Top Ten Mistakes Made When Offshoring
Sending work offshore can be a valuable tool for firms looking to enjoy the benefits of labor arbitrage, increased geographical penetration and strengthening ties with national governments. It can also be a nightmare. Done incorrectly, offshoring can undermine the very foundations of a company with bills that could draw tears from a stone. It’s amazing, then, how often it all goes pear-shaped…
The Shared Services & Outsourcing Network asked a number of experts for their thoughts on the most common, and the most potentially dangerous, mistakes companies make when sending work offshore. So here it is: the SSON guide to the Top Ten Mistakes Made When Offshoring. Recognise anything?
Mistake #1. Not allocating sufficient time and resources to transition
Especially when cost-savings are a primary driver, there’s an understandable impulse to get an offshoring move completed as quickly as possible. The organization’s biggest cheeses - not to mention the shareholders - may find it hard to resist the temptation to push hard for a speedy transition so the big move can start demonstrating cold hard gains speedily (as cash spent on the transition - especially to a new captive center - tends to be seen as dead money). However, that way lies if not madness then at least the risk of creating significant, and potentially very costly, difficulties in the longer term.
"Often times companies consider offshoring as part of a cost -cutting exercise," says Steve Reynolds, MD North America at WNS. "Savings needs to be substantial and delivered as soon as possible. Unfortunately, this results in an accelerated time for transition which can short cut the required processes for moving complex work offshore. The average tenure in a shared services center should not be ignored and process mapping and documentation cannot capture every detail of a process. Gaps are filled by sending the right number of staff for the right amount of time to observe the processes in the SSC location. In addition, subject matter experts from the company should plan on spending a substantial amount of time in the offshore location insuring that training is done accurately and be available for escalation during ramp-up and production cut over."
Mistake #2. Not making the appropriate choice between outsource and captive
Offshoring work can be done whilst keeping it within the organization, or of course as part of an outsourcing deal. There are pros and cons to either solution (and indeed to the hybrid model as well). However, companies sometimes make the mistake of looking at offshoring itself as the key to solving the particular problems they’re addressing, without looking fully into all the options as to who might be best-placed to carry out that work once it’s been sent overseas. There might be overwhelming advantages for some firms in retaining the work within a captive set-up; similarly, outsourcing might be a preferred option for others. The critical issue is that in many circumstances the outsource/captive decision might well be a more important one than the onshore/offshore debate; simply voting for "India" or "Malaysia" over onshore locations isn’t taking a sufficiently big-picture perspective.
"The threshold issue is, of course," says Peter Brudenalll, partner at Hunton & Wiilliams, "whether to ‘go it alone’ and establish a captive or to use a third-party outsourcing vendor. Clearly, if a company is a large, well-known organization with intellectual property or data too core to the business to be outsourced then there is a very good chance it will be able to succeed in running a captive in an offshore location. However, captives can struggle to succeed where there is a lack of management expertise on the ground and a high attrition rate among employees. Attrition rates can be extremely high in places such as India where there is always a wealth of opportunities for talented individuals to change companies. If a company is not well-known, or is not able to provide its staff with a distinct career path, then attrition rates can start to become a big issue. It should also be recognized that salary costs have risen in India over the last few years so establishing and running a captive may not necessarily generate the cost savings anticipated in the original business plan."
Mistake #3. Having insufficient disaster-recovery plans and backup
It’s a dangerous world out there - and with climate change and associated socio-political instability looming, it’s probably only going to get more so - and moving work and resources to a new location means having to prepare for new dangers. Even over the past few weeks we’ve seen catastrophic natural calamities in the Asia-Pacific region (including devastating floods in the offshoring hot spot of the Philippines) damaging infrastructure and placing serious obstacles in the way of beleaguered workforces. Failing to plan correctly for negative phenomena is an unforgivable sin that tends to be uncovered only when it’s too late to be redeemed. Don’t be a sinner.
"Earthquakes happen. Flooding occurs. Underwater cables get knocked out. Water disputes on regional borders can cause strikes. Ageing thespians can die. Be prepared for the unexpected. Items like this can strike, and have in our experience struck, when you least expect them. Make sure that you can quickly leverage resource elsewhere to another center or back up SSC location or move to a backup plan at a fast turnaround time. Ensure your key local employees in the new offshore operations have laptops and can work remotely if required. You do not want to be the one having to explain to your CFO at a month- or quarter-end, that you cannot close the books or process key transactions, just because you have not thought of adequate business continuity." cautions Chris Gunning, Director Global Shared Services, Europe, Bangalore and Asia Pacific regions at Unisys.
Mistake #4. Skimping on the due diligence
There’s no excuse for this one. Whether investing bundles of precious cash in an offshore center or handing over key processes (and more precious cash) to an outsource provider, failing to carry out the requisite due diligence isn’t just asking for trouble, it’s walking up to the counter, slamming your fist down and demanding it. An organization needs to be as diligent as possible even at the expense of a delay in implementation. No matter how close the relationship between buyer and provider, or how confident an organization might be in the integrity and stability of a proposed new location, the due diligence must be seen as an indispensable part of any offshoring process.
"In offshore arrangements, particularly when outsourcing to a third party, the importance of due diligence on the vendor cannot be underestimated. We always advise clients that they must visit offshore sites so that they fully understand where the services will be provided from, and what security arrangements are in place. [When outsourcing] nterest from a senior level in the customer's organization is essential to this process, and will also assist in getting the contract negotiations concluded, rather than both the vendor and customer beating each other up to obtain small wins while the big picture gets lost," says Hunton & Williams’ Peter Brudenall.
Mistake #5. Lacking a corporate offshoring strategy
Offshoring is a major proposition with major consequences. A failure to look at this proposition holistically across the organization means some of these consequences could impact negatively on areas which might have been off the radar for those behind the drive to offshore who might have their own horizons limited by their own responsibilities. A corporate offshoring strategy will allow the company to make the very most of their offshoring while preparing everyone within the organization for the changes which are about to take place.
"Companies can no longer allow every process manager to determine their own strategy when outsourcing," warns WNS’ Steve Reynolds. "The complexity of multiple agreements, minimum volume commitments, disparate terms, multiple locations, lack of BCP, etc. quickly erodes the expected savings. A company quickly becomes frozen trying to manage and meet commitments across too many suppliers. A much better approach is for senior management to think through a high level strategy of what is to be outsourced, what can go offshore, an ideal set of vendors to utilize, optimal locations, and expected results. Once this strategy is in place, procurement can then determine the appropriate set of suppliers."
Mistake #6. Letting advisors and attorneys lead the negotiations
It’s a common problem when outsourcing, particularly when work is to be sent to locations into which the organization doesn’t already have commercial penetration: allowing the legal eagles to drive the conversation during negotiations. Now, it’s obvious that legal representation at negotiations is indispensable (and having a good stable of experienced advisors on your side is increasingly de rigeur): but it’s imperative that negotiations proceed according to the interests of the organization - and that means the organization leading negotiations and being supported by its advisory team, not the other way round.
"During the negotiation of the agreement between a vendor and a client, all too often, the customer takes a back seat during the discussions allowing the advisor and/or attorney to take the lead. Many times, the customer isn’t even present. The result of this style of negotiation is a substantial increase in the amount of time to negotiate an agreement due to battles being fought over every term and condition whether big or small. One would assume that a client would get a better agreement but in reality it’s the opposite. The spirit of partnership is typically lost as both sides dig in their heels. Attorneys and advisors should give advice and/or an opinion then get out of the way and let the customer and vendor figure it out," advises WNS’ Reynolds.
Mistake #7. Not creating sufficient visibility around offshore operations
Sending work offshore isn’t getting rid of responsibility - especially if you’re operating a captive center. The adage "out of sight, out of mind" when applied to offshore work is a recipe for the kind of disaster that leaves hardened professionals weeping into their whiskies. Offshore operations need to be highly visible - to encourage engagement among many other reasons - and must not at all costs be seen as anything other than an indispensable aspect of global operations. Keeping your offshore work and employees in the dark could mean you’ll be blind to potentially destabilizing events down the line.
"Just because you have moved work offshore, does not mean that you can hope to disconnect yourself from the new offshore operations. If anything, the opposite must apply. Be visible. Our captive offshore Global SSC in Bangalore is an integral and key part of our overall Finance operations. They have the same access to employee development and training as every other Finance employee in our company. Being seen is important. Visit them as often as you can. Hold regular All Hands Meetings. Leverage other forms of communications on a daily and weekly basis. Invite and encourage your CEO, CFO and regional Finance Vice Presidents down to meet the new offshore teams. Get your customers out to meet them. Stay connected with them. Invite the key members to your own strategy meetings. Engage. Communicate. Remember, they are ‘the finance of your future’ so nurture and develop your key leaders and team members, as you would with staff in Corporate or Regional HQs, or in your retained captive organizations onshore," says Unisys’ Chris Gunning.
Mistake #8. Insufficient ongoing management
Just as you can’t hide your offshore operations out of sight, you can’t take your hands all the way off the controls - even if you’ve outsourced the work that’s gone offshore. Ongoing management is essential - after all it’s still your organization that is affected by the work being done, even if it’s someone else doing it. The management of the work itself might be out of your hands to a certain extent - but the management of the contract and its terms, and the management of the relationship itself, shouldn’t be considered any less crucial simply because work’s now being done a few thousand miles away.
"This is a typical mistake in many outsourcing arrangements, but it becomes particularly bad when made in an offshoring context. Customers need to understand that any outsourcing arrangement will require them to provide on-going direction and management - not only to ensure that they are actively engaged in the outsourced services but so that they understand how the services are being performed in case they need to very quickly transition those services to another vendor. In the event of a vendor suffering an event such as that experienced by Satyam earlier this year, or running into financial difficulties, many customers will quickly evaluate the potential reputational and service delivery issues and decide that they would feel more comfortable with another vendor. Assuming that the legal basis for terminating the agreement is there, only those customers who have a very good understanding of the way in which the services have been delivered will find it possible (let alone easy) to quickly transfer the services to another vendor. When services are being provided from an offshore location, it can often be even more difficult to quickly transition services to a replacement vendor unless the customer has been actively engaged with the vendor," says Hunton & Williams’ Peter Brudenall.
Mistake #9. Not having clearly defined roles and responsibilities
Offshoring is complicated enough without the added confusion of people not knowing specifically what they’re going to be doing, where and when. Obviously during the transition period it’s critical that everyone adheres to a well-defined timetable; even beyond that, though, the usual need for shared services staff to enjoy clear role-definitions becomes extra-crucial once distance is placed between the SSO and other areas of the organization - even something as simple as changing time zones can lead to problems at both ends unless people are certain of their own responsibilities.
"This goes much beyond the need of simple Service Level Agreements (SLAs) or Statements of Work (SOWs)," says Unisys’ Chris Gunning. "Ensure that each of your key team members, including managers and those responsible for delivery of services as well as your process owners, have cleared defined roles and responsibilities. And for that matter, encourage your customer to do the same for his or her organization. No matter how much governance you have in place, or how wonderful and detailed your SLA and KPI metric structure looks like, if you take your eye off the ball on simple things such as clear role descriptions, and who is actually responsible for the delivery and meeting of those metrics and services, then you will forever be embedded a series of finger-pointing and looking the other way, when trying to make people internally accountable and responsible for their actions, as well as trying to explain to dysfunctional customers, that their C-Sat issue really starts and end with them, and not shared services."
Mistake #10. Not achieving a level of partnership with a vendor
A successful outsourcing relationship requires both parties to work together. This is just as true - in fact more so - when work is transferred to another country. The buyer organization must trust the vendor to work successfully within a social and legislative environment with which the buyer may have no experience; the vendor needs the buyer to give sufficient support to enable it to take on processes and activities smoothly and successfully. Failing to develop the requisite level of partnership can destroy any outsourcing relationship, let alone one that involves crossing oceans, timezones and international boundaries.
"Outsourcing has matured to achieve a new level of relationship between a customer and vendor. With many customers, the relationship has gone way beyond a typical customer/vendor arrangement. For those clients that are able to achieve this level, their satisfaction with outsourcing and offshoring is significantly higher than most. Both parties are in the game together. Strategies are shared and the offshore provider is an extension of the clients operation. Too often, this level of relationship is not achieved resulting in a commoditization of work and inability to achieve the expected transform of the operation," says Steve Reynolds of WNS.