While offshoring continues to offer the prospect of significant savings through labor rate arbitrage, multinational organizations are getting smarter about offshoring. They're looking beyond basic savings to decide what work stays in-house (insourcing) and what gets sent to local (nearshore) or distant (offshore) teams, either directly managed (captive) or through vendors.

The Early Days of Offshoring

Initially, the allure of significant savings led many organizations to outsource or offshore back-office operations wholesale, driven by a single-minded focus on labor rate arbitrage. But with time, it became apparent that workforce management decisions are more complex and need to account for numerous factors beyond just cost. Many companies have since reversed some of their outsourcing/offshoring decisions, either bringing the work back in-house or switching to alternative labor markets and professional services vendors.

The Cost-Effective Quality Time-to-Market Equation

Outsourcing and offshoring decisions are anchored by a simple formula: cost-effective quality time-to-market for goods and services. The key question is how this equation is weighted—does cost outweigh quality, or does time-to-market outweigh cost? Or are they equally weighted? Organizations need to prioritize their value expectations against cost, quality, and time-to-market, as this will strategically guide their ultimate decisions.

Cost versus Productivity

A common surprise for many organizations using offshore resources for the first time is the difference in productivity levels per capita. Productivity measures the time, effort, and resources it takes to produce a specified unit of work. If productivity metrics exceed the benefits of labor rate arbitrage, the advantage of leveraging offshore resources diminishes. For example, if a project in the U.S. requires two resources at $120K per annum and two months to complete, but the same project takes three resources offshore at $48K per annum and four months to complete, offshoring becomes more expensive. Factors like language and communication barriers, time zone and cultural differences, and varying business, leadership, and technology skills impact productivity when comparing labor markets and assessing near-shoring and offshoring opportunities.

The Technology Factor

Before outsourcing or offshoring work, organizations should first determine how much of that work can be automated. The software solutions company Coupa emphasizes, "New Technology + Old Process = Expensive Old Process." In other words, streamline and transform your old processes before automating. The same applies to outsourcing. Prior to outsourcing legacy processes, identify unneeded or redundant processes, streamline where possible, and consider whether automation can eliminate resource dependency entirely. The rise of generative artificial intelligence solutions makes it imperative to consider technology's role before committing to outsourcing or offshoring.

Intellectual Capital and Complexity of Work

Decisions about outsourcing should consider intellectual capital requirements, intellectual property (IP) constraints, and the complexity of work. Complex functions are best serviced by resources in or close to the business. When intellectual capital is critical to the business or IP constraints are constrictive, the decision to outsource is less compelling. Although the same work can be performed in offshore captive centers, the risk of outsourcing to a third party is often not justified. As one industry colleague puts it, “the decision to outsource is core versus chore”.

Knowing Your Markets

There's often a herd mentality in offshoring, leading to inadequate due diligence when selecting geographic locations. Thorough analysis is crucial and should include assessments of:

• Labor skills availability and cost

• Resource attrition rates, communication skills, and capabilities

• Local labor laws and their constraints and benefits

• Infrastructure reliability and dependability

• Geopolitical stability

• Country foreign direct investment (FDI)

• Cultural alignment and differences

• Industrial Development Agency (IDA) incentives

For example, assessing Brazil for nearshore opportunities for a leading U.S. investment bank in the early 2000s revealed significant risks associated with co-employment laws. These risks influenced the decision-making process, demonstrating the importance of comprehensive market analysis.

Governance

To ensure the success of outsourcing and offshoring operations, it is imperative for organizations to establish a robust governance model and supporting function. This model should encompass well-defined strategies for location selection, vendor management, and captive arrangements. Additionally, it should set clear terms of engagement, service level agreements (SLAs), consistent pricing structures, and key performance indicators (KPIs).

Effective governance oversight is crucial to prevent strategic sprawl and to foster cohesion and synergy across all engagements and global operations. Without such oversight, organizations risk fragmented strategies and inefficiencies that can undermine their global initiatives.

In Summary

The outsourcing, near-shoring, and offshoring landscape has evolved, presenting significant opportunities for leveraging labor markets. However, it requires a sophisticated and multifaceted approach to realize these opportunities fully. At Hatfield, we have the expertise to guide you towards those opportunities—without compromising on risk.

Ready to Explore Outsourcing, Near-shoring, or Offshoring Opportunities

Contact us to learn more about transforming your challenges into opportunities.