Offshoring -- just another business tool?

Are you convinced that offshoring is a panacea?
Written by Scott Mckenzie, Contributor
commentary Corporations tempted to relocate their business processes, including software development and call centres operations, to low cost countries such as India and China need nerves of steel and sound management.

This hasn't always been the case. When offshoring first took off a few years ago, numerous corporations put their hands up to send their business processes outside Australia.

Scott Mckenzie, News Editor

And why not? It was good for the bottom-line. A recent SBS documentary on BPO (business process outsourcing) with a focus on call centres revealed that workers in India made $8,000 a year. The annual average wage, according to the documentary is $700.

So, tapping into a low-cost, skilled labour pool makes perfect business sense. Profits rise, management makes money and everyone is happy, right?

Well, not everyone. Certainly not the businesses which took the plunge into offshoring focused purely on cost-cutting.

A July 2006 report from industry analyst Gartner, 'Factors that influence the effectiveness and levels of offshore service' revealed that such a narrow cost focus didn't deliver the benefits that companies predicted.

Add to that unrealised costs savings and the bottom-line doesn't look so rosy anymore.

Management didn't have the foresight to factor in (hidden) costs apart from labour, such as infrastructure expenses, communication and cross cultural training, which ate into expected profits.

With these tales of woe, often reported in the media, it is no wonder then that businesses need to approach the question of offshoring with nerves of steel.

Rolf Jester, Gartner vice-president, IT services market strategies, told ZDNet Australia today that companies had to be cautious about having work done by people in other countries.

``Working across borders and across business cultures is not as easy as having work done by a local provider," Jester said.

This translates into a hesitation on behalf of firms to really throw their weight behind the possible riches - increased competitiveness, improved service levels and operational efficiencies etc. - of offshoring.

Despite the nervousness of local firms, Indian outsourcers such as Satyam and NIIT Technologies, predict offshoring is set to boom. Arvind Thakur, the CEO of NIIT, told ZDNet Australia that further offshoring was inevitable.

The critical point, however, is if offshoring's day has arrived as Satyam's Australia and New Zealand country manager, Deepak Nangia, said this week, then businesses have to have a sound management plan.

Offshoring must be treated as just another business tool. Management has to pick the right kind of work that can be done offshore, as well as budget for any potential hidden costs. In addition plans have to be set in concrete with regard to governance, security, privacy breaches and quality of service.

Jester also rightly points out that integration of the offshore work with that of your own in-house staff requires careful attention to the management and people issues.

It is pure folly to give the go-ahead to relocate IT services based on substantially lower labour costs.

Offshoring won't cure a company's ills, but used in the right circumstances and with management paying careful attention to the progress, then the risk of failure is relatively low.

What do you think? Are you convinced that offshoring is a panacea? Are you concerned about the business world's approach to offshoring? E-mail me at scott.mckenzie@zdnet.com.au and give me your feedback, or use the talkback feature below.

Scott Mckenzie is the News Editor of ZDNet Australia.

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