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IIR060
Diaz, 2023.

EXPERT
insight

Illustration by EVA VÁZQUEZ

MORE THAN COST CUTTING

Adding Value
Through Offshoring
By JOAN ENRIC RICART and PABLO AGNESE

T
he U.S. sitcom Outsourced is based
on an all-too-real premise: An Amer-
ican manager named Todd sudden-
ly finds his departmental functions
being outsourced to a call center in Mumbai.
“Todd, we decided to restructure Order Ful-
fillment.”
“Restructure how?”
“Offshore the whole department.”
(Laughs.) “Good one.”
“I’m not kidding. Check out this spread-
sheet. Any American job that’s done on the
phone or online is going overseas. The savings
are incredible.”
“You can’t outsource Order Fulfillment.
Our catalog is patriotic knick-knack. If a factory
worker from Wisconsin calls the 800 number to
buy this and gets a person from another country,
they’ll flip out. You expect me to walk in there
and tell everyone, ‘I’m sorry, your job has been
outsourced’?”
“I’ll do it.”
“So I’m fired, too?”
“No, not at all. We need you in India. Some-
one has to train the new guy.”
“What does this new guy get paid?”
“Half a million… rupees. That’s $11,000 a year
to do your job. As in, eight for the price of one.”

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EXPERT insight ADDING VALUE THROUGH OFFSHORING
In real life as in fiction, the arguments made
by numerous companies to offshore services
in the ’90s usually followed this same script.
Those years saw offshoring as little more than
simply moving call centers to countries with
lower labor costs.
But things have changed. Today’s new gener-
ation of offshoring increasingly features value-
added services, such as highly complex software
projects or specific R&D functions. Gone are the
days of simple cost reduction, which favored the
routine use of call centers and overseas software
developers for minor projects.
Two of Spain’s biggest banking groups, BBVA
and Santander, exemplify the new and improved
offshoring trend.
Less than a decade ago, BBVA was running
its entire back office out of Madrid. Five years
later, it had relocated these operations, first
to the southern Spanish city of Malaga, before
outsourcing two-thirds of its operations to low-
cost destinations such as Buenos Aires, Mexico
City and Lima. BBVA is currently doing the same
with its remaining administrative activities in
the other geographic areas where it operates.
Santander has taken a much more radical ap-
proach. Since 2000, the banking group has pro-
gressively transferred software development,
computer centers and business operations to
three subsidiaries. These, in turn, were given the
freedom to concentrate, outsource or transfer
part of those activities as they saw fit, but always
under the supervision of the banks. At the same
time, Santander has developed a single, shared
technology platform and common processes,
among which offshoring is just one facet of an
overall operating strategy.
This article is based on studies conducted
by the Offshoring Research Network, which is
associated with IESE’s Center for Globalization
and Strategy. For companies interested in mov-
EXECUTIVE SUMMARY
For decades, offshoring in- their internationalization strate-
volved little more than moving gies in order to incorporate
call centers to countries with more of these kinds of value-
lower labor costs. But things added offshoring processes.
have changed. Today’s new In this article, the authors
generation of offshoring in- discuss the risks and oppor-
creasingly features value-added tunities that managers must
services, such as highly complex consider when offshoring, and
software projects or specific they propose six steps aimed
R&D functions. These changes at creating value rather than
are forcing companies to rethink simply reducing costs.
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ing operations overseas, our research shows
that offshoring has become a critical component
of a business strategy aimed at creating value.
For those who have not yet made the leap, an
understanding of the current state of offshoring
is essential. First, we explain the factors that
have contributed to transforming this business
practice. Then, we weigh up the benefits and
risks, before sharing some of the tools that will
help you to define a successful international
offshoring strategy suited to your organization.
The IT Impetus
How did offshoring get to be so popular? Un-
doubtedly, the development of information
technology, fuelled by the Internet, gave rise to
a certain set of functions that could be relocated
more easily, and influenced which business rela-
tionships could be maintained through offshore
destinations.
Information and communications technol-
ogy (ICT), such as Voice Over IP and telepres-
ence, became not only much cheaper, but also,
with the advent of more collaborative applica-
tions and cloud computing phenomena, more
comprehensive. This enabled companies to car-
ry out high value-added activities far from home
with the maximum degree of reliability and effi-
ciency. With digitization, distance ceased to be a
problem and, in many ways, disappeared.
The Telemedicine Clinic is a good case in
point. What began life in 2003 as a means to cen-
tralize diagnostic services performed by hospi-
tals in Sweden has since expanded to become a
full radiology solutions provider to where public
hospitals across the European Union are able to
subcontract their diagnostic services. A special-
ist based in Barcelona, for example, can have
immediate access to X-rays taken in Sweden,
and on-call specialists in Sydney make sure that
quality readings are provided day or night.
Eventually, offshoring evolved beyond pro-
viding technical support services, to actually be-
ing a source of new professional expertise in the
form of research and development. Such was the
path taken by General Electric, IBM and Cisco.
This went hand in hand with the proliferation
of professional services firms and management
consultancies, which specialized in offshoring
and facilitated these tendencies even further.
From Cost Savings
to Head-Hunting
In 2009, the Offshoring Research Network
surveyed senior executives representing more
than 2,000 companies and 4,300 offshore proj-
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EXPERT insight SIX WAYS
ADDING
MARKETING
VALUE THROUGH
CAN CHANGE
OFFSHORING
THE WORLD

While executives continue to cite “labor cost savings,”

others say they value the benefits of access to qualified
personnel and the greater organizational flexibility
that offshoring brings.

ects in four continents. While these executives with value creation processes. As our analysis
continued to cite “labor cost savings” as the shows, improving the quality of skilled workers
top advantage of offshoring, the survey also worldwide will encourage product develop-
turned up significant numbers of executives ment offshoring, as opposed to just offshoring
who valued, for instance, the benefits of access lower value activities.
to qualified personnel or greater organizational This shift has been partly driven by emerg-
flexibility (see Exhibit 1). ing countries making a firm commitment to
There are two main reasons behind this. invest in education and infrastructure. Several
First, many have come to the realization that studies, including the one by the Offshoring Re-
“labor cost savings” cannot serve as the only search Network, reveal explosive growth in the
source of competitive advantage, as there will number of engineering and computer science
always be someone who can do it cheaper. graduates, especially in the two major offshor-
Also, what’s happening is that, thanks to ing destinations of India and China. No wonder
better education, the supply of skilled labor in the U.S. administration is concerned, as reflect-
offshore destinations has improved significant- ed by President Obama’s pledge in 2010 for the
ly over the years. This means that these workers United States to “produce eight million more
are able to take on and carry out new business college graduates by 2020, because America
tasks requiring high levels of knowledge. has to have the highest share of graduates com-
Our research corroborates the develop- pared to every other nation.”
ment of talent and knowledge as a critical ele- This growth in the availability of skilled
ment in offshoring strategies – a development labor has led to the emergence of clusters spe-
that reinforces the association of offshoring cialized in offshoring activities, like investment
banks in Mumbai or call centers in Bangalore.
The phenomenon is not restricted to the Asian
ABOUT THE AUTHORS giants. There are now IT-associated clusters in
Latin America, too, from Guadalajara, Mexico,
Joan Enric Ricart is a profes- the Kellogg Graduate School of to Recife, Brazil, and Córdoba, Argentina.
sor of economics and strategic Management, a Ph.D. in indus- Having clusters concentrated together in
management at IESE, where he trial engineering from the Te- one area makes it easier for companies and
holds the Carl Schroeder Chair chnical University of Catalonia universities to exchange ideas and people,
of Strategic Management. He (UPC) and a Ph.D. in business with universities tending to become the main
was the founding president administration and economics recruitment centers. Clusters can also gener-
of the European Academy of from the Autonomous Univer- ate pools of talent with specific capabilities,
Management and is currently sity of Barcelona (UAB). making these offshore destinations even more
president of the Strategic attractive.
Management Society and vice Pablo Agnese is a senior But the picture is not entirely perfect. Some
president of the Iberoamerican lecturer in the Economics of these regions have suffered significant infla-
Academy of Management. He Department at Pompeu Fabra tion as well as high turnover of labor.
is the author of award-winning University, Barcelona. He
books, studies and teaching also collaborates on research Benefits Not Without Risks
materials on strategic mana- projects at IESE and at IZA, The positive effects of offshoring on the pro-
gement, corporate governan- the Institute for the Study of ductivity of companies and – by extension – the
ce, organizational design, the Labor, in Bonn, Germany. His economy, are well-documented (see “An Argu-
economics of organizations, research interests include ment Blown Out of Proportion”).
business models and offs- international labor economics One study of 450 U.S. industries found that,
horing. He holds a Ph.D. in and the effects of offshoring between 1992 and 2000, offshoring succeeded
managerial economics from on labor markets. in boosting productivity by as much as 10 per-

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EXPERT insight ADDING VALUE THROUGH OFFSHORING
cent. Another study, of 35,000 British produc-
tion plants over a three-year period, estimated
that increasing offshoring activities by 10 per-
cent saw a corresponding 0.37 percent rise in
total-factor productivity. Meanwhile, a study
of 83 Japanese industries found that, between
1980 and 2005, a 1 percent rise in offshoring re-
sulted in an improvement in total-factor pro-
ductivity of between 0.5 percent and 2 percent.
Other studies, however, underscore the
risks of offshoring, such as the problems as-
sociated with limiting the number of offshore
destinations. A 2009 McKinsey survey found
that 70 percent of offshore centers, whether
company-owned or outsourced, were concen-
trated in just three countries: India, China and
the Philippines.
The risks of such concentration include un-
stable currencies and wages, intense competi-
tion for employees and regulatory limits – none
of which compensate for the lower labor cost
advantage. Certainly, the emergence of clus-
ters in other parts of the world will undoubt-
edly help to mitigate such risks through a wider
geographic distribution of activities.
The Offshoring Research Network study
highlights the primary risks perceived by se-
nior management, and how their perceptions
changed from 2007 to 2009 (see Exhibit 2). Of
particular note are the changes in how manag-
ers rank data security and the quality of the
services provided. This should come as little
surprise, since the financial crisis that erupted
during this period made these issues of para-
mount importance for company survival.
Destinations à la Carte
Most services offshoring used to go primarily to
India (Hyderabad, Bangalore, Delhi and Mum-
bai), Eastern Europe (Prague and Budapest)
EXHIBIT 1
More Than Cost Savings
COMPANIES INCREASINGLY VALUE OFFSHORING
FROM THE VIEWPOINT OF ACCESS TO TALENT AND
IMPROVED FLEXIBILITY.
FINANCE &
HIGH TECH
INSURANCE
Labor Costs 92 84
Other Costs 74 68
Access to Talent 67 65
Growth Strategy 56 69
Organizational Flexibility 70 53
SOURCE: “Taking Offshoring to the Next Level.” The 2009 Offshoring Research Network Corporate Client Survey Report.
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and Russia (mainly Moscow). In recent years,
however, some of these cities have become less
attractive in terms of labor costs and infrastruc-
ture, as they have been inundated with demand.
New offshoring destinations have emerged,
with unique selling points of their own.
Dubai and the United Arab Emirates, for
example, have focused on internationality,
state-of-the-art infrastructure, a stable and
qualified workforce, low taxes and five-star at-
tractions. Cape Town, South Africa, stresses its
highly qualified workforce, strong insurance
and professional services sectors, alongside
its well-developed telecommunications net-
work. Morocco specializes in customer service
and back-office functions for many French and
Spanish companies, since many of its workers
speak both languages. Vietnam boasts a large
number of math graduates who also speak Eng-
lish, French, German or Russian.
Given the expanding choice of destinations,
managers who consider offshoring will need to
compile lists of locations and weigh their suit-
ability based on the following criteria: costs,
availability of skilled labor, local or regional
market potential, quality of infrastructure, the
country’s risk profile, and the political and busi-
ness environment.
Finding the Right Strategy
Are managers fully aware of what they face in
implementing offshoring strategies? Until now,
services offshoring has followed the traditional
strategy applied to industrial processes – that
is, identifying any repetitive and nonstrategic
processes that can be relocated to geographic
areas with lower labor costs.
Experience shows that this approach is not
enough. To make offshoring decisions, one
must have a clear strategy of activity assign-
ment for different locations. This requires a
systemic view of the changes in the business
model.
In line with IESE Prof. Pankaj Ghemawat’s
PROFESSIONAL CONSUMER
MANUFACTURING SOFTWARE
SERVICES GOODS
78 82 78 86
70 66 74 56
61 55 53 63
69 64 74 62
77 70 85 64
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EXPERT insight SIX WAYS
ADDING
MARKETING
VALUE THROUGH
CAN CHANGE
OFFSHORING
globalization theories, we consider three types
of strategies that yield different business mod-
els: aggregation, adaptation and arbitrage.
They usually come two at a time; rarely all
three at once.
Aggregation means exploiting economies of
scale through the use of regional business units
offering a standardized product or service.
Here, the purpose of offshoring is to centralize
the activities in a specific geographic region to
gain efficiencies through economies of scale.
Adaptation, on the other hand, seeks to
compete through personalized dealings with
the customer at the local level. Unless the loca-
tions share many traits, it is very hard to think of
offshoring processes designed according to the
framework of this type of global strategy.
Arbitrage involves exploiting the differenc-
es that may arise between countries where the
different business units are located. Most off-
shoring processes are associated with this last
strategy. The goal is to take advantage of other
economies with lower wages and, as recent re-
search indicates, the possibility of competing
for talent at a global level.
What happens when your existing strategy
is incompatible with offshoring – that is, when
your business model is not flexible enough to
integrate it? This is a question that should make
managers reconsider the pros and cons of the
drive toward offshoring at all costs.
Choose Your Strategy Wisely
Implementing all three of the previously men-
tioned strategies often results in friction or
imbalances between them, or between the
business models involved. Sometimes offshor-
ing strategies will force changes in the current
orientation that can be very hard to assume, es-
pecially if the process involves changes to the
long-term business model.
EXHIBIT 2
Risks to Consider
MANAGERS PERCEIVE SERVICE QUALITY AND DATA SECURITY
AS THE PRIMARY RISKS ASSOCIATED WITH OFFSHORING.
FINANCE &
HIGH TECH MANUFACTURING
INSURANCE
Service Quality 70 56 54
Data Security 72 47 43
Loss of Control 45 44 44
High Turnover 42 42 47
Cultural Differences 37 50 47
SOURCE: “Taking Offshoring to the Next Level.” The 2009 Offshoring Research Network Corporate Client Survey Report.
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THE WORLD
The experience of the companies studied
shows that it isn’t necessary to “go all out” when
embarking on a strategy of global scale. Instead,
it’s enough to focus on one or two strategies, at
most. It should be remembered that the opti-
mal strategy depends not only on conditions in
the market or sector, but also on the company’s
position relative to its competitors.
Managers also need to consider whether a
strategy based on activity offshoring is the most
appropriate when it comes time to take action.
Other options might be more suitable to the
company’s situation and market conditions.
Productive resources – labor services, know-
how, raw materials – allotted to arbitrage, for
example, could be used for other purposes,
such as tasks related to adaptation or aggrega-
tion strategies.
Thus, the final decision of whether or not
to go for offshoring must take into account the
company’s comparative advantages.
An Advanced Offshoring Model
The case of Santander illustrates some of the
salient aspects of offshoring processes.
The banking group has concentrated most
of its software development activities in its
subsidiary, Isban. With this centralization in a
single unit, and all banks sharing the same tech-
nology platform, the group reaps enormous
benefits from aggregation.
Meanwhile, Santander leaves control of the
management of these processes to those banks
that have a manager for operations and technol-
ogy. This enables total adaptation to the idio-
syncrasies of each context.
Furthermore, by operating this way in
all the countries where the group is present,
Santander can move its software factories to
locations that provide the maximum benefits
of arbitrage.
Ultimately, with this model, Santander ob-
tains benefits from each of the key aspects of its
international strategy. It gains flexibility and
resilience, making the group better able to re-
PROFESSIONAL CONSUMER AVERAGE AVERAGE
SOFTWARE
SERVICES GOODS 2007/2008 2009
53 35 46 51 65
36 33 31 43 59
42 34 33 43 44
33 17 42 41 39
32 28 26 32 40
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EXPERT insight ADDING VALUE THROUGH OFFSHORING
An Argument Blown Out of Proportion
The impact of offshoring on employment in countries of origin is neither
as significant nor as lasting as some would portray.
The argument that offshoring leads to
serious job losses has found sympathizers
in the media and certain political spheres.
There is no shortage of voices advocating a
return to tighter regulation and protectio-
nism. But many of these fears are unfoun-
ded, and taking the measures some call for
would bring results diametrically opposed
to the desired ones.
HIGHER PRODUCTIVITY, MORE DEMAND
The greater efficiency and productivity
obtained through offshoring exerts down-
ward pressure on domestic prices, which,
over time, raises demand for goods and
services, and thus, for labor. How? By being
more productive, companies can offer
lower prices, which stimulates demand
for their products and services, thereby
boosting domestic job demand. This line
of reasoning is supported by Mary Amiti
and Shang-Jin Wei, who, in a 2006 study of
U.S. industries, noted sufficient consequent
growth in demand to offset any negative
effects. More recent research by Pablo
Agnese on the offshoring experiences of
Japan found very probable gains in employ-
ment and productivity for local firms.
act to adverse conditions, as well as better able
to challenge its main competitors.
Admittedly, this three-pronged strategy is
rare and seems to work only in companies with
large infrastructure and vast experience. Even
then, implementation is not easy, and requires
three critical elements.
First, there needs to be a common trans-
action platform flexible enough to serve the
needs of each bank, while at the same time be-
ing uniform enough to achieve the benefits of
aggregation.
Second, there needs to be a complex sys-
tem of governance that balances efficiency
improvements, acceptable risks and the qual-
ity of services.
Third, there needs to be an unequivocal de-
sire to serve the client banks.
Yet if the functioning and coordination of
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IMPACT ON EMPLOYMENT
LESS THAN BELIEVED
The impact of offshoring on labor mar-
kets in the economies of origin is neither
significant nor lasting. With few excep-
tions, the research agrees that any negative
consequences are nil or negligible. Despite
the recent crisis, Forrester stands by its
estimates that, by 2015, the United States
will have exported about 3.3 million service
jobs – far from the alarming 40 million
predicted in other reports.
RELEASED RESOURCES
BRING LONG-TERM GAINS
Alarmist figures pale further against em-
ployment projections of the U.S. Bureau of
Labor Statistics, which foresees the creation
of 160 million jobs for the same year, 2015.
While some workers may be affected in the
short term, as jobs they used to perform
go overseas, the new resources that are
freed as a result of offshoring opens up new
opportunities for employees and emplo-
yers alike. In the long run, labor markets in
the economies of origin find themselves
performing new activities or entering whole
new sectors.
these tasks is correct, the results are extremely
positive, as has been the case for Santander.
Six Steps to Follow
Formulating an appropriate strategy is tricky,
and following generic advice can lead to disas-
ter. Instead, we offer you a sequence of specific
steps that can help to guide managers.
1. THINK BIG PICTURE , NOT ITEM BY ITEM .
Offshor-
ing that’s not linked to the overall strategy can
be a one-way ticket to failure. In the search for
the best capabilities at the best price, a com-
pany must adapt both its global strategy and
its organization.
2. DECIDE WHAT YOU WANT TO OUTSOURCE AND HOW.
Defining a global strategy requires deciding
which activities or processes are suitable for
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EXPERT insight SIX WAYS
ADDING
MARKETING
VALUE THROUGH
CAN CHANGE
OFFSHORING
THE WORLD

It isn’t necessary to “go all out.” The optimal strategy

depends not only on conditions in the market or
sector, but also on the company’s position relative to
its competitors.

offshoring, how – through subsidiaries or out- evolution and adaptation of firms to the tech-
sourcing – and where. Study the complexity or nological revolution. But companies shouldn’t
simplicity of your processes and services, and underestimate the risks. Prudence may be the
the interdependencies between them, to iden- most useful tool in your approach to offshoring
tify the most outsourceable. You should also – even more so in times of crisis.
take into consideration issues such as whether
these processes require some sort of presence
or physical proximity, or specific company ex-
pertise. You will need to review this analysis
from time to time, since studies show that these
situations are changeable.
TO KNOW MORE
3. EXAMINE DESTINATIONS CAREFULLY. You should
take into account variables such as labor costs, Q Ricart, J.E. (ed.), P. Agnese, N. Pisani and A.
availability of talent, market potential, quality Adegbesan. Offshoring in the Global Economy:
of infrastructure, acceptable risks and the envi- Management Practices and Welfare Implications.
ronment of each destination. Madrid: BBVA Foundation, 2011.

4. ADAPT YOUR ORGANIZATION TO THE NEW REALITY.
According to our studies, in most companies,
adapting business processes to the new reality
entails a long learning curve. Therefore, it pays
to make the transition with the help of a special-
ized company.
5. DEVELOP LOCAL TALENT. Another organizational
difficulty is learning how to attract, manage and
develop talent in the destination countries.
Again, this task is easier if you hire the services
of an experienced, specialized provider in the
chosen country, as BBVA did. If you opt for full
outsourcing, it is important that you create
some way of incorporating their know-how,
otherwise you run the risk of these operations
being held hostage by the local talent.
6. GOVERN YOUR OFFSHORED BUSINESS. Finally, the
company needs to develop management mech-
anisms to oversee activities in different parts of
the world, often with different suppliers. The
development of sound governance capabilities
is vital.
Q Ricart, J.E., M. Bakardjieva and M.S. Rosatti.
“Grupo Santander: Technology and Operations
in a Global Bank.” SM-1573-E, IESE Center for
Globalization and Strategy, 2011.
Q Manning, S., J.E. Ricart, M.S. Rosatti and
A.Y. Lewin. “From Blind Spots to Hotspots:
How Knowledge Services Clusters Develop
and Attract Foreign Investment.” Journal of
International Management 16, no. 4 (2010): 369-
82.
Q Mesøy, T., B. Maitra and M. Daub. “Rethinking
the Model for Offshoring Services.” McKinsey
Quarterly, September 2009.
Q Adegbesan, A. and J.E. Ricart. “The Offshoring
of High-Value Services and the Globalization of
Capability Sourcing.” SMN-670-E, IESE Center
for Globalization and Strategy, June 2009.
Q “Taking Offshoring to the Next Level.” The 2009
Offshoring Research Network Corporate Client
Survey Report.

Activity offshoring is evolving rapidly to- Q Ghemawat, P. Redefining Global Strategy:

ward ever-higher levels of complexity. The Crossing Borders in a World Where Differences
sequence from labor costs to skilled person- Still Matter. Boston: Harvard Business School
nel to value creation illustrates the continuous Publishing, 2007.

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