The offshoring of business processes to low-cost countries, having grown substantially over recent years, has become an increasingly important part of the senior management agenda at most Fortune 1000 companies. The trend has been led by institutions in the UK and US, and is far more developed in some industries. But there is growing realization that offshoring is a phenomenon that virtually all sectors must now evaluate.
Financial services (along with telecommunications, airlines, etc.) has led in embracing the offshoring concept. Indeed, many major financial institutions now offshore significant parts of their operations – because companies offshoring successfully are realizing cost savings of over 30%, often accompanied by significant quality improvements. Higher revenues can also result, since lower delivery costs allow new customer segments to be targeted. For certain activities, such as credit card servicing, offshoring is becoming the norm.
Yet for every success at offshoring, there is another company that failed to understand the basics before taking the plunge – resulting in lost time, lost money, and dissatisfaction with the entire process. Quite a few offshorers today are still not satisfied with their overall results. But few have abandoned the exercise, and some have regrouped after bad experiences to offshore on a larger scale.
What exactly determines whether offshoring ultimately succeeds or fails? Although there is no easy answer, companies should learn from the experiences of early movers and carefully weigh different choices as they embark on their offshoring journeys. Part of that process involves observing best practices that have emerged as prime drivers of offshoring success.
Our work suggests that the ten maxims listed below — although not a guarantee of success — will greatly increase the probability that your company's offshoring activities will, in time, deliver the desired results.
1. Ensure full support from the CEO. Offshoring is not easy. It creates profound anxiety across entire organizations. Employees are put in jeopardy of losing their jobs or being transferred (along with their families) to an unfamiliar part of the world. Such weighty issues necessitate the attention and full commitment of the CEO, who will have to manage the company through any social and political repercussions that arise from the offshoring initiative.
The CEO will not assume responsibility for this task unless he or she believes that offshoring is absolutely necessary for the company to remain competitive. Moreover, the CEO must demonstrate and communicate commitment to the rest of the senior management team in order to make the initiative successful.
2. Develop a clear vision of the value at stake. It is vital for companies to be clear about the full value on offer from offshoring. When internal discussions about offshoring begin, senior management must develop a lucid outlook on which specific activities in each business unit can be moved offshore, the potential savings, the investment required, and a likely time-frame for starting the process.
Naturally, activities suitable for offshoring are likely to differ among players with different business focuses. For example, a primarily wholesale bank may perceive little downside in offshoring customer-facing processes, although retail banks must gauge the consequent benefits and risks to their retail-customer relationships.
In our experience, many retail players view the potential benefits from offshoring differently even among themselves – some seeking cost savings only, others pursuing quality improvements as well — and may thus arrive at different conclusions about how to approach the initiative. But all types of players need a clear view of the total value on offer. Without that, the effort will often lose momentum — especially in large organizations — or be discredited outright.
3. Derive an optimal sequence. The key factors to weigh when formulating the best sequence of processes to offshore are strategic risk, offshoring feasibility, and organizational readiness. Our experience indicates that it is critical to establish initial success with processes that are relatively easy to offshore. For example, in mortgage servicing, it may be better to start with simpler post-closing operations, such as auditing, before moving on to first and second-tier call centres that account for most full-time equivalents (FTEs).
It is also important to be aware of any major technological hurdles. Sometimes relatively simple data processes are technically more challenging because they are specific to certain organizations or run on legacy systems.
4. Evaluate locations with care. Countries and regions should be considered on criteria such as economic growth rate, political stability, vendor-market maturity, cost advantage, language resources, availability of peer experience, confidentiality, time zone advantages, and integrity of legal enforcement.
Proximity to a core market can also be a factor. One global bank chose to start part of its offshoring activities in Malaysia, even though it was significantly costlier than India. A prime reason for the bank's decision was that Malaysia was closer to the institution's key markets — and hence more advantageous for certain tasks that had to be completed on the same business day.
5. Choose the right business model for your organization: captive, outsourced, or hybrid. Most early-moving offshorers to India already had local operations and chose the captive route because there were not many credible vendors available. But this trend is starting to change. Vendors are now more mature, and many companies with no operations in India are finding the outsourcing route an easier way to start, especially for non-core activities.
Furthermore, many would-be offshorers, may not have sufficient scale to establish captive organizations. Our empirical observation is that a captive becomes viable only after it surpasses 1,000 FTEs. If the entity can reach a maximum of just 500 FTEs, outsourcing may be the best option. However, these model choices may not be as stark as they appear today. Organizations may end up having a captive entity that sources and manages vendors, enabling the organizations to retain only a few key processes and outsource most of the established ones to credible vendors with scale.
6. Move inefficient processes before fixing them. A common refrain when a company delays decisions on offshoring is 'Our processes are so inefficient that we need to fix them first, or we'll lose leverage with insourcing vendors'. Yet our experience indicates that offshoring initiatives are similar to post-merger integration (PMI) issues. With PMIs, it is generally best to integrate things in their established mode before improving them. Otherwise, no one — neither the offshorer nor the vendor — fully understands the new process, and that is a recipe for confusion.
One global financial-services institution, for example, chose to move certain business processes to its locations in India without waiting for standardization. This step allowed the company to capture up front most of the potential labour-arbitrage savings — which made up 70 to 80% of total savings – and to generate momentum for reengineering without dealing with the baggage of how the processes had been carried out in the past. There is a caveat, however. If a process is already being fixed, it is best to finish repairing it and then allow time for the process to stabilize before moving it offshore.
7. Appoint the right leadership. Below the CEO level, offshoring activities need to be led by someone who is powerful internally and can be a worthy champion for the project in its initial, difficult phase. Even organizations that have had no presence in the location are often better off picking someone who knows the company well and goes offshore as an expatriate, rather than hiring a local who knows the offshore geography well.
Still, the expatriate typically needs to be supported by a locally hired person who can run day-to-day operations of the offshore centre — allowing the expatriate to manage the internal organization and to set the company's standards and expectations for the centre.
8. Design an efficient governance structure. Which entity should own the processes and the people? Should it be the business units, or should a shared-services model be followed? It is best to let pragmatism win in the initial stages by providing the business units with more control. This makes for a smoother transition and helps instill the business units with the confidence they will need. In the later stages, however, governing the offshore centre as a shared service becomes somewhat inevitable, given the multiplicity of processes and business units involved and the need to take a coherent view across the organization.
9. Know your service benchmarks before going offshore. Dissatisfaction with offshoring performance often results from not having any credible service benchmarks. Such benchmarks are important whether your company chooses to follow mainly the captive or the vendor route. Yet few organisations have robust internal service-level agreements between business units and operations that can serve as a basis for comparison once the offshoring activities have had time to settle in.
For example, one organization was thoroughly dissatisfied with its offshore captive operation — not realizing that the entity was saving roughly $24 million per year and providing the same service level enjoyed in the home country. All offshoring advocates should insure themselves by having clear means by which to measure their projects' progress.
10. Don't use pilots to decide whether offshoring works. Pilot programs should be used to fine-tune implementation progress, not as a litmus test for a go-no-go decision on offshoring. One reason is that pilots are carried out on a small scale and therefore do not accurately reflect the potential savings from offshoring activities. Pilots typically take three to six months to stabilize, and they should be used to adjust the speed with which processes are offshored.
A common pitfall of offshoring is to immediately compare the operating metrics of a newly opened offshore centre, run by inexperienced staff, with those of a long-established centre, run by experienced personnel in the home country — that is, if the home metrics indeed exist. In our experience, it takes at least six months for performance to be directly comparable on this basis. It also typically takes about 18 months for the entire transition to settle in.
Understanding offshoring has spawned many myths and masked real issues that senior management needs to confront. These issues are not easy to master, and the risks involved in offshoring are substantial. Common reasons for dissatisfaction, in addition to not observing the maxims explained above, include poor choice of vendors, unrealistic expectations, and a lack of patience to allow the initiative to develop and come to fruition.
Yet offshoring is increasingly critical to competitiveness. What is more, a handful of leading players have already achieved a significant offshoring imprint. Some have more than 12% of their global work forces located in India — a figure that will continue to rise. In our view, tomorrow's leaders will be those companies with the capability to use all the resources that the global business landscape has to offer.
If there is one overriding observation regarding the evolution of offshoring in financial services, it is the following: half-hearted attempts inevitably lead to failure. The rule to follow is 'Think big, start small, and ramp up quickly.' Indeed, if your organization is not fully committed to offshoring now, then wait. But beware — don't wait until you are the only high-cost player in your market.
Janmejaya Sinha is a vice president and director in the Mumbai office of The Boston Consulting Group. Craig Rice and Steven Thogmartin are vice presidents and directors in the firm's New York office.