Business Book Review

Monday, October 30, 2006

Offshore Outsourcing - Business Models, ROI and Best Practices - by Marcia Robinson and Ravi Kalakota - PART III: OFFSHORE OUTSOURCING—STRATEGY AND...

Reading Suggestions & CONTENTS
About the Authors

“We anticipate that by utilizing automation and standardization, the transaction processing market will eventually become more specialized based on industry-specific knowledge. … Transaction processing, one of the leading success stories of offshore outsourcing, is definitely here to stay.”
“Offshore outsourcing can save time and money, but only if companies do it right. … Firms that jump on the offshore outsourcing bandwagon without paying attention to external planning... will struggle with their offshore projects.”
According to Robinson and Kalakota, the outcome of an offshore outsourcing project depends on two critical factors—the strategy selected and the discipline with which the strategy is implemented. Because a “let’s do something quickly mentality” is a recipe for disaster, the authors recommend a seven-step methodology for success that includes: (1) analyzing offshoring goals and setting strategy, (2) creating an offshore delivery model, (3) negotiating an offshore contract, (4) designing service level agreements, (5) managing the transition, (6) managing the relationship for maximum value, and (7) measuring performance improvement.

The first step in any offshoring initiative involves a definition of the objective, scope, and time frame of the project. Companies must determine why they are using this approach and what they hope to accomplish. They must analyze current costs and prioritize areas of functions that could be a match for outsourcing. For each opportunity, objectives, as well as hoped for benefits, must be clearly stated. They must decide what improvements are needed (and why) and how offshoring will affect operations and customers. And, beginning with the end state in mind, companies must determine what capabilities are required for aligning offshore operations with the business strategy.

Keeping the firm’s culture, customers, and employees in mind, management must determine what processes to send offshore, selecting them based on savings potential, labor attributes, interdependencies, and regulatory constraints. And, because it is impossible to improve the unknown, a gap analysis is needed as a means of defining current costs, quality metrics, and procedures for those processes deemed probable candidates for offshoring, At this point, the scope of the process can be defined so as to establish an appropriate baseline, outlining the current service delivery costs, service levels, and benchmarks, and serving as a guideline for the desired outcome. Finally, a well-researched financial model, which includes a cost-benefit analysis and clearly stated assumption, must also be developed.

In the second step, it must be decided which of the available business and delivery models can be employed to meet the stated objectives. Robinson and Kalakota note that the decision essentially comes down to building an operation (insourced or captive centers), buying into an existing operation (joint venture), or creating a sourcing relationship (outsource to a third party). As previously noted, each has its unique advantages, disadvantages, and challenges, depending upon a company’s objectives, experience with offshoring, and the type of processes tagged for outsourcing. Another critical factor is, of course, location. Because every location has a certain risk profile, each should be evaluated based on distance, time-zone differences, cultural differences, language barriers, quality of suppliers, legal framework, and geopolitical stability. In order to limit their exposure to any of these risks, many businesses take a multivendor, multisite, multicountry approach.

The final factor in the business model decision is the choice of vendor, which can be a tricky endeavor, given the relative infancy of the offshore industry. Thus, because the authors believe that the key to success is maintaining discipline throughout the decision process, they offer a useful vendor sourcing methodology that begins with identifying what type of vendor fits the needs of the proposed offshoring venture. The choice of either a transaction provider, a process provider, or a full-service provider is dependent upon how deep and broad management would like the relationship to be—whether it wants to offshore one well-defined task, several processes, or a total end-to-end process, and whether or not it is looking to reengineer any of its functions.

The next phase focuses on vendor selection. This procedure which, when well-organized, can take from six months to a year, involves: (1) identifying offshoring requirements and finding vendors that match those requirements; (2) preparing a request for information (RFI) questionnaire and sending it to selected vendors; (3) conducting an extensive evaluation of the returned RFIs to eliminate those that do not meet requirements; (4) selecting vendors for the request for proposal (RFP) process; (5) preparing an RFP that will facilitate assessment of each vendors performance, style, experience, people resources, process capabilities, and technology infrastructure; (6) evaluating responses so as to validate or invalidate information supplied about processes, financials, and the vendor’s record with its recent clients; (7) selecting the top vendor and visit the offshore facility to assess the company, people, processes, technology and infrastructure further; (8) performing a pilot project to assess project management and quality of work; and (9) finalizing the decision. The authors note that this entire procedure must begin with the critical first step of forming a core team that will participate in evaluating vendor responses and in negotiating the contract.

Once a vendor has been selected, contract negotiations begin, with the objective of creating a framework that specifies the general, financial, and legal aspects of the relationship, clearly defining all services and costs so that both parties have the same expectations. The master contract should reflect the company’s strategic view and critical goals, as well as the goals of the vendor. Thus, it should be flexible in time and scope so as to accommodate new risks and technologies. And, it should clearly define payment terms; document procedures for reporting and resolving conflict; spell out the duration of the contract and the terms under which it will expire or be renewed; define the scope and objective of the services to be provided, including a time line and deliverables; and detail performance measurements. The goal of the financial framework phase of contract negotiations is to ensure that the contract addresses approved cost parameters; thus, pricing, price stability, and hidden costs need to be discussed and agreed upon. Finally, the contract must address the critical legal issues: warranties, liability, confidentiality, protection of trade secrets and intellectual property, the security and privacy of data, local regulations, the possible failure of the vendor to perform agreed upon duties, and terminating the relationship.

Designing the service level agreement (SLA) is the next step. When well-designed, it describes the start and end dates for the service, defines the level of performance the vendor promises to deliver, the company’s rights if the vendor should fall short, the roles and responsibilities of both parties, the schedule for reviewing performance, and the documentation to be used in measuring the service.

Once the contract is signed, the real work begins; thus, smooth transition management (i.e., “the detailed, desk-level knowledge transfer and documentation of all relevant tasks, technologies, workflows, and functions”) is the next issue. Robinson and Kalakota note that the transition period is perhaps the most difficult stage of an offshoring project (taking from three months to a year) and involves such critical factors as knowledge transfer between organizations, communication management, and employee management (i.e, communicating who is to be redeployed, transferred, and/or let go, as well as why, how, and when).

In the midst of managing the transition, companies must also begin the sixth step of managing the relationship for maximum value. This is about more than monitoring the contractual obligations. It also involves an ongoing alignment of processes, projects, and goals with business requirements; making tactical decisions on program costs, project priorities and milestones, expected ROI, and risk management; and at the operational level, handling the day-to-day management of offshore projects to ensure that processes are running smoothly. This step establishes the framework for governing offshore outsourcing and overcomes the common misconception that once vendors are chosen and the transition is complete, the initiative will run on automatic pilot.

Because a disciplined, continuous improvement program is required for long-term success, measuring performance improvement (the seventh step) is an ongoing and critical responsibility. This phase of the offshoring project consists of the communication, monitoring (using well-defined audit controls), and reporting of SLA metrics, as well as continuous learning, via benchmarking and making changes as problems are discovered. At this point, a well-defined offshore outsourcing model should have emerged, along with a learning framework for ensuring that the overall strategy improves continuously.

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Endnotes by chapter and a subject index are provided.


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