Practice 2180 10 March 2004

Offshore Outsourcing: It Just Is; Learning to Live With It

Outsourcing & Service Provider Strategies, Professional Services Strategies
Stan Lepeak

FOCAL POINT
Debate about the merits and/or ills incurred from offshore business process and IT outsourcing continues to
grow. However, offshore outsourcing is a manifestation of an ongoing and long-term economic evolution. It
will not go away and cannot effectively be outlawed. User organizations and their staffs need to learn to live
with and exploit it (albeit perhaps more “passionately”). Advocates must better quantify and tout its legitimate
merits. Politicians must try to create a more intelligent dialog around offshore outsourcing and identify
meaningful and realistic policies to address its side effects.

CONTEXT
Arguments for, and mostly against, business process and IT offshore outsourcing continue to grow and become
more passionate (or rabid, depending on one’s perspective). In the US, more than two dozens bills have been
submitted in federal and state legislatures to restrict or ban various types of offshore outsourcing. Minimally,
anti-offshore forces want organizations that engage in offshore outsourcing to do so much more publicly (e.g., have
call-center agents inform callers where they are located at the start of each call) with the goal of “shaming”
organizations into reversing/limiting offshore activities.

Legislation and political pressure will likely somewhat curtail offshore outsourcing in the public sector, as will other
legitimate concerns about data integrity, intellectual-property theft, and national security. Legislation aimed at the
private sector, much of which rests on dubious grounds, will face greater challenges and have only nominal impact.
Overall, META Group research has found, to date, that anti-offshore and related protectionist activities have not
significantly affected offshore outsourcing, and we do not expect them to do so in the near term. Although the
anti-offshore debate highlights legitimate issues that need greater attention (e.g., job training/retraining, education
quality, global trading playing-field levelness), the tone, form, and forum for the debate on both sides are long on
rhetoric and short on good ideas about how to realistically and better address this critical business issue.

The following are the two main points that most anti-offshore arguments miss:

• Offshore outsourcing represents a continuation of ongoing economic evolution

• Multiple perspectives (not just laid-off workers) must be considered when assessing offshore
outsourcing’s overall impact and value proposition

Arguments also must better address other tactical/short-term (e.g.,

job loss benefits) and strategic/long-term (e.g., national META Trend: Throughout 2004-06, the
competitiveness) elements. Offshore outsourcing advocates and boundary will continue to blur between
benefactors, on the other hand, must do a better job articulating “domestic” and “offshore” business
and IT service providers. Through
and rationalizing its benefits and value propositions or else risk
acquisition and organic growth, the line
losing business, mind share, and political battles, at least in the
between the two camps will largely
short term.
disappear by 2006/07. The main
challenge to all providers, however, will
Outsourcing in general and offshore outsourcing in particular are remain evolving into true global (vs.
manifestations of a long-running shift in how organizations gain multinational) service providers with
and maintain competitive advantage. They represent a transition global delivery, operating, and resource
from vertical to horizontal integration and specialization. management models. Geopolitical and
Historically, organizations were self-contained (e.g., Ford made protectionist backlash issues will grow
steel, The New York Times owned forests for pulp). Now and nip at offshore services, but overall
organizations focus on a narrower range of specialized areas (e.g., do little to slow services globalization.
“core competencies”) and rely on third parties/outsourcers to

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perform other activities (e.g., logistics/transportation, contract manufacturing, advertising, public relations, legal,
payroll). This broader trend is not changing anytime soon, though questions exist about how narrow a focus can
ultimately become.

The difference with offshore outsourcing, enabled by telecommunication and networking advances during the
past 10 years (e.g., Internet, broadband), is that the third parties are potentially a long way “offshore” and the
work they are doing is increasingly of a white-collar nature. The color of one’s collar does not matter to the
worker laid off; it matters (more) from the standpoint of where the high-value, or at least higher-paid, jobs
reside. The “giant sucking sound” currently threatening the US white-collar economy is reminiscent of that
“threatening” the manufacturing base as a result of NAFTA since the 1990s and Japanese economic prowess
in the 1980s. The latter now seems a bit muted, especially given the success Japanese auto manufacturers
have experienced using US workers in the US. The percentage of the US workforce employed in
manufacturing has been declining for 60 years. Yet during that time, the overall services economy has grown
and thrived. Similarly, the white collar/service economy must evolve to continue to thrive, and
organizations/government must also do a better job managing the transition.

Defining Offshore Constituencies and Broad-Based Benefits

Two broad constituencies have considerations to account for when considering and debating offshore outsourcing
(see Figure 1). One is the collective parts of the organization considering or involved in offshore outsourcing. The
second is comprised of those tasked with providing offshore services or addressing its larger impact. Each group
has multiple individual constituencies, each with its own sets of issues, value propositions, concerns, and needs.

Figure 1 — Offshore Constituencies

Participating organization
• Workers
• Management
• Shareholders
• Customers

Macroeconomic
• Domestic service providers
• “Offshore” service providers
• Politicians/government
• Local/domestic economy
• Offshore/global economy

Source: META Group

When attempting to determine how much (if any) offshore outsourcing is enough or too much, concerned parties
must factor in all relevant variables. Figure 2 identifies potential offshore benefits beyond cost cutting that are often
overlooked or ignored. This is a far from a comprehensive list, but if just these variables are considered as a whole,
the benefit/cost scenario around offshore is generally more positive. This does not mean there are no clear losers
(e.g., laid-off workers, potentially local economies) from offshore outsourcing, especially in the short term, and
more must be done to address their needs. Rather, it means the case for offshore outsourcing is stronger if viewed
in the big picture.

Organizations must also clearly account for all relevant offshore risks. Such risks include unrealistic cost-savings
expectations, data/security concerns and challenges, loss of business knowledge, and inadequate knowledge
transfer (see Delta 2618).

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Figure 2 — Potential Offshore Benefits

Participating organization
• Cost reduction
• Promote growth
• Increase competitiveness
• Improve service levels
• Alleviate worker shortages
• Acquire access to new/different skills
• Acquire cost-viable access to skills and services
• Enable refocusing of scare resources elsewhere
• Discharge or exit commoditized/low added-value activities
• Support new market penetration
• Leverage external economies of scale
• Gain greater operational efficiencies
• Obtain greater productivity
• Gain greater flexibility
• Spread or reduce risk
• Enable cross-border alliances/partnerships

Macroeconomic
• Spur growth of new skills/services/product and service offerings
• Spur offshore market/economy growth
• Open new markets
• Reduce geopolitical risks
• Grow the pie
• Accept economic evolution

Source: META Group

The Offshore Outsourcing Decision-Making Process

Individual organizations and macroeconomic players must develop a more thoughtful and rational approach to
weighing offshore outsourcing’s benefits, costs, risks, and externalities. Minimally, organizations must have in place
and follow a service sourcing process (see PSS Delta 003 and Delta 2610) as well as ensure that the process
reflects offshore outsourcing’s additional risks and requirements. This process should address when and from what
source external services are acquired and who the required participants in the decision-making process are.

The following is a high-level process for addressing offshore outsourcing. Although an organization might find it
impractical to apply this process against every offshore opportunity, something akin to it should be employed to set
the broader parameters for under what circumstances an organization may choose to go offshore and who is
involved in making that decision. It is also critical to ensure that management is in sync with an organization’s
offshore positioning and usage model and decisions are not being made in isolation. A precursor to this is to
assess an organization’s past experiences and existing capabilities to engage in outsourcing in general. This
includes reviewing outsourcing’s pros/cons, risk/rewards, and desirability. If an organization cannot pass an
“onshore” outsourcing test, offshore outsourcing is likely not a viable option.

• Include all key decision makers (e.g., management, worker representatives, board of directors) in
decision-making processes: Direct shareholder involvement would prove cumbersome, and that
constituency has other means to voice its opinion. Organizations could include other constituencies, such
as community leaders and politicians, in initial decision-making processes, but it is unlikely they would
view the equation holistically, and private companies are not directly beholden to those entities when it
comes to the normal course of running the business. However, communities should be involved around
efforts such as job training/retraining and improving educational systems.

• Identify all relevant affected constituencies (as defined in Figure 1).

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• Weigh constituents' relevance: Although this is hard to do, it must happen. Although it can be painful to
lay off workers and ship jobs offshore, it can be even more painful to pursue the alternative: long-term
competitive decline (e.g., how many mill town economies in the Northeast US could trade policy changes
have saved, and are not the workers now in high-tech industries on Route 128 in a better economic
position, albeit one now facing its own foreign competition?).

• Define representative benefits (akin to those defined in Figure 2): It is critical to assign a meaningful
and defensible value to these benefits as well. Given the challenges and sensitivity in performing this
assessment and benchmarking, organizations should consider possibly employing third-party
benchmarking services and using industry-standard metrics and key performance indicators (to the extent
they exist).

• Define representative costs and risk factors: As mentioned previously, organizations must take into
account all relevant risks and define potential costs savings at a realistic level. Most organizations do not
accurately estimate true costs and as a result overstate, often dramatically, the true cost savings with
going offshore (see Delta 2026). Organizations must also define and weigh in a broader basket of risks,
including those related to intellectual-property loss, security risk, and regulatory compliance requirements
(see Delta 2545).

• Define decision-making criteria: In addition to defining as comprehensive set of metrics for benefits and
costs as possible, clear guidelines on decision-making criteria must exist (e.g., who votes, what are the
weightings, dispute mediation, go/no-go criteria).

• Incorporate and weigh negative externalities: Organizations must identify and attempt to quantify
negative externalities from their offshore decisions, including more subjective elements like employee
morale/productivity for those left behind and potential operational efficiency degradations arising from
having portions of business/IT processes managed offshore.

• Define appropriate supporting measures to address externalities: These include realistically

addressing issues like job training, outplacement, severance, managing disaffected remaining workers,
dealing with community and political issues, and determining to what degree to publicly clarify future
intentions. Here it is critical to involve relevant constituencies beyond the organization itself.

• Gain consensus on decision: This is where the proverbial rubber hits the road. At some point, the
debate must stop and the decision to go forward or not reached. Waffling and half-hearted efforts benefit
no one.

• Execute: Both on the offshore strategy and the means to address all negative externalities.

None of this is should imply that offshore outsourcing is easy, wonderful, or enables as much cost savings as many
(particularly offshore service providers) advocate. Cost savings are generally overstated, complexities (e.g.,
managing distributed projects, addressing compliance, capabilities mismatch, sourcing providers) and
security/intellectual-property concerns understated, and as with any form of outsourcing, there are as many if not
more disappointments — at least partial — than successes. Addressing these points, however, is a function of
learning to do outsourcing, and offshore outsourcing in particular, better and right, rather than not doing it at all.

Speak Up, Service Providers

Service providers offering offshore services must become more effective at getting their side of the story out while
at the same time not glossing over or unduly minimizing negative externalities from offshore outsourcing. This
involves many potential things. Active involvement in trade associations (e.g., NASCOM, Computer Systems
Policy Project) and urging those associations to take a more proactive position on offshore benefits as well as
fostering a better offshore dialog is one dimension. Becoming more active lobbyists is also a logical course of
action and one where the high-tech industry has long been a laggard.

Service providers must recognize, however, the inherent negative position they hold relative to the pro-local-jobs
camp and therefore focus much of their efforts on individual organizations. Minimally, they should strongly
encourage organizations considering/expanding offshore efforts to employ a more comprehensive decision-making
framework as previously defined. This could even extend to assisting organizations in crafting their own position,
messaging, and rationalization of offshore outsourcing, though user organizations should remain cautious of the
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perception that its offshore strategy was developing or unduly influenced by an offshore outsourcers. It is also not
in the offshore provider’s best long-term interests to overstate cost savings, understate risks, or ignore political and
relative externalities from offshore.

Doing Offshore Outsourcing “Right”

In addition to defining a comprehensive decision-making process, organizations must also obviously focus on how
to successfully engage in and manage outsourcing efforts. Although there are many factors and facets to doing so,
the following are some key points to emphasize:

• Organizations must understand what should and should not go offshore. This involves considering
intellectual-property risks, data access/privacy laws, compliance regulations, other legal issues.

• Organizations must enable adequate processes for key offshore outsourcing segments, including the
following:

− Supplier vetting and selection (see Delta 2610)

− Ongoing supplier relationship management
− Multiprocess management (e.g., program, project, financial, service levels)
− Overall supplier and relationship governance (see PSS Practice 010)

• Organizations must also determine how to adequately manage distributed/outsourced global business
processes and underlying IT systems. This is much different from managing an insular/in-house organization
and will require significant work to define new best practices and operating and governance models. In addition,
these models must identify and factor in appropriate geopolitical risk and compliance elements.

Value-Added Roles for Politicos

Politicians and other macroeconomic players must also take a more constructive stance on offshore
outsourcing. Although many bills pending in US legislatures to limit offshore outsourcing are facing resistance,
the overall dialog on the topic is still poor and largely rhetorical. The following additional areas also merit the
attention and action of these constituencies, including the following.

• Provide state/national-level job training: Although it is great to say workers must evolve to higher-skilled jobs,
they need support in doing so, and practical consideration must be made for those who cannot (though not
necessarily for those who will not). It would not be unrealistic to impose a modest tax on organizations to fund
such efforts, if they were truly value-added and could produce measurable results.

• Enhance unemployment benefits to address the transition period required for reskilling efforts.

• Provide tax and job creation incentives to keep jobs local (already a common practice) and to attract
jobs (a potentially expensive proposition, but one that many states in the US, for example, have seemed
to use successfully to attract manufacturing jobs), as well as create new higher-skilled jobs (e.g., R&D
credit): However, there is a significant cost to all these efforts which is potentially onerous in difficult economic
times. However, putting the issues on the table and working toward defining some level of meaningful metrics
around offshore benefits and job loss costs are a worthwhile and needed effort.

• Improve the educational system: This is hardly an easy or quickly addressed issue nor one that touches just
offshore outsourcing, but the simple fact is that most workers and students in the US do not have the requisite
skills for the higher-level jobs that come after the current outsourced white-collar work.

• Improve the trade climate: Service trade is one area that has traditionally benefited industrialized countries like
the US, yet is an area that has less structure and greater inconsistencies in terms of trade barriers. Countries on
the “losing” end of offshore white-collar outsourcing must press to open up trade for other service areas (e.g.,
selling financial services back into India) to help benefit positive trade flows in other directions.

• Provide perspective: Although not simple arguments, providing a historical perspective on job evolutions and
highlighting the fact that, for example, white-collar offshore outsourcing will affect only a relative small minority of
overall jobs, are messages that politicians and others should get to a broader audience and work into the
ongoing debate. However, this will prove difficult in sound-bite politics and for constituencies which seek to
benefit from limiting offshore outsourcing at all costs.
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Bottom Line
Offshore outsourcing has greater appeal and is easier to rationalize if viewed holistically and if it
is the result of a pragmatic and comprehensive decision-making process. Organizations, however,
can generally do a much better job engaging in offshore outsourcing, and providers can do a
better job helping to define legitimate benefits.
Business Impact: Offshore outsourcing of white-collar jobs is another manifestation of economic
globalization that is not going to go away. All parties to the trend need to define better terms and
means for rationally engaging on the topic.

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