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Offshoring pays off with the right strategy

Reduce project failure by weighing the benefits and risks and avoiding mistakes of the past, experts say.

Offshore outsourcing is well and alive, but companies should exercise due diligence in selecting a contractor to ensure success, industry observers caution.

According to a report by economic and financial analyst Global Insight, worldwide offshore IT outsourcing spending is likely to hit US$30 billion by 2009, up from around US$18 billion in 2005, said Siddhartha Mukherjee, vice president of Cognizant Technologies Solutions' Indian office.

Mukherjee warned, however, that lessons from past experiences show that offshore outsourcing contracts can fall short of the mark if companies do not carefully assess their business needs and sourcing options.

"Companies have [come to realize] that they need to find their match--it's not just what you read about the organization on paper, you need to actually find a cultural match with the partner, so the due diligence process tries to establish that match," he said at a sourcing seminar in Singapore organized by research analyst IDC.

Expressing similar sentiments, Phil Hassey, IDC's associate director of services research in the Asia-Pacific region, said success or failure "boils down to homework". He pointed out that there could be several reasons for the failure of earlier attempts, such as insufficient research on market conditions, lack of appropriate training for staff, and an "obsession with cost savings" that could have compromised the quality of labor.

Hassey, based in Australia, added that companies need to re-look at their processes and corporate priorities before making a decision on whether or not to outsource. As policies or work processes often change as a result of outsourcing, he said, companies would do well to pay more attention to communicating the changes—and the impact-- resulting from outsourcing to their employees early.

Issues in offshore outsourcing in India
While India has been hailed as one of the fastest rising giants in offshore outsourcing, the country has its share of problems. Rising labor cost and a shortfall in professionals have plagued the Indian outsourcing industry in recent years.

Cognizant Technology Solutions' Siddhartha Mukherjee played down the two problems, saying that the rise of salaries in India enabled companies to "move up the value chain in terms of services provided, but not at such a level that they are being driven out of business." He also noted that the Indian government has been taking steps, such as increasing the intake of university undergraduates and training and redirecting workers from other industries, to improve the shortfall in supply of IT professionals.

Data security breaches have also caused ripples in the offshore outsourcing wave. In April, there was a case of bank fraud involving Indian outsourcer, which led to concerns over the security of sensitive information. The country took measures to retain trust, such as making an amendment to the Indian IT Act to make security breaches or transfer of commercial or privileged information punishable by law, and a competence test to improve the quality of outsourcing professionals.

    The quality of customer interaction is another key factor, particularly for companies that outsource services like customer support. Businesses need to understand the customers that they wish to serve with the outsourced services, said Sam Haggag, chairman of the Contact Center Association of Singapore, a newly-launched development and standard-setting body for contact centers in the island-state.

    "It's about customer satisfaction--the contact is done through a third interface… each experience has a direct impact on revenue, profit," he told ZDNet Asia in an interview.

    Companies, Haggag added, must weigh the lower costs offered by the offshore location against the potential loss in customer retention as a result of a bad strategy or partner, and be realistic about the value equation. They would do well to consider the level of service provided by the outsourcers, the actual value of the transaction--exactly how much cheaper is the offshore alternative and if the move is worth it--and the supporting infrastructure of the offshore environment, he noted.

    One company that changed its mind about outsourcing is PC giant Dell which in 2003 withdrew tech support services handled by a Bangalore call center for two of its corporate computer lines after reports of customer complaints. The company now has its own contact centers in India to serve onshore and offshore customers.

    Not everyone, however, sees Dell's move as the right one. Mukherjee questioned the impact on efficiency. "It is not your core business. Why would you like to own a contact center?" he noted.

    Mukherjee stressed that companies should outsource areas that are not their core competencies, such as warehousing or human resource, to a partner "who can do it better".

    With the right partner, he said, companies can benefit from, among other things, having access to the global talent pool and the difference in time zones to better cater to their customers. He added that industries that have adopted a successful offshoring strategy often outperformed those that did not.

    Mukherjee noted that General Electric's 70:70:70 principle, where the company believes in outsourcing 70 percent of its work, out of which 70 percent will be offshore, and a further 70 percent of which should be outsourced to GE-certified development centers, has proven effective for the company in terms of cost savings and resource allocation.