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Home > Performance Management Checklists > Assessing the Value of Outsourcing and Offshoring

Performance Management Checklists

Assessing the Value of Outsourcing and Offshoring


Checklist Description

This checklist considers the main reasons behind the trend toward the greater use of outsourcing and offshoring and outlines some of the strengths and weaknesses in employing these approaches.

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Definition

The increasingly competitive global business environment and the pace of technological innovation over the last decade have had huge ramifications for the way companies operate. As national borders have shed some of their significance in commercial terms, companies have sought out new ways to focus on their core strengths while seeking to delegate other activities to external parties with specialist expertise in particular fields. Thus, companies with a competitive edge in design could, for example, outsource their manufacturing to a contractor, while other businesses focusing on sectors such as mobile telecoms may choose to outsource their billing and call-centre operations to a specialist third party. However, companies must recognize that, as customers will judge them—rather than the outsourcing specialist—by the overall experience they have in buying and using their products, they must ensure that the outsourced services meet the standards expected by customers, or the reputation of the company will suffer.

The increased use of offshoring—the transfer of business processes abroad—over recent years has been further driven by rapid advances in data networking and storage technology. Rather than simply outsource services to specialists in the same country, many companies have seized on opportunities to offshore support services to countries such as India and China, taking advantage of the availability of labor capable of doing the work to the required standard. In most instances, the primary incentive for offshoring is cost, given that the average wage in many developing countries is considerably lower than that demanded by Western employees. However, specialists in the provision of offshoring services claim that using overseas suppliers brings companies other benefits, such as a sharper focus on core activities, better operational efficiency, and improved cultural awareness.

Nevertheless, while offshoring can bring many benefits, the use of overseas external service providers entails some risks. Fraudsters have been quick to investigate opportunities of their own, recognizing that they too can take advantage of cost savings by attempting to bribe employees who have access to secure data, including customer account details. Companies that fall victim to such fraud can run the risk of considerable damage to their reputation and loss of customer confidence.

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Advantages

  • Outsourcing and offshoring can bring significant cost benefits.

  • Using high-quality specialist external providers can allow companies to capitalize on their strengths and, indirectly, help to improve customers’ experiences.

  • The use of outsourcing and offshoring can free local employees to focus on strategic planning and other activities.

  • Provided that service suppliers meet the required performance standards, the use of outsourcing can improve a company’s operational performance.

  • External providers can help a company’s competitiveness by delivering greater flexibility and responsiveness than would be available in-house.

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Disadvantages

  • Some in-house employees—even those involved in core activities—could see the use of external specialists as the “thin end of the wedge,” taking the view that ultimately their own roles could be outsourced. This could impact on their morale, leading to poor performance.

  • Should an external supplier fail to deliver, it is the client company’s reputation that stands to suffer most.

  • Outsourcing and offshoring can raise control and data security issues.

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Action Checklist

  • Choose your service suppliers with care, performing adequate checks on their capabilities and conducting due diligence as required.

  • Do not select partners purely on the basis of price; consider a range of factors including their experience, track record, financial stability, and the robustness of the company’s technology and equipment.

  • Consider the strength of the local infrastructure—including communications, security, and the availability of resources—when assessing whether to offshore production facilities to a particular overseas location.

  • Be open with your own employees about the logic behind using external specialists for non-core services.

  • Whenever possible, test external providers’ capabilities with limited trials before increasing your reliance on them.

  • Ensure that procedures are in place to monitor customer satisfaction levels as external suppliers are introduced, particularly where customers have direct exposure to third-party service providers.

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Dos and Don’ts

Do

  • Consider how offshoring production to rapidly developing countries such as China and India could improve your ability to service rising demand in local markets as the spending power of domestic consumers in emerging markets grows.

  • Discuss your needs with specialist intermediary consulting companies with direct experience in managing offshore outsourcing. Though this adds to costs, paying for sound advice can prove considerably less expensive than the impact of a poor choice of external provider. Remember that specialist consultants can advise on which activities are most suitable for outsourcing as well as the best choice of external supplier.

Don’t

  • Don’t see outsourcing and offshoring as exclusively cost-cutting exercises.

  • Don’t expect the decision to offshore to deliver a constant level of benefits. For example, recognize that higher wage inflation for skilled specialists in developing countries is likely to narrow the gap between salaries in developed and developing economies.

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Further reading

Books:

  • Kehal, Harbhajan S., and Varinder P. Singh. Outsourcing and Offshoring in the 21st Century: A Socio-Economic Perspective. Hershey, PA: Idea Group, 2006.
  • Plunkett, Jack W. Plunkett’s Outsourcing & Offshoring Industry Almanac. Houston, TX: Plunkett Research, 2010.

Articles:

  • Farrell, Diana. “Offshoring: Value creation through economic change.” Journal of Management Studies 42:3 (May 2005): 675–683. Online at: dx.doi.org/10.1111/j.1467-6486.2005.00513.x
  • Harland, Christine, Louise Knight, Richard Lamming, and Helen Walker. “Outsourcing: Assessing the risks and benefits for organisations, sectors and nations.” International Journal of Operations and Production Management 25:9 (2005): 831–850. Online at: dx.doi.org/10.1108/01443570510613929

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