Getting Offshoring Right

Advantages: Reduce Costs, Become more efficient, gain strategic advantage

Potential Disadvantages: Consumer Dissatisfaction, resistance from employees.

Note. Businesses don't make decisions about off shoring systematically enough. (3 fundamental mistakes)

1. Focus their effort on choosing countries , cities and vendors, and negotiating prices - instead o evaluating which process they should offshore and which they shouldn't. First – Distinguish between what processes can be offshore or outsource – and what processes must stay in house
I. Core Processes – (which you must control)
II. Critical Processes = which you can procure from best in class vendors
III. Commodity process – which you can outsource

2. Organizations don’t take into account the risks that accompany off shoring – due diligence must go beyond the cost/benefit analysis to making decisions. (how much power are you handing over to your vendors? How much of your value is now being captured by your vendors?

3. Off shoring or off shoring is no longer an all or nothing choice. There are options – companies can execute some processes in house, offshore/outsource others. Buy services from local providers, entire into joint ventures or set up captive centers overseas (internal off shoring).

Note: Both location and organizational form – decide the fate of off shoring strategies.

Rank Process by Value:
1. Create a Value Hierarchy of core processes: How does each process help create value for customers? The relative importance of each process determined the risks/rewards of off shoring
2. Identify & Manage Risk - (Operational Risk, Structural Risk)

Operational Risk – risk that processes won’t operate smoothly after being offshore or outsourced. (transparent processes, Opaque processes, codifiable processes
Structural Risk – primarily based on the behavior of vendors, based on contractual obligations, lack of resources, qualified staff. Vendor captures value and then changes terms, Vendors may steal intellectual property.

3. Choose the right organizational form: match org structures to the needs boy considering structural and operational risks of off shoring processes.
 Use location to combat operational risk and captive centers/joint ventures or alliances – to combat structural risks