Offshore use on the rise but savings lag

Companies in growing numbers are turning to offshore service providers as a way to cut costs, but a survey of more than 5,000 executives worldwide shows that savings aren’t as high as typically expected.

“Most people across the board think they’re going to cut a third or half of their costs,” says Phillip Hatch, president of offshoring consulting and market research firm Ventoro. “That simply isn’t realistic.”

Hatch wrote Ventoro’s Offshore 2005 Research report, released earlier this month, which found that cost savings for companies that send work overseas averages a little over 9 percent.

“If you exclude those that had catastrophic failures and just look at projects that were deemed to be a success, you still see only about 19 percent average cost savings,” Hatch says.

At the same time, more than 50 percent of the offshore engagements Hatch reviewed had no savings or costs increased. A key reason for offshore failures, according to the report, lies with the client.

“The ultimate success or failure of any offshore strategy hinges on the performance of the implementing executive,” Hatch says.

To be successful with an offshore strategy, a client first must identify a specific business problem, consider all possible solutions, and decide whether sending work offshore is the appropriate answer.

Making such a decision isn’t always as easy as it may seem, Hatch says. For example, Hatch’s survey showed that offshore savings don’t come strictly from lower labor rates found in offshore locales.

“If that is your single purpose: to achieve your cost savings through low-cost hourly resources, you’re likely to lose your shirt,” he says.

Corporate customers need to look for offshore providers that have high-caliber systems in place that will push clients to optimize their own internal processes, he says. In fact, 46 percent of offshore savings result from improved internal processes, and 45 percent come from vendor execution, according to the companies Hatch surveyed.

Farrell Delman, president of the Tobacco Merchants Association, in Princeton, N.J., says it is up to the client to find an offshore provider that understands the client’s business.

“You can find groups offshore that have business people that spend an awful lot of time understanding your business and then jump into your code,” says Delman, who has been using offshore provider Cordiant since 2002.

“A lot of these offshore companies are driven by price,“ he says. “You stand to lose a lot when you’re just driven by price.”

If companies manage their offshore projects well, they could see savings of as much as 30 percent, Hatch says. Those kinds of savings remain elusive for most companies. Of the companies Hatch surveyed, 45 percent deemed their offshore strategy a success; 36 percent called it a failure.

Further, one in three executives said they had to move work from their offshore team back onshore “due to performance problems with their offshore strategy.” At the same time, 73 percent said they would continue with a long-term offshore strategy.

An outsourcing index published by advisory firm TPI showed that the number of companies that would include an offshore strategy is growing.

“In 2004, 40 percent of the companies we worked with had an offshore component,” says Jack Benton, vice president of marketing at TPI. “This year so far it’s 45 percent.”

The total contract value for offshoring deals has shrunk from 38 percent last year to 28 percent this year, showing that less money is going overseas. “But it also shows that there a lot of new entrants into the offshore marketplace that are dipping their toes in,” Benton says.

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