OutsourcingMonitor.EU comment: We have chosen this article as an interesting case study that we Europeans can learn from, although it deals with US companies. It holds many nuggets of entrepreneurial ideas that may serve you well.
Article by: Michael F. Corbett & Associates, Ltd.
Taking operations offshore,
in general, and offshore outsourcing, in particular, are receiving
unprecedented attention – in the executive suites of both
customer and provider companies, in the reports and recommendations
of consultants, in the countries, like India, that are recipients
of much of the new business, and in the Western media.
To some, it’s one
of the most important opportunities for improving businesses performance
available today; to others it’s yet the latest example of
companies seeking short-term gains at the expense of employees
and customers.
Fortunately, there’s
enough information and experience now available to put the topic
in perspective. A careful review of what’s really happening
and why leads to the following conclusions:
1) Offshore outsourcing
represents an irrefutable opportunity for businesses to reduce
costs and improve other aspects of their operations.
2) The benefits are not,
however, automatic and management needs to exercise real care in
planning and implementation.
3) The impact on U.S.
employees may not be all bad – as many in the media would
have us believe.
What’s Really
Happening
Although there are certainly
examples of companies moving the majority of their back-office
operations offshore, they are few and far between. The offshore
program at consumer products giant Procter & Gamble is more
representative of what is actually happening.
In 2001 Procter & Gamble
began a pilot global sourcing program for its information technology
work, particularly software development. The goal was to create
$100 million worth of capability around the world that could be
leveraged on-demand by its individual business units. Through the
pilot, about 600-people worth of work was relocated to lower-cost
P&G locations in places like Manila in the Philippines and
Warsaw, Poland. Additionally, another few hundred contractor positions
were consolidated and taken offshore through outsourcing.
What P&G found was
that offshore labor rates were, on average, about 1/5th those in
the U.S. and other more advanced economies. For example, a contract
Java programmer that might cost $98 an hour in Cincinnati costs
$20 to $22 dollars an hour in India and Manila.
But P&G found that
it wasn’t just lower local labor rates that created the cost
difference; it was also the competition between outside organizations
bidding for P&G’s work.
The company found that
productivity differences were an important contributor, as well.
These highly educated and well trained individuals were extremely
motivated to work hard to improve their standard of living – individually,
for their families and for their countries. They are often on the
job at 7:00 am handling emails before beginning their regular work
at 8:00. Similarly, internal meetings and training are typically
deferred until the evening hours in order to maximize productive
time during the day.
In other words, it was
the rates, competition and the work ethic that combined to create
the offshore cost advantage.
Other advantages, not
necessarily dependent upon the offshore aspect of the pilot, were
also found. P&G was able to build a more dynamic operating
structure. Resources could be added and removed quickly. Flexibility,
as measured by the percent of the company’s IT workforce
that could be ramped up and down on short notice, increased. Economies
of scale were created because the program centralized purchasing
for skills that could be used be multiple business units. With
the ability to objectively measure a provider’s processes
against standard industry benchmarks, quality increased.
Overall, during the first
twelve months of the pilot, P&G saved an estimated $28 million
dollars – a relatively small number given the total information
technology spending of a Fortune 500 company, but still an important
benefit in any economy. Expansion of the program is underway.
It’s a Corporate
Campus; Not the Center of the Universe
Procter & Gamble’s
experience is not unique. Companies ranging in size from the giants
of corporate America, such as, American Express and General Electric,
to a small plastics products company like Waxman Consumer Group
of Bedford Heights, Ohio, are finding that outsourcing and taking
operations offshore can reduce costs, improve quality, and increase
speed and flexibility.
The simple truth is that
the sophistication and resources of any one company pale when compared
to the world outside its corporate campus. Take Microsoft. The
company employs about 50,000 of many of the best and brightest
programmers from around the world. But, that’s still only
a tiny, tiny fraction of the estimated 12 million programmers worldwide.
Microsoft’s recent investments in offshore capabilities in
Hydrabad, India and in Beijing, China (where one-third of Microsoft’s
180 new programmers have PhDs from U.S. universities) reflect its
emerging acceptance that Redmond, Washington is not the center
of the programming universe.
Bill Gates has said that
outsourcing mission-critical work offshore is now “a common-sense
proposition.” Does that mean that the Redmond campus will
shrink dramatically over the coming years? Not likely. What it
does mean is that Microsoft will learn from its experiences and
expand its offshore program in a consistent, thoughtful way – as
long as it continues to add value to the company’s business.
General Electric, with
its 315,000 employees worldwide, has been doing this for sometime
now. The company began setting up operations in India in the late
1990s and today there are 15,000 GE employees there processing
financial transactions such as receivables, payables and credit
verifications, and handling customer calls. GE also has about 6,000
non-employees working at India technology companies, like TCS and
Satyam.
Companies are right to
be looking off-campus for solutions. And off-campus has to mean
down the street and half-way around the world.
It’s a Tool – Not
a Panacea
The fact that offshore
operations and outsourcing, used separately or in combination,
can add to the success of an organization is well established.
But, just because the potential is there doesn’t mean that
every organization will realize it.
These are not panaceas.
They carry their own set of challenges and risks. Problems can
and do occur, and companies can get less or more out of the program
than they expect.
When American Express
first began outsourcing its call centers, it found that the performance
of the outsourced operations for high-end customer interactions
was quite poor, abandoned the project and pulled the work back
in-house. On the other hand, it found that the performance of outsourced
call centers for simpler customer interactions was actually better
than at its internal centers – and that these outside operators
did a better job of up-selling callers on additional products and
services. As a result, that part of the project quickly took root
and grew rapidly.
The right questions then
are: How might offshore outsourcing specifically create value for
my company at this time? How can we test the approach and build
experience? And, are we prepared to abandon failures while increasing
our investment in successes?
In the end, organizations
should probably not outsource unless they are prepared to make
an ongoing investment of time and talent to learn how to create
and leverage long-term relationships with outside companies – relationships
that will become an integral part of their strategic, tactical,
financial and social fabric.
Similarly, organizations
should probably not go offshore unless they are prepared to make
the investment needed to learn how to successfully integrate elements
of businesses running at significant distances, under differing
cultural and legal frameworks.
It goes without saying
that they should not outsource offshore unless they are prepared
to do both.
The more successful companies
seem to be taking a longer-term view of the value of offshore outsourcing
and are building toward advantages beyond cost savings, such as,
the ability to operate the company in real-time 24-hours a day
with operations that follow the sun and reducing business risks
by diversifying and distributing the company’s operations.
The Media Story
is All About Jobs
The media is filled with
stories about American jobs being exported offshore. One estimate
that has received a lot of attention forecasts that between now
and 2015, 3.3 million U.S. information technology jobs and $186
billion in wages will move offshore. What the stories and estimates
like this don’t tell us is that the information technology
industry as a whole continues to grow and is actually creating
new jobs faster than what’s being lost.
In the fourth quarter
of 2002 the U.S. IT industry created 148,000 net new jobs, even
with a slower economy and with the offshore movement in full swing.
Furthermore, offshore companies are themselves creating onshore
jobs right here, particularly in the marketing, sales and client
relationship parts of their businesses. In fact, the services sector
of the U.S. economy loses about 10 million jobs every year while
creating 12 million brand new ones. So, while churn can be expected,
net job loss is far less likely.
Still, many individuals
will be faced with the hard reality that they are not as competitive
in an increasingly globally-sourced job market as they have been
in the past. Just as companies have no guarantee that their products
and services will always enjoy the same customer demand and price
they do today, neither do any of us as employeeApril 22, 2006s-serif">Some may find themselves
doing the same work for less money. Others will find ways to continue
to command their current and even higher salaries by learning the
latest technologies and doing so ahead of the pack. Others will
move away from the technical parts of their jobs entirely toward
solution design work that requires more customer face-time. Still
others will find themselves moving into careers that leverage their
skills in entirely new ways.
If history is any teacher,
there will be a period of disruption, one that may be painful for
some, but in the end, the U.S. economy is likely to create even
more exciting, higher-paying jobs in fields we can’t even
see clearly today.
What may be needed the
most is for companies to be even more open and honest with their
employees on what they are seeing and planning. They probably could
be more pro-active in helping individuals assess their marketability
in a global economy and in helping them to develop the skills needed
in the future – skills that will produce even more value
for the company, as well.
In the end, the appeal
of offshore outsourcing will continue as long as it creates value
for the businesses employing it. Eventually, the companies in India
and elsewhere that are the recipients of today’s work will
find their cost advantages eroding. The natural dynamics of supply
and demand, emergence of the next low-cost labor pool, government
actions, and the constant drumbeat of new and better technologies
will at first reduce and eventually eliminate the current differentials.
If, however, these companies
are able to use today’s cost advantage to build long-term
value for their customers then the offshore trend will continue.
If they can’t, then offshoring will eventually level off
and we’ll all move onto the next opportunity.
Published: July 7, 2003
Article courtesy of Firmbuilder.com
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