Avoiding the shoals of offshoring

Why does offshoring frequently ‘fail to launch’? Senior executives are being told there is a lot of money to be saved with offshoring. And just like the captain of a ship, they expect to say “let it be so”, and have it just happen. Unfortunately, it’s not that easy.

They are right about the cost savings, but there are many more benefits to offshoring. It can improve productivity, reduce turnover rates, lower labour costs, enable access to a highly educated, motivated workforce, and so on. These benefits are real, so why is it so hard for many companies to make it work?

Let me share three important requirements for a successful offshore relationships: first, you must have a simple program; second, you need a great program manger; and third, your goals must be clear and specific.

Moving operations offshore requires careful planning and controls. But before you get started drawing up project charters, finding executive sponsors, determining objectives and setting plans, let’s make sure we understand some basic terminology. Offshoring and outsourcing are not interchangeable terms.

Outsourcing is when internal operations – an integrated business process that is part of your operations for either customer or employee services – are moved to a third party. Offshoring simply describes your chosen destination. Outsourcing is different from buying third-party services. Despite the importance of third-party services to your operations, they support and are not part of your core business. A real test of whether you are simply buying services or are engaged in an outsourcing relationship lies with your customers and employees. Is it invisible to them that the services they are receiving are not being provided by your company directly? If the answer is yes, then you have an outsourcing relationship.

There is a good reason to care about this – outsourcing is a deeply embedded relationship, with a higher level of operational risk. If your outsourcer fails to perform, they can shut your operation down. You won’t be able to recover services until they do. You are rarely in a position to move the services elsewhere without months of work.

This is a key reason why outsourced relationships are tightly controlled and managed for those companies in highly regulated industries. Outsourcing relationships are costly to get into, and even more costly to get out of.

Once you determine the nature of the business relationship you have or will enter into, then you must do the proper due diligence around moving operations to another country. In particular, you must understand the nature of the risks involved and the ongoing viability of such a move. You’ll want to learn enough about business practices in other parts of the world to ensure you understand, accept and mitigate some differences in operational risk that you will face.

Lots has been written on the sourcing process – supplier selection, contracting and risk management – so let’s focus instead on how to increase the probability that you will have a successful offshore program.

Managers and leaders can accidentally, or sometimes deliberately, sabotage your offshore program before it gets off the ground. This may be as a result of the blinders they have on and the fear of the unknown and the lack of understanding of the process. The best way to get past this problem is to simplify the program, make it accessible, and get your leaders familiar and comfortable with the offshore environment. Easy to say, hard to do. Breaking the program design into bite-sized pieces helps a lot. One way to do it is to think of it as Build, Educate, and Engage.

Assuming you have completed due diligence and supplier selection activities, construct the program basics, which consist of: a comprehensive Master Services Agreement; pricing tables; a relationship Service Level Agreement; actionable reporting; secure and reliable connectivity.

If your Master Services Agreement acts as an umbrella for each Statement of Work, business leaders won’t have to concern themselves with the ongoing terms of reference, such as insurances, liability, warranties, reporting, and exit provisions. This will allow them to concentrate on their real interest, running their business with the aid of their offshore provider.

To simplify pricing, organize processes, skills or technologies into simple groupings. This will make it much easier for your business leaders do a quick cost/benefit analysis, and to manage their total costs of doing business. This also eliminates the need to get involved in complicated pricing discussions after you launch your program. For example, for software development, organizing all of your application development needs into a few categories such as “Legacy”, “Web”, and “Emerging” applications, skills and technologies takes the mystery out of pricing. Negotiating one hourly rate for each of the three categories takes you one giant step closer to simplicity, a key ingredient in successful migration.

Another important aspect of the “Build” phase is to establish a secure infrastructure and ensure your provider meets your security and risk requirements. The FFIEC SR00-4 guidance offers sound recommendations on this subject. In the absence of a controlled connectivity, creative business leaders will set up their own “skunk works”, possibly risking exposure of confidential customer data.

Many companies underestimate the importance of investing the time and money to educate stakeholders. This is a critical step, and there are many ways to do it effectively. Creating an Executive Steering Committee and engaging them in key decisions will ensure that the program meets their needs. This is also a great opportunity to educate, inform and keep your sponsors current. After you’re up and running, presenting the facts, successes, progress and issues by supplier and business unit to the Steering Committee may put just the right amount of light on your program’s progress.

Offshore providers have very sophisticated operations, well educated leaders and certified processes. Taking your business leaders to see this for themselves makes a world of difference in gaining their proactive support. And regularly sending key project and operations managers to the providers’ shop for a week or two at a time will help establish rapport, improve communications and keep operations running smoothly. There’s nothing like the warmth of handshake, joint problem solving, and some laughs over a few meals together to lower cultural barriers.

Once your program is in flight, classroom training on the program and processes, orientation seminars, lunch and learn sessions, and quarterly user-group meetings will bring your program together and move it forward faster than if you keep everyone separated and in their silos.

Creating standard, accessible tools and templates to enable the commercial relationship for each engagement will minimize the effort and angst of contracting. You really want business leaders focused on operations, but still need to have clear contracts and performance expectations. The best way to do this is to create templates for Statements of Work, Service Level Agreements, Process Maps and Operational Procedures. And you also need to provide samples of what “good” looks like.

An in-house Web site that stores all relevant information – e.g. supplier profiles, qualified suppliers by technology or operational categories, pricing by skill type, cultural information, and templates – rounds out the tool set.

Designing a successful offshore program is one thing, but launching it is another. For this, you really need to find a great program manager. Recruiting experience is hard to do, and expensive. You may be further ahead if you can find that special person inside your own organization, but you’ll have to be willing to invest in their learning and development. One way to make the job more attractive is to offer the role as a temporary assignment. This approach will help you attract the best candidates by giving them the assurance that they can return to their division at the end of the assignment, if they choose.

The characteristics of a great program manager are discipline and strong technical competence in the subject of your outsourcing efforts, plus the right soft skills. Having the technical competence will ensure they are credible and allow them to understand the issues and barriers the business is facing. If you are starting with IT outsourcing, look for an upwardly mobile, intelligent and knowledgeable person from your IT department.

Key soft skills are intelligence, open-mindedness, natural curiosity, tenacity and good relationship-building skills. This person will be guiding your organization on a journey into the unknown. Active listening, broad-spectrum learning, the ability to adjust plans on the fly, and the knack for influencing positive change are all personal skills that must be part of their DNA. Don’t underestimate the ability of a great program manager to effectively lead change.

It is obvious that clear goals and metrics are important, but which goals should you have and how will you measure success?

If you are talking about software development, think about setting progressive goals for location mix of resources, with an end goal of an 80/20 mix of offshore/onshore resources, and 90% of all domestic third-party development (non OEM) offshore within a specific time frame. You can evolve to full scale outsourcing of systems in production over time. If you are outsourcing business processes, set an FTE goal.

Reviewing progress and results against plan in an Executive Steering Committee format, by business unit, will provide visibility and exert some peer pressure. A dashboard with results against plan, user satisfaction scores, financial benefits and FTE impact is a good tool to develop early on.

Offshoring is not going to happen on its own. An easy-to-use program that your business leaders quickly get comfortable with, orchestrated by a great program manager, will really make this work.

QuickLink: 072474

Linda Tuck Chapman is Senior Vice President and Chief Sourcing Officer for Fifth Third Bank, Cincinnati, Ohio. She can be reached at [email protected]

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