Cost is not the only consideration in outsourcing
December 14, 2008
Offshore development has always been regarded as an effective strategy for organizations wanting to cut costs and/or remain focused on their core business values. The common management principle is that the stronger your core, the more opportunities you will have to move into other profitable ventures. The rationale behind outsourcing is thus to transfer all non-core activities to other vendors, who can perform those activities as well, if not better than the parent company.
With the recent dramatic improvement in telecommunications services this has indeed become a feasible, viable alternative and often extremely profitable even for small, emerging, mid-cap companies.
Though the first and the most obvious reason for offshore development is cost reduction, our experience is that companies that lack a clear plan for growth start blasting away at costs without any strategic intent. That can destroy a business, causing irreparable damage to a company’s product portfolio and services infrastructure, ultimately defeating the very purpose of outsourcing.
The negative pitfalls of such a trend were summed up long ago by Vernon Altman, director, Bain & Company in ‘Turn Cost Cutting into a Core Competency’ (Harvard Management Update, December 2002), “Its like driving your convertible into a car wash with the top down: You may clean up the problems but you’ll create even more.”
Beyond a point, argued Altman corporates cannot cost-cut, which is when they must value-add to keep a client. In fact, in my opinion, its better NOT to outsource any component of your client servicing function. Since quality control is not as simple or easy with an outsourced project as with one that is being executed at home, it can eventually tell on your customer relationship management. Some portions of the operations of a business can certainly be outsourced, but in a services-oriented business, it cannot be anything directly or even indirectly related to customer relations. This is one reason why quality-wise customer contact centers (“call center”) don’t end up delivering as much value as say, an offshore software development hot shop. (I realize that John Miano would vehemently disagree with me on this one)
Therefore, in recent years, the landscape of why, how and when companies can cost-cut through offshoring has changed dramatically. Today, it’s done as much for strategic as for tactical reasons.
That said, the main reasons to offshore remain the same: cost reduction, speed to market, reduction in capital expenses, reduction in operating expense or when a corporation lacks in some in-house capability, technical skills or resource management acumen.
However before you outsource, it would be better to calibrate the feasibility and the cost-saving potential of the process, which calls for a rigorous four-step procedure outlined below:
- Break down each component of this value chain into its constituent activities
- Identify the activities that can be performed remotely, for example in claim processing, most activities in origination and closing can be offshored, while others may require a physical interface with the claimant.
- Estimate the cost (labor and infrastructural)
Once you have this ground study, you can be more accurate and effective in choosing to outsource.
Comments
One Response to “Cost is not the only consideration in outsourcing”
Got something to say?
-
Advertisements
Text Links
Outsourcing can be motivated by many different company activities. Some of the areas to examine as possible drivers for your business are lowering the cost of operations. Before you outsource, is there something you can do internally – be it process, resource allocation or technology that could meet your drivers investigated above. Outsourcing is not without its challenges and as such if the outcomes can be achieved in-house, this may offer a more practical alternative.