Author: Ralph Dandrea
Source: articleage.com
Many business executives believe "offshoring" to be the destiny of any company that wants to remain competitive. Labor costs can be reduced by 25-30% or more, and companies, quality control, across the country are doing it. How can responsible corporate officers not consider the offshoring option for their companies? But what are the real benefits and the pitfalls of offshoring?, quality control, When does it make sense to pursue outsourcing, and how can you safely take advantage of lower cost resources in other, quality control, countries without risk or loss of quality?
Background:
Moving jobs to cheaper work forces is nothing new. Even as recently as a few decades ago, significant segments of the manufacturing sector were transferred to locations such as Mexico, where labor was cheaper. Although the transfer caused some social turmoil, it was regarded as a growing pain on the way to a more sophisticated economy. Workers were retrained in new skills and assimilated into the "new" economy, based largely upon free trade and emerging technologies. It was reluctantly acknowledged that those jobs were gone forever, and that in the end both the workers and the economy would, quality control, be better off.
A new variation, quality control, on this familiar story occurred in the late 1990's. As the technology boom reached its peak, demand for skilled IT workers, quality, quality control, control, was far exceeding supply, driving labor costs to unsustainable levels and leaving companies without personnel for new projects. With the Y2K crisis putting additional pressure on technology, companies began to look to other locations to fill some of the excess demand for IT workers.
India and other, quality control, countries had a wealth, quality control, of highly skilled workers willing to work for dramatically less than was demanded by comparably skilled American workers.
With the Y2K crisis, the current wave of IT and other white collar job sector offshoring was initiated.
"The new telecommunications technologies are now making possible this pitting of domestic workforces against foreign workforces just as for centuries before domestic products have been pitted against foreign products."
Current State:
It is estimated by Goldman Sachs that since 2000 U.S. companies have sent 400,000 service jobs overseas, and the Information Technology Association of America (ITAA) believes that during the same period 104,000 technology jobs have moved overseas. Everyone agrees that this number will grow dramatically over the next five years. Some have estimated that as many as one million jobs may be sent to India alone by the end of the year, and that a million jobs a year may be lost to overseas locations for the next several years. But who is offshoring, what kinds of jobs are being transferred, and, quality control, how is it working?
Forty percent of the Fortune, quality control, 1000 firms have begun to offshore, according to Forrester Research, Inc., though 25 to 30 percent of these are offshoring on a limited basis, for small projects, spending no more than 5 percent of their IT budgets on offshore work. Only 5 to 10 percent are using, quality control, offshoring for complex projects and mission-critical operations. However, this is likely to change.
Sixty-four percent of, quality control, finance executives polled recently responded that they planned to do more offshoring in the next two years. A great portion of recently offshored jobs paid $50,000 or more before being transferred overseas. Although much of the offshoring has been in the information technology area, call centers, finance functions, data entry, and human resource operations have also been outsourced.
Benefits:
There, quality control, is no doubt that the primary benefit of offshoring is the cost savings. The ITAA estimates that outsourcing currently saves U.S. companies about $7 billion and that by 2008 the number will climb to $20 billion. The savings from offshoring varies. In the same survey cited above, over forty percent surveyed said they were saving as much as twenty percent or more. Nearly the same number are saving from ten to twenty percent.
Hazards:
The savings do not tell the whole, quality control, story, however. Offshoring does have hazards which companies considering the option must weigh.
ท Finding Skilled Labor: Before investing in a region, you must be sure there will continue to be an adequate supply of labor skilled in your areas of need. Look at the rates of graduation and the demand, quality control, for the skills in the country.
ท Geography Gap: Inherent in offshoring is the distance obstacle. Since work is being done in a different country, it is often more difficult to ensure that companies are getting what they are paying for until it is too late. Rework and quality control are problems.
Distances also mean travel and other communication costs.
ท Cultural Gap: Cultural gaps may be a problem for some types of work, such as call centers and business analysis, quality control, . For example, different cultures may have differing standards of customer service, and business analysis often requires a good understanding of American business practices. Cultural differences may be the source of some disconcerting surprises.
ท Language: It may be obvious,, quality control,, quality control, but language differences can be a major stumbling block to getting the work product and the working relationship you expect. Even different dialects and accents can cause problems in areas involving direct customer contact.
ท Infrastructure: The country's telecommunications infrastructure may be inadequate for some types of IT work. Even poor roads and airports may cause major headaches.
ท Security & Property Rights: Security and the status of intellectual property rights are often major considerations for those organizations dealing with sensitive data.
ท Movement of Money & People: Some countries impose burdensome restrictions on the movement of money out of the country. And obtaining visas in short order may be impossible for residents of some countries.
ท Politics: Finally, the political stability of the country must be considered, and the laws of the location must be carefully examined to avoid unforeseen consequences.
" By following some basic guidelines and having a clear plan of execution, offshoring may be the right strategy for your company."
Tips For Success:
ท Scope the work: Carefully define and scope the work to be offshored. Know what you want to accomplish and how much it should cost you.
ท Offshore non-critical functions: Maintain the integrity of your core competencies by offshoring only non-critical functions. And start small. Just as you wouldn't jump in too deeply with a domestic company before gaining some history and confidence in the company, so should you be similarly cautious with offshoring, quality control, partners.
ท Know what to offshore: Software development, data entry, and transaction processing have been successful; customer service and voice interaction are more risky.
ท Choose the right location: The type of work being outsourced will influence the location, quality control, . India has gained a reputation for software development. Between 2003 and 2004 it has seen over a 30% growth, quality control, in software and IT service exports, and by the year ending in March, 2004, Indian companies have earned $12.5 billion in technology exports. But, quality control, India is not the only source of reliable but inexpensive labor. Countries such as China, the Philippines, Romania, Argentina, and even Ghana and Ireland are all centers for offshore operations of various kinds.
Matching an outsourcing effort with the appropriate labor force requires consideration of a whole host of factors.
ท Measure performance: A plan for measuring performance and evaluating success must be in place. Companies must be able to measure the work. In order to measure the financial success of the offshore operation, current costs must be, quality control, understood. Pay may be linked to performance benchmarks to safeguard against poor performance.
An overall savings of 20 to 30% is reasonable, quality control, to expect as a bottom line measure of success.
ท Monitor the work: Monitoring the work is critical if surprises are to be avoided. Personal interaction with the offshore site should be incorporated in some fashion. Placing one or more managers on-site is ideal, but at least some face-to-face contact should be planned. An on-site presence will also help to alleviate security concerns.
ท, quality control, Consult experts: Extra caution must be used when negotiating the deal. International specialists should be consulted and, quality control, intellectual property rights retained.
ท Exit strategy: An exit strategy should be place in case the operation does not work, quality control, out.
Summary:
With large populations of educated workers in foreign lands willing to work for considerably less than similar workers in the U.S., the offshoring of strategic segments of work traditionally thought of as white collar work has begun. And this shift of work and work forces, quality control, will continue as long as these conditions exist. Companies with operations ripe for offshoring must consider this option if they are to remain competitive.
About Ralph, quality control, Dandrea:
Ralph Dandrea is the President, quality control, of ITX Corp., and leads its Business Performance practice. He is experienced in business and information technology management and holds graduate degrees in business and law.
About ITX:
ITX Corp is a business consulting and technology solutions firm focused in eight practice areas including Business Performance, Internet Marketing, IT Staffing, IT Solution Strategies, IT Solutions Implementation, Technical Services, Internet Services, and Technology Research. To learn more about what ITX can do for you visit our website at http://www.itx.net or contact us at (800) 600-7785.
