Projected cost savings are almost always the key drawcard when companies consider sending some of their IT and business operations offshore. But performance gains can be a benefit of sending work overseas as well — as long as they are planned for from the start and built into contracts.
This was the conclusion drawn by AT Kearney following a survey of executives and IT leaders at 42 Fortune 200 companies with offshoring experience. In a recently released report, the management consulting firm says the companies that showed the most improvement in both operational performance and cost savings focused on performance issues early in the offshoring process.
“The people who really concentrated on performance saved more money than companies that offshored and didn’t stress and analyse performance,” says Adam Dixon, a Kearney consultant and co-author of the study.
And, he says, the greatest gains were realised by companies that improved on three or more of the six operational process metrics considered in the survey. This runs counter to a belief held by many IT leaders who worry that sending some operations offshore will reduce the performance of their departments, Dixon says.
Vijay Sonty, CIO for the public school system in Florida’s Broward County, agrees that although cost savings are certainly one goal of offshore outsourcing, operational improvements are also possible, depending on the work that is being sent overseas.
“You can build in performance gains,” Sonty says. “You have to do it up-front and bring in offshoring experts who understand your business.”
Broward County Public Schools, which serves 270,000 students and has an annual budget of about US$4.5 billion (NZ$6.1 billion), is one year into a planned three-year implementation of a new SAP ERP system. The work is being done under a US$30.5 million outsourcing contract with IBM and about 10% of tasks sent to India, Sonty says.
He adds that offshoring those functions — preparing data-logistics reports, as well as reports for the school district’s payroll, human resources and purchasing departments — did not affect the quality of the work or cause the district to lose control of the tasks.
Kearney’s online survey, which was conducted during the fourth quarter of last year, asked respondents 50 questions about their offshoring experience. The questions covered topics such as operational performance capacity and flexibility, revenue performance and process maturity.
Of the 42 respondents, 35 said they had completed their offshore implementations and had cut costs by an average of 49% while gaining some improvements in all six of the performance metrics. Still, 60% of those companies reported that their performance gains weren’t as high as expected, and 34% say they didn’t meet their cost-savings goals, according to the study.
Kearney says offshoring some medium-complexity work, such as IT and advanced business processes, improved operational performance more than sending low-complexity functions like call centre operations overseas did. Offshoring the latter functions also saved less money — an average of 28%, compared with 38% for the more complex work, the firm says.
“Some companies can take advantage and grab an operation and move it offshore,” says Adam Braunstein, an analyst at analyst firm Robert Frances Group.
“It’s definitely doable, but the number of companies that can do it correctly is still [small]. It’s difficult to get there.”
Particularly in areas such as software development and maintenance, companies that succeed “are not giving up the entire kit and caboodle”, Braunstein says. “What you’ll find is that in order for things to move [offshore] effectively, nobody hands it all over. If you do that, you’re in for a world of pain.”