Why Aren't You Offshoring Business Services? An Analysis of "Blocking" Factors




 

In previous columns I have discussed how – if done properly – offshoring and global outsourcing of services can help companies reach their strategic objectives through cost reductions, flexibility gains, growth, and access to qualified personnel. But not all companies take advantage of the benefits of services offshoring.

So, today, I will report on the perceived risks and blocking factors that prevent firms from offshoring part of their services functions. Data comes from the US and Europe and have been collected as part of the Offshoring Research Network initiative.

 

The number one perceived risk of service offshoring is the quality of services that might not be up to standard.

 

Our research found that, whether firms do or do not offshore services, the number one perceived risk of service offshoring is the quality of services that might not be up to standard. Looking into the difference in risk perceptions, we found, as expected, that firms that don’t offshore services perceive greater risk from doing so, than firms that do. More interestingly, the difference is particularly strong with regards to the risk of losing control and internal capabilities and knowledge, as well as the risk of losing synergies across the firm’s activities. Legal and contractual risks, IP protection issues, and the instability of potential offshore locations are also rated significantly higher by firms that do not offshore.

But perceiving risks does not mean firms will decide not to offshore if they are able to manage the risks. So we asked those firms that do not offshore what factors could make them change their mind and start considering offshoring certain services.

We found the following top 5 reasons that could make companies consider offshoring business services (scale from 0 to 5):

 

1. Greater certainty to achieve expected savings

3.4

2. Greater scale to take advantage of offshoring

3.3

3. Better resources to manage a remote service location

3.0

4. Better capabilities to implement offshoring projects

3.0

5. Greater ability to quantify risks

2.9

 

This suggests that the strongest "blocking" factors that prevent certain firms from offshoring business services come from the fear of hidden costs because managers don’t know how to identify risk and manage the process of offshoring. There is also the common feeling that offshoring is for the big guys, who have greater scale and better resources to manage remote locations – not for the bulk of the market.

I see this as a good starting point for discussion for those of us wondering how to relieve the fears of managers who continue to resist offshoring. Offshoring is certainly not the solution to all company problems. But I don’t think the factors identified here should be the ones driving decisions not to offshore.

So let’s solve the operational issues and focus on the strategic reasons for why to offshore, or not.