Each sourcing conference brings a new set of countries marketing themselves as the next big thing in offshoring. China, India, Ireland, Malta and South Africa all have active marketing campaigns underway.

Yet senior executives who offload problematic operations in the hope that they will improve in another climate are likely to be disappointed. A more compelling area for managers to focus on is confirming to what extent the savings promised by offshore service providers are realistic, sustainable and whether they will enhance the experience for internal stakeholders or external customers.

Analysis of mature offshoring operations by Compass Management Consulting is uncovering examples of organisations locked into long-term agreements, deteriorating service levels and higher costs than anticipated. Specifically, over the long term, service levels are being compromised and changes in volumes and labour costs mean that the offshoring decision is failing to deliver the level of savings anticipated. In short, we are seeing organisations facing the double whammy of service quality being compromised and a failure to deliver the level of savings anticipated.

Despite extensive evidence emerging from early offshoring contracts, organisations continue to regard the practice as an easy way to reduce costs and remove troublesome operations to faraway postcodes. This ‘lift and shift’ approach prioritises moving the operation offshore as soon as possible in order to take advantage of lower labour costs.

In this scenario, managers rarely pause to undertake a root and branch review of the operation in order to optimise processes and solve inefficiencies ahead of the offshoring. Rather, the freedom to avoid confronting such issues is often seen as an attractive by-product of the offshoring decision. The expectation is that lower wages in the offshore location will mean that additional personnel can be assigned to the process to iron out problems at little cost. Compass has seen organisations reducing operational costs by up to 20 per cent in the first year using this approach.

The questions to ask

Rather than asking, “Which country is right for our offshore operations?”
a better set of questions for organisations to consider is:

What is right about this operation/process and what needs fixing?
How do we compare with the best performing operations in our sector?
What can we learn about operational efficiency and making changes from other sectors?
What elements of our operations are already streamlined, have low customer/stakeholder contact and could benefit from a lower wage environment?

Yet simply changing the location of an inefficient operation or broken set of processes does not solve business problems in the long term.

Instead, the seductive simplicity of the lift and shift approach masks a series of operational issues that can become major business problems over time.

Analysis of onshore and offshore environments by Compass has shown that substantial increases in processing volumes is the main driver of cost increases over time, regardless of location.

At the same time, we are seeing rises in personnel costs of up to 15 per cent per annum in countries such as India. These two factors combined – high rates of growth in processing volumes and increased labour costs – will quickly reduce the price advantages of offshoring over time.

In the example below, the chart confirms that the cost benefits of offshoring decrease substantially over time. It also illustrates Compass’ findings that some organisations are able to achieve the cost savings of lift and shift offshoring by simply improving the performance of their existing onshore operations.

The ACME (prior) column shows the costs of a bank’s existing onshore operational costs per application processed, broken down into an IT and personnel component. The ACME (offshore) column shows the cost reduction achieved through lift and shift offshoring. The onshore best performers column shows the cost achieved by the best performing onshore operations while the offshore best performers shows the reduction that can be achieved for an operation through a performance improvement programme prior to offshoring.

The contrast between ACME (prior) and onshore best performers is the potential saving that can be achieved through a performance improvement programme ahead of any decision on sourcing.

So instead of mulling over which country would be ‘best’, the first step in any offshoring decision should be a thorough analysis of existing operations in order to understand the drivers of business performance and cost.

Compass analysis of high-performing organisations has shown that an optimised blend of onshore and offshore operations delivers the best long-term returns to the business. This blending, or ‘fix and mix’ approach, involves analysing the efficiency of existing processes onshore, identifying precise and quantifiable opportunities for improvement (normally against a reference group of high performing peer organisations) and implementing a performance improvement programme.

Different elements of the improved and more efficient operational processes or infrastructure can then be either kept onshore or selectively packaged offshore to take advantage of competitive labour costs. This approach may seem less glamorous than being fêted on country visits but will deliver more enduring business benefits.

Geraldine Fox is an analyst at Compass Management Consulting