Benefits and Challenges of Offshoring

The primary business rationale for offshoring has been to reduce IT operating andinfrastructure costs. The cost savings from offshore outsourcing increase with the percentageof total development effort outsourced and the percentage of work performed offshore. Theyare maximized when the entire development is outsourced and all the work is performedoverseas.
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Benefits and Challenges of OffshoringBenefits and Challenges of OffshoringWhile there are benefits and risks in incorporating offshore suppliers in a sourcing strategy, inmost cases, companies find that the advantages outweigh the risks.BenefitsThe primary business rationale for offshoring has been to reduce IT operating andinfrastructure costs. The cost savings from offshore outsourcing increase with the percentageof total development effort outsourced and the percentage of work performed offshore. Theyare maximized when the entire development is outsourced and all the work is performedoverseas.Since the predominant component of IT costs is direct and indirect labor, sizable costreductions can be achieved by moving these functions to lower wage rate locations. Based onrecent average wage rates for IT professionals, net savings from offshore outsourcinggenerally range between 25 to 40 percent for U.S. and European companies. Cost savingshas been the primary business rationale for offshoring across all industry sectors. The SandHill Group Study found that even technology companies were moving work offshore, driven, inpart, by lower labor costs.After wage rate differentials, the level of cost savings also depends on the amount of work thatis moved offshore. While an analysis of offshore projects shows that the optimal ratio ofoffshore to onshore work ranges between 70:30 to 80:20, some companies only reach a 50:50split because they desire to have a greater number of people onsite, which reduces the overallsavings.Offshore outsourcing has been used to achieve a variety of other financial and non-financialbenefits, including:- Faster time-to-market for new products and services- Increased focus on core competencies- Staff augmentation for work load balancing and/or access to skilled IT labor on an as-neededbasis- Access to skilled IT labor to augment existing (internal) skill sets- Access to leading technologies- Ability to have work performed nearly 24/7 by augmenting local activities with developmentcenters on other continents.Other reasons for offshore outsourcing include a scaleable business model that can beramped up or down very quickly without incurring long-term costs such as unemploymentinsurance and employee benefits, and implementing the software development and qualityassurance processes and practices of the offshore suppliers as a way to quickly improve thecustomer’s own internal processes.While labor cost savings have been the primary rationale, additional value can be achievedover time from enhanced and streamlined business processes. For example, creating a singleshared services environment can generate sizable efficiencies if the current processes aredone in different locations or done by different business units. Business processreengineering, i.e., removing inefficiencies and bottlenecks and enhancing workflow usingautomation and other information technologies, can add additional cost savings as well asfaster cycle times and other business benefits.ChallengesBefore launching an offshore development initiative, senior management needs to thoroughlyunderstand the challenges to successful offshoring. Major risks and issues include differencesin language, culture, politics, regulations, and work practices—all of which can disrupt acollaborative customer-supplier relationship. Specifically, some of the key challenges include:Internal Organizational Issues- “Loss of control” of projects and processes- Increased management attention- Concerns over retaining intellectual property and other proprietary information- Concerns over potential legal issues with foreign companies- Uncertainty about achieving the financial and nonfinancial objectives- Sensitivity around moving certain types of applications overseas- Security risks- Customer preference for suppliers in close physical proximity- Internal IT departments may not welcome outsourcing due to concerns about job security.Offshore Market and Supplier Issues- Formative offshore market- Dependence on supplier-provided information- Limited understanding of suppliers’ true reputation and track record- Socio-cultural barriers and business compatibility- Infrastructure issues- Supplier may have little or no experience in the industry or business function/process- Uncertain political climate.Project and Process Management Issues- Communication, language, and cultural issues- Time zone and holiday schedule issues- Increased travel costs.The importance of the risks listed above varies widely from company to company. Some of therisks presented could be quite costly and damaging to the business, and therefore, mitigationstrategies should be developed before getting underway.By Dr. Bernard L. Palowitch, Jr., President & CEO of Incoda Corporation.Source: http://www.s3solutions.com.vn