool such as Philippines or India. The work based in the the Asia/Pac Rim region that is not English-based would stay in that region in a reduced scope “½ center”.

The outliers to the global answer are usually Japan and China since they are both difficult to outsource in another country. If you have substantial language driven operations in Japan or China, you usually have to outsource in that country to standardize and outsource in that geography.