p2180 Offshore Practice

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Copyright 2004 META Group, Inc. All rights reserved.

Practice 2180 10 March 2004

Offshore Outsourcing: It Just Is; Learning to Live With ItOutsourcing & Service Provider Strategies, Professional Services StrategiesStan Lepeak

FOCAL POINTDebate about the merits and/or ills incurred from offshore business process and IT outsourcing continues togrow. However, offshore outsourcing is a manifestation of an ongoing and long-term economic evolution. Itwill not go away and cannot effectively be outlawed. User organizations and their staffs need to learn to livewith and exploit it (albeit perhaps more passionately). Advocates must better quantify and tout its legitimatemerits. Politicians must try to create a more intelligent dialog around offshore outsourcing and identifymeaningful and realistic policies to address its side effects.

CONTEXTArguments for, and mostly against, business process and IT offshore outsourcing continue to grow and become

more passionate (or rabid, depending on ones perspective). In the US, more than two dozens bills have beensubmitted in federal and state legislatures to restrict or ban various types of offshore outsourcing. Minimally,anti-offshore forces want organizations that engage in offshore outsourcing to do so much more publicly (e.g., havecall-center agents inform callers where they are located at the start of each call) with the goal of shamingorganizations into reversing/limiting offshore activities.

Legislation and political pressure will likely somewhat curtail offshore outsourcing in the public sector, as will otherlegitimate concerns about data integrity, intellectual-property theft, and national security. Legislation aimed at theprivate sector, much of which rests on dubious grounds, will face greater challenges and have only nominal impact.Overall, META Group research has found, to date, that anti-offshore and related protectionist activities have notsignificantly affected offshore outsourcing, and we do not expect them to do so in the near term. Although theanti-offshore debate highlights legitimate issues that need greater attention (e.g., job training/retraining, educationquality, global trading playing-field levelness), the tone, form, and forum for the debate on both sides are long onrhetoric and short on good ideas about how to realistically and better address this critical business issue.

The following are the two main points that most anti-offshore arguments miss:

Offshore outsourcing represents a continuation of ongoing economic evolution

Multiple perspectives (not just laid-off workers) must be considered when assessing offshoreoutsourcings overall impact and value proposition

Arguments also must better address other tactical/short-term (e.g., job loss benefits) and strategic/long-term (e.g., nationalcompetitiveness) elements. Offshore outsourcing advocates andbenefactors, on the other hand, must do a better job articulatingand rationalizing its benefits and value propositions or else risk

losing business, mind share, and political battles, at least in theshort term.

Outsourcing in general and offshore outsourcing in particular aremanifestations of a long-running shift in how organizations gainand maintain competitive advantage. They represent a transitionfrom vertical to horizontal integration and specialization.Historically, organizations were self-contained (e.g., Ford madesteel, The New York Times owned forests for pulp). Noworganizations focus on a narrower range of specialized areas (e.g.,core competencies) and rely on third parties/outsourcers to

META Trend:Throughout 2004-06, theboundary will continue to blur between

domestic and offshore business

and IT service providers. Through

acquisition and organic growth, the linebetween the two camps will largely

disappear by 2006/07. The main

challenge to all providers, however, will

remain evolving into true global (vs.

multinational) service providers with

global delivery, operating, and resource

management models. Geopolitical and

protectionist backlash issues will grow

and nip at offshore services, but overall

do little to slow services globalization.


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Figure 1 Offshore Constituencies

Source: META Group

Participating organization Workers Management Shareholders Customers

Macroeconomic Domestic service providers Offshore service providers Politicians/government

Local/domestic economy Offshore/global economy

perform other activities (e.g., logistics/transportation, contract manufacturing, advertising, public relations, legal,payroll). This broader trend is not changing anytime soon, though questions exist about how narrow a focus canultimately become.

The difference with offshore outsourcing, enabled by telecommunication and networking advances during thepast 10 years (e.g., Internet, broadband), is that the third parties are potentially a long way offshore and thework they are doing is increasingly of a white-collar nature. The color of ones collar does not matter to theworker laid off; it matters (more) from the standpoint of where the high-value, or at least higher-paid, jobs

reside. The giant sucking sound currently threatening the US white-collar economy is reminiscent of thatthreatening the manufacturing base as a result of NAFTA since the 1990s and Japanese economic prowessin the 1980s. The latter now seems a bit muted, especially given the success Japanese auto manufacturershave experienced using US workers in the US. The percentage of the US workforce employed inmanufacturing has been declining for 60 years. Yet during that time, the overall services economy has grownand thrived. Similarly, the white collar/service economy must evolve to continue to thrive, andorganizations/government must also do a better job managing the transition.

Defining Offshore Constituencies and Broad-Based BenefitsTwo broad constituencies have considerations to account for when considering and debating offshore outsourcing(see Figure 1). One is the collective parts of the organization considering or involved in offshore outsourcing. Thesecond is comprised of those tasked with providing offshore services or addressing its larger impact. Each grouphas multiple individual constituencies, each with its own sets of issues, value propositions, concerns, and needs.

When attempting to determine how much (if any) offshore outsourcing is enough or too much, concerned partiesmust factor in all relevant variables. Figure 2 identifies potential offshore benefits beyond cost cutting that are oftenoverlooked or ignored. This is a far from a comprehensive list, but if just these variables are considered as a whole,the benefit/cost scenario around offshore is generally more positive. This does not mean there are no clear losers(e.g., laid-off workers, potentially local economies) from offshore outsourcing, especially in the short term, andmore must be done to address their needs. Rather, it means the case for offshore outsourcing is stronger if viewed

in the big picture.

Organizations must also clearly account for all relevant offshore risks. Such risks include unrealistic cost-savingsexpectations, data/security concerns and challenges, loss of business knowledge, and inadequate knowledgetransfer (see Delta 2618).


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Figure 2 Potential Offshore Benefits

Source: META Group

Participating organization Cost reduction Promote growth Increase competitiveness Improve service levels Alleviate worker shortages Acquire access to new/different skills Acquire cost-viable access to skills and services Enable refocusing of scare resources elsewhere Discharge or exit commoditized/low added-value activities Support new market penetration Leverage external economies of scale Gain greater operational efficiencies Obtain greater productivity Gain greater flexibility Spread or reduce risk Enable cross-border alliances/partnerships

Macroeconomic

Spur growth of new skills/services/product and service offerings Spur offshore market/economy growth Open new markets Reduce geopolitical risks Grow the pie Accept economic evolution

The Offshore Outsourcing Decision-Making Process

Individual organizations and macroeconomic players must develop a more thoughtful and rational approach toweighing offshore outsourcings benefits, costs, risks, and externalities. Minimally, organizations must have in placeand follow a service sourcing process (see PSS Delta 003 and Delta 2610) as well as ensure that the processreflects offshore outsourcings additional risks and requirements. This process should address when and from whatsource external services are acquired and who the required participants in the decision-making process are.

The following is a high-level process for addressing offshore outsourcing. Although an organization might find itimpractical to apply this process against every offshore opportunity, something akin to it should be employed to setthe broader parameters for under what circumstances an organization may choose to go offshore and who isinvolved in making that decision. It is also critical to ensure that management is in sync with an organizationsoffshore positioning and usage model and decisions are not being made in isolation. A precursor to this is toassess an organizations past experiences and existing capabilities to engage in outsourcing in general. Thisincludes reviewing outsourcings pros/cons, risk/rewards, and desirability. If an organization cannot pass anonshore outsourcing test, offshore outsourcing is likely not a viable option.

Include all key decision makers (e.g., management, worker representatives, board of directors) indecision-making processes: Direct shareholder involvement would prove cumbersome, and thatconstituency has other means to voice its opinion. Organizations could include other constituencies, suchas community leaders and politicians, in initial decision-making processes, but it is unlikely they wouldview the equation holistically, and private companies are not directly beholden to those entities when itcomes to the normal course of running the business. However, communities should be involved aroundefforts such as job training/retraining and improving educational systems.

Identify all relevant affected constituencies (as defined in Figure 1).


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Weigh constituents' relevance: Although this is hard to do, it must happen. Although it can be painful tolay off workers and ship jobs offshore, it can be even more painful to pursue the alternative: long-termcompetitive decline (e.g., how many mill town economies in the Northeast US could trade policy changeshave saved, and are not the workers now in high-tech industries on Route 128 in a better economicposition, albeit one now facing its own foreign competition?).

Define representative benefits (akin to those defined in Figure 2): It is critical to assign a meaningfuland defensible value to these benefits as well. Given the challenges and sensitivity in performing this

assessment and benchmarking, organizations should consider possibly employing third-partybenchmarking services and using industry-standard metrics and key performance indicators (to the extentthey exist).

Define representative costs and risk factors: As mentioned previously, organizations must take intoaccount all relevant risks and define potential costs savings at a realistic level. Most organizations do notaccurately estimate true costs and as a result overstate, often dramatically, the true cost savings withgoing offshore (see Delta 2026). Organizations must also define and weigh in a broader basket of risks,including those related to intellectual-property loss, security risk, and regulatory compliance requirements(see Delta 2545).

Define decision-making criteria: In addition to defining as comprehensive set of metrics for benefits andcosts as possible, clear guidelines on decision-making criteria must exist (e.g., who votes, what are the

weightings, dispute mediation, go/no-go criteria).

Incorporate and weigh negative externalities: Organizations must identify and attempt to quantifynegative externalities from their offshore decisions, including more subjective elements like employeemorale/productivity for those left behind and potential operational efficiency degradations arising fromhaving portions of business/IT processes managed offshore.

Define appropriate supporting measures to address externalities: These include realisticallyaddressing issues like job training, outplacement, severance, managing disaffected remaining workers,dealing with community and political issues, and determining to what degree to publicly clarify futureintentions. Here it is critical to involve relevant constituencies beyond the organization itself.

Gain consensus on decision: This is where the proverbial rubber hits the road. At some point, thedebate must stop and the decision to go forward or not reached. Waffling and half-hearted efforts benefitno one.

Execute: Both on the offshore strategy and the means to address all negative externalities.

None of this is should imply that offshore outsourcing is easy, wonderful, or enables as much cost savings as many(particularly offshore service providers) advocate. Cost savings are generally overstated, complexities (e.g.,managing distributed projects, addressing compliance, capabilities mismatch, sourcing providers) andsecurity/intellectual-property concerns understated, and as with any form of outsourcing, there are as many if notmore disappointments at least partial than successes. Addressing these points, however, is a function oflearning to do outsourcing, and offshore outsourcing in particular, better and right, rather than not doing it at all.

Speak Up, Service ProvidersService providers offering offshore services must become more effective at getting their side of the story out while

at the same time not glossing over or unduly minimizing negative externalities from offshore outsourcing. Thisinvolves many potential things. Active involvement in trade associations (e.g., NASCOM, Computer SystemsPolicy Project) and urging those associations to take a more proactive position on offshore benefits as well asfostering a better offshore dialog is one dimension. Becoming more active lobbyists is also a logical course ofaction and one where the high-tech industry has long been a laggard.

Service providers must recognize, however, the inherent negative position they hold relative to the pro-local-jobscamp and therefore focus much of their efforts on individual organizations. Minimally, they should stronglyencourage organizations considering/expanding offshore efforts to employ a more comprehensive decision-makingframework as previously defined. This could even extend to assisting organizations in crafting their own position,messaging, and rationalization of offshore outsourcing, though user organizations should remain cautious of the


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perception that its offshore strategy was developing or unduly influenced by an offshore outsourcers. It is also notin the offshore providers best long-term interests to overstate cost savings, understate risks, or ignore political andrelative externalities from offshore.

Doing Offshore Outsourcing RightIn addition to defining a comprehensive decision-making process, organizations must also obviously focus on howto successfully engage in and manage outsourcing efforts. Although there are many factors and facets to doing so,the following are some key points to emphasize:

Organizations must understand what should and should not go offshore. This involves consideringintellectual-property risks, data access/privacy laws, compliance regulations, other legal issues.

Organizations must enable adequate processes for key offshore outsourcing segments, including thefollowing:

Supplier vetting and selection (see Delta 2610) Ongoing supplier relationship management Multiprocess management (e.g., program, project, financial, service levels) Overall supplier and relationship governance (see PSS Practice 010)

Organizations must also determine how to adequately manage distributed/outsourced global business

processes and underlying IT systems. This is much different from managing an insular/in-house organizationand will require significant work to define new best practices and operating and governance models. In addition,these models must identify and factor in appropriate geopolitical risk and compliance elements.

Value-Added Roles for PoliticosPoliticians and other macroeconomic players must also take a more constructive stance on offshoreoutsourcing. Although many bills pending in US legislatures to limit offshore outsourcing are facing resistance,the overall dialog on the topic is still poor and largely rhetorical. The following additional areas also merit theattention and action of these constituencies, including the following.

Provide state/national-level job training:Although it is great to say workers must evolve to higher-skilled jobs,they need support in doing so, and practical consideration must be made for those who cannot (though notnecessarily for those who will not). It would not be unrealistic to impose a modest tax on organizations to fundsuch efforts, if they were truly value-added and could produce measurable results.

Enhance unemployment benefits to address the transition period required for reskilling efforts.

Provide tax and job creation incentives to keep jobs local (already a common practice) and to attractjobs (a potentially expensive proposition, but one that many states in the US, for example, have seemedto use successfully to attract manufacturing jobs), as well as create new higher-skilled jobs (e.g., R&Dcredit): However, there is a significant cost to all these efforts which is potentially onerous in difficult economictimes. However, putting the issues on the table and working toward defining some level of meaningful metricsaround offshore benefits and job loss costs are a worthwhile and needed effort.

Improve the educational system: This is hardly an easy or quickly addressed issue nor one that touches justoffshore outsourcing, but the simple fact is that most workers and students in the US do not have the requisiteskills for the higher-level jobs that come after the current outsourced white-collar work.

Improve the trade climate: Service trade is one area that has traditionally benefited industrialized countries likethe US, yet is an area that has less structure and greater inconsistencies in terms of trade barriers. Countries onthe losing end of offshore white-collar outsourcing must press to open up trade for other service areas (e.g.,selling financial services back into India) to help benefit positive trade flows in other directions.

Provide perspective:Although not simple arguments, providing a historical perspective on job evolutions andhighlighting the fact that, for example, white-collar offshore outsourcing will affect only a relative small minority ofoverall jobs, are messages that politicians and others should get to a broader audience and work into theongoing debate. However, this will prove difficult in sound-bite politics and for constituencies which seek tobenefit from limiting offshore outsourcing at all costs.


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Offshore outsourcing has greater appeal and is easier to rationalize if viewed holistically and if itis the result of a pragmatic and comprehensive decision-making process. Organizations, however,can generally do a much better job engaging in offshore outsourcing, and providers can do abetter job helping to define legitimate benefits.

Business Impact: Offshore outsourcing of white-collar jobs is another manifestation of economicglobalization that is not going to go away. All parties to the trend need to define better terms and

means for rationally engaging on the topic.

Bottom Line

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p2180 Offshore Practice