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Introduction
Offshore outsourcing has transformed the way U.S. companies do business and global consulting firm McKinsey predicts global offshore outsourcing spend to hit $110bn by 2010. The attraction to?offshore outsourcing?is primarily the resultant cost savings that happen due to it. However, many companies fail to recognize that there are additional soft costs that need to be incurred over and above the direct contract cost of the offshore outsourcing engagement and these costs can undermine the success of the engagement, if not factored in at the start of the offshoring process.
These soft costs include time involved in vendor selection, process transition, training and monitoring operations in offshore locations, and in overcoming the challenges of working in a foreign country including communication challenges, low-skilled workforce, unfamiliar laws and regulations, and infrastructure constraints. These factors directly affect the outcome of the offshoring process, and along with the direct contract cost constitute what can be termed as TCO ? Total Cost of Offshoring. Investment tienda de futbol madrid in these needs to be made upfront, even before the actual work gets underway.
This article analyzes the soft csts mentioned above and recommends that companies budget for these in advance to make their offshore outsourcing endeavor truly successful. It tienda de futbol madrid also tries to bring up some reasons for failure or mid-way abandonment of offshoring engagements and suggests ways to overcome them. This article is of use to companies that plan to offshore work and also to offshore service providers (vendors) who can use the observations to educate prospective clients.
Cost of Vendor Evaluation & Selection
The first step in an offshoring endeavor is to determine which functions are best suited for offshoring. While some tasks can be performed efficiently even when done remotely, other tasks may necessarily need a face-to-face interaction. In their article "The Rise of Offshoring ? It's not wine for cloth anymore" Gene Grossman & Esteban Rossi-Hansberg of the Department Economics, Princeton University, share the paradigms set forth by various scholars to classify tasks on these lines. For example Edward Learner & Michael Storper distinguish between tasks that require codifiable information and those that require tacit information. The former can be done remotely because they can be expressed as a set of symbols, be they mathematical, linguistic or visual. The latter non-codifiable tasks require that both parties have a broad common background to "know" each other well enough; the doer needs to interact face-to-face with the receiver of the service to perform such tasks.
After determining whether the function in question are amenable to be offshored, the next step is to identify the vendors that can match your needs by defining the relevant skills and experience needed for the function being offshored. After this a first cut analysis of the shortlisted vendors will need to be made. All these steps can cost anywhere between 0.2% to 2% of the Direct Contract Cost (DCC) because of the additional time incurred on the following activities:
Evaluation of the in-house functions to determine if they can be offshored Documenting the specifications, skill-sets required and the scope of work in the RFP Identifying potential vendors, sending out the RFP, and managing the responses Bids evaluation and negotiation Due diligence of the vendor capability Travel expenses to the overseas location
The vendor evaluation and selection process may need an in-house resource working full time on this, in addition to other resources chipping in with time & domain expertise. Travel is recommended to get the actual feel of the vendor's staff capabilities, rather than evaluating just the paper bids or basing it on your interactions with a limited set of people on the vendor side (usually the sales team and the operations head), and is an essential part of the due diligence process.
tienda de futbol madrid Cost of Transition & Training
The process of transition & training can take between 3 months to a year before work can be completely handed over to the offshore team. Typically this is the most expensive stage in the offshoring process and can cost an additional 2% to 3% of the DCC.
The costs here will typically be those incurred due to travel & temporary relocation of the vendor's project team to the client's office(s) in the home country, so that they can learn the intricacy of the functions from the in-house staff that has been doing them for years.
Also there will be a cost of reduced productivity of the in-house staff because of their time spent in training the vendor's team. To offset the costs at this stage it can be negotiated that the cost of travel and relocation be borne completely by the vendor.
Cost due to lower productivity of the offshore workers
Once the project or function is completely offshored, you will realize that the offshore team lags behind due to a variety of reasons that range from work culture, lack of good understanding of the business of the company, bad ergonomics at the place of work, lesser work experience (staff of most offshore companies are typically graduates or post-graduates with 5-7 years experience as opposed to an average of 10-15 years in the US), long commute times to the place of work, underdeveloped civic amenities, unstable political environment, and many more. Therefore though you may paying say $10 per hour for an offshore worker as against say $40 per hour for an in-house employee, you can end up incurring twice the cost due to his reduced productivity. Hank Zupnik, CIO of GE Real Estate, who has overseen numerous projects outsourced offshore for over a decade, observes that because of these differences you cannot assume that one offshore worker can simply replace all the work done by one American worker.
Another reason for low productivity is the high turn over at offshore vendors. With attrition rate as high as 30% in some industries, companies spend time re-training everytime critical resources leave the vendor to join another offshoring outfit.
Thus it needs to be understood that lower productivity of offshore workers can offset the assumed savings by a factor of 3% to 10% of the Direct Contract Cost.
Cost of lay-offs & reduced output of in-house staff
Companies should also be ready to factor in productivity dips of the in-house staff after the offshoring transition has been completed.? This is because of the low morale of the employees due to their colleagues suddenly losing their job, and extra workload on the existing in-house staff. The severance package of the laid-off employees also needs to be factored in the cost of the offshoring endeavor. Also some ex-employees may also initiate legal action against the company, thereby adding a legal expense to the cost of lay-offs.
