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Pulse - March 2012 - Outsourcing and offshoring - EY - Australia

Outsourcing and offshoring:

The price of achieving lower cost

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The concepts of outsourcing or offshoring are hardly new. Since the 1990s, Australian corporations have been offshoring or outsourcing work at a steady pace. And given the current capital constrained climate and the continuing evolution of a truly global market place, the pace of this change is set to accelerate.

Of course, the decision to outsource or offshore cannot be taken lightly, primarily due to the significant impacts it can have on key stakeholders such as employees, clients and customers as well as public perceptions.

Our report, 20 issues on outsourcing and offshoring, developed in conjunction with The Institute of Charted Accountants in Australia, is designed to help businesses make that decision. It explores how best to weigh up options available and if moving to an offshoring or outsourcing model how to set up the processes and the issues to consider when transitioning to new arrangements, such as governance, business continuity and feasibility.

Getting strategic

As highlighted in the report, ensuring that outsourcing and offshoring tactics support your business strategy is a critical issue to consider.

Traditionally, the motivation to offshore or outsource was about cutting costs. However, today it has moved away from just a simple cost reduction solution to a more holistic view of business services, and needs to be based on more strategic factors. To be competitive, businesses need to drive innovation, enable growth and increase flexibility.

Offshoring or outsourcing activities can help a business become more flexible and adaptive, and react faster to changing markets. However, before considering these options, it is critical that you are confident such a strategy aligns well with your overarching business strategy.

Feasibility is another obvious issue to consider. It is important to have a solid foundation of facts on the current state of your internal processes and the gaps to better practice. This includes having a holistic view of current processes and costs, how your performance stacks up against competitors and understanding qualitative and quantitative benefits and risks.

Importantly, the condition of existing processes needs to be understood. If you were to outsource operations along with inefficiencies or issues, a call would need to be made whether it is best to ‘shift then fix’ or the reverse, ‘fix then shift’. Increasingly, businesses are investing in a degree of fixing processes first, to capture full value and ensure that they are not simply outsourcing a problem.

Location, location, location

When the decision has been reached to outsource and offshore, success is highly dependent on choosing the right location for your business needs. And this is no small task.

There are a number of typical key considerations for any location decision, including skills and language availability, available infrastructure, labour cost and inflation, political and country risk. Businesses should seek input from advisors with current local expertise and knowledge of these issues to make an informed decision before proceeding.

Careful analysis of the incentives for investment in any location should be undertaken, as this can significantly impact the business case and have unforeseen consequences in the future. Declining cost savings in some locations due to wage inflation and increasing and significant establishment costs mean that the economics for a chosen location can change from one year to the next.

Governance is key

Once the wheels are in motion, maintaining good governance is key. This includes ensuring roles and responsibilities of all key parties are clearly defined and understood, governance is maintained beyond the transition phase and adequate risk assessment and control frameworks are in place.

Service delivery is critical to the success of a service provider. Understanding customer requirements and monitoring the ability to meet those requirements over time is important to building a trusted relationship between each party. The governance approach drives the relationship between the parties and provides a framework for communication, a process for decision making, the delivery and breadth of services, and the mechanism for driving and measuring performance.

Poor risk management, performance management and collaboration failures are the most common areas where value is lost in any sourcing arrangement.

Friend or foe?

As we have seen in the past decade or so, not all cases of outsourcing and offshoring have been beneficial for the companies that have chosen these approaches. There are well known examples of declining customer service, such as end users struggling to communicate with telemarketers who have a poor understanding of local customs and language terminologies, to other examples of businesses being exposed to unseen risks, such as operations being bought to a standstill amidst significant political uncertainty or industrial relations upheaval.

On the flip side, well thought-out outsourcing and offshoring tactics based on business strategy have proven to be effective and in some cases game-changing for many. The difference being, all variables were considered before hitting go.

For smaller businesses offshoring or outsourcing can help them potentially match the performance of larger organisations by increasing manpower and resources, giving them much needed competitive edge and in some unique cases, throw a lifeline to businesses that are struggling to compete on their home turf.

What is certain is that the benefits of moving to an offshoring or outsourcing model can be reversed if all variables haven’t been considered. It’s imperative for businesses to fully address all options and potential issues well ahead of making a move.

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