Monday, October 20, 2003

Information Technology

Offshore insourcing offers benefits over outsourcing

By Amit Maheshwari

Recent years have seen a marked increase in offshore operations in lower-cost countries such as India. A growing number of U.S. companies are taking advantage of India's white-collar talent pools, which can cost one-fourth to one-fifth of comparable staff here.

A clear indicator of this trend is that India exported $9.5 billion worth of IT services (mostly to the United States) in 2002-03, a growth of 25 percent over 2001-02. This occurred during the same period in which most U.S. companies registered slow or minimal growth.

Various factors have contributed to the growth in offshore operations. Some include cost-cutting initiatives by American companies, the ability of countries such as India to produce large quantities of skilled resources and the ability for offshore outsourcing companies to demonstrate high-quality processes.

In addition, improvement in international voice and data networks has ushered in a new wave of offshore-based services, focused on a broader array of corporate services. Companies are now using lower-cost countries for technical support, customer service, claims processing and data entry activity.

Traditionally, the way to exploit offshore resources has been through offshore outsourcing providers. Over the years these providers have embraced a two-tier service in which there are U.S.-based consultants who package work for their offshore-based colleagues.

While this model has proved successful for several companies, it has pitfalls. Offshore outsourcing leaves companies with limited control over resources that belong to the outsourcer and creates risks when companies must hand over intellectual property to a third party. In addition, companies looking to exploit offshore outsourcers to gain a competitive advantage may instead harm their value proposition in the marketplace by giving up a core competency. Finally, the cost of offshore outsourcing may be 30 to 40 percent more than required.

An alternative to offshore outsourcing that is gaining popularity is offshore insourcing or "do-it-yourself." An increasing number of U.S. companies are creating their own subsidiary or entity offshore to get the benefits of the offshore model. In this model, the company creates its own global delivery center (GDC) and staffs it with its own offshore employees.

Insourcing has several benefits over the outsourcing approach, such as:

• 30-40 percent additional cost savings over traditional offshore prices

• Greater control over resources because they are direct employees

• Better control over intellectual property

• Higher acceptance of insourcing offshore vs. outsourcing offshore within the company.

Offshore insourcing can work well for companies looking to use offshore resources for long periods of time, working on strategic activities such as product engineering and customer facing services.

Several corporations, including General Electric, American Express, Dell Computers, Texas Instruments, Deloitte and Touche, EDS, IBM, Intel and Oracle have set up their own GDC operations in India.

However, companies attempting to set up their own operations offshore typically face challenges, including:

• Lack of knowledge about which business functions are best to send offshore and how to migrate them

• Lack of expertise and experience setting up the right offshore facilities, infrastructure and team

• Lack of experience with offshore accounting, legal, regulatory, day-to-day operational and human resources issues

• Cultural and communication differences between U.S. employees and offshore employees and vendors

• Capital investment in the facility/infrastructure

• Understanding geopolitical dynamics, their consequences and the proactive remedies.

These and other issues can jeopardize a company's plans to set up a successful GDC within reasonable timeframes and costs.

A four-step risk reduction approach is suggested for companies considering offshore-based insourcing:

1. Assess which business functions are appropriate for offshore outsourcing vs. insourcing.

2. Select a pilot project or process to move or supplement offshore. Find partners who can provide their own facilities to test the program in an incubated manner without making major upfront investments.

3. Retain ownership of operations, employees and delivery. Outsource support services such as accounting, human resources, IT, regulatory filings and vendor management to an offshore vendor.

4. Create and execute change management programs for U.S. and offshore employees including cultural training and cross-country visits.

While third-party offshore outsourcing is a well-accepted model, offshore insourcing is becoming a viable and attractive alternative. However, companies can be exposed to risks that they may not be prepared to manage. Careful planning and partnering can go a long way in reducing the challenges and maximizing returns of offshore operations.

Amit Maheshwari is the CEO of i-Vantage, a Cambridge consultancy that helps companies evaluate, build and manage offshore operations in India. He can be reached at amaheshwari@i-vantage.com.