Saturday, January 31, 2009

Before You Offshore Your Business

So you've been thinking about offshoring parts of your business. Often these decisions are rushed and not properly thought through. If you make the decision without proper considerations it could end up a lot costlier than than you think, so here are some things to consider before you offshore your business.

Do you know the reason that you want to offshore parts of your business? What is it that you hope to accomplish by doing this? There is a widespread belief that by moving work to lower labor cost regions of the world that it will save companies tons of money. In some cases this is true, but the actual cost of doing this is very often not properly calculated (it is often not even in the same ballpark). Some business functions and types of work lend themselves more to offshoring than others, but as you move into unchartered territory the risks become higher and higher. I would make the argument that merely wishing to save labor costs should not be your only reason for doing this. If you're wanting to break into markets in India, China, and so on, then actually performing some type of work there is probably something that you want to do, but even cracking those markets is not a simple task (especially China). Your reason(s) should be compelling enough to deal with the complexities of offshoring.

Touching on the labor cost item again, when you first look at it the inital difference in what is being paid per hour can be very alluring. Depending upon the field and market conditions, the difference in going labor rates can be very large. One of the biggest factors of the wage rates is the cost of living of your labor force. Wages in California (i.e Silicon Valley) have been higher than elsewhere, but when you look at what the real estate prices had been and what it actually costs people in that area to be able to live (factoring out a luxurious lifestyle for the moment), you could buy an awful lot of property and live like a king based on this salary in much of the world. It is exploiting this difference that is at the heart of off-shoring. In classic economic theory, in the long run, the labor rate will eventually reach a market equilibrium. Meaning that for the same position, the wage rate would eventually be the same in California and India. As time goes on labor rates do rise in popular offshore locations as more companies do this and there is more competition for the "cheaper" resources. As other companies move in, they're willing to pay higher wages which can lure away much of your workforce and drive up your costs. Companies can move their work from country to country as the labor rates rise, because there are a lot of countries that will continue to have "attractive" rates for years to come as the labor market continues to move to equilibrium, but there is always the cost associated with making the move.

Your communication costs and effort will rise and chances are that your calculations aren't even close in this front. At the very least your telecommunications charges will need to accommodate lots of phone calls between far flung project and work teams. You'll need to make sure that your phone service will accommodate calls to and from your offshore location. There will be lots of questions by your offshore location as they do work that they're not familiar with, sure they may be experienced in the type of work that they're doing but there will be the natural need to clarify what it is that you want from them. This can be harder because they won't have the same cultural references and many things won't mean the same to them. You can spend a lot of time and effort dealing with false assumptions. In the beginning (anyways) there will need to be a lot of supervision, so that you can "see" that you're understood and that what is being delivered is truly what you want.

Training costs are likely to be a lot larger than you anticipate when you factor in what I've said about communication. Because your new workforce is not familiar with your company, they don't know your history (really know it) and likely don't share your "vision". These are things that will need to be trained. At the very least, they're going to need to know about your product and how what they're doing fits into the big picture. With many non-native English speaking cultures there is a tendency to agree and not ask questions. Maybe this is to save themselves embarssment, but you can't assume that what you've said is understood. If they're not asking questions, there is a very good chance that they don't understand.

Your travel costs will rise. Many companies will offshore to cut costs allowing for the necessary travel within their budgets. Without allowing enough travel, you're setting yourself up for failure. There is no subsitute for people being in the same room. You can see by the look on people's faces if what you've said makes sense and you can get a feeling if your message is at least being heard (if not understood). It is a lot easier to clear up problems face to face that might take tons of email and phone calls otherwise. Face to face meetings also build a relationship that doesn't exist over phone calls and email. It can also help to build more of a team feeling.

When you move jobs offshore, those jobs are then gone from your local economy. You're likely to be putting people in unemployment lines at a time when it isn't so easy to find work. If the displaced workers do find work, it is often a far lower rate than they were paid before. The wage differences might be enough that they're not able to pay their mortgages and provide for their families. If you then factor in the other jobs lost offshore the overall local economy is dragged down that much more. These displaced workers are now not likely to spend like they did before, further dragging down other businesses. Various trade agreements were pushed through saying that manufacturing jobs will be lost, but other good paying jobs will replace them. This hasn't happened on a large scale yet, maybe it still will.

Your former employees might have been a big consumer of your product and now they're less likely to be in your customer base. G.M. employees have bought a lot of G.M. cars and trucks (albeit often at a discount) but when the work is moved offshore, how many of the new workers are likely to buy the more expensive vehicles that the former G.M. workers bought? Chances are that the new employees won't be paid enough to really buy your premium products. There is something to be said for companies where the employees buy and use what they produce. Maybe it was an urban legend, but I heard that their were such good incentives for Mercedes employees that the workers didn't know if they were working on their own car, which gave them more incentive to produce a better quality product and take pride in what the produce.

How will your customers be effected and what are they likely to think? If you're operating a customer facing call center that is being offshored, how is this likely to be received? I've read stories about these things being moved back to the country of origin. What is often forgotten is that the people answering the phones might be the image of your company to your customers, it might be there only experience with people of your company. Bad experiences drive customers away like nothing else. Sometimes the various accents within our own countries are hard enough to understand when you're native, let alone when the people in the call center aren't native speakers. How receptive are your customers likely to be to this? I've seen that there is sometimes extensive cultural and language training to help these employees do the job, so this is not to say that it can't work but should be thought about.

There is also more and more pressure on governments to put pressure on businesses not to offshore. If you're selling something to various governments there is a greater chance that there will be provisions to require various aspects of the product you're providing to be "produced/serviced" within that country or continent. As time goes on, your company could take a bad public relations hit for offshoring. There could be a public backlash, with boycotts and so on. You might find yourself having to move some or all of the work back. Keeping jobs in your local economy could be a PR card that you can play to your advantage.

One of the lures of offshore locations is that there are less regulations to deal with. Many of the offshore locations are happy to get factories and work created in their countries but they're not really ready to deal with the by-products of this work. Many offshoring locations don't have environmental regulations to the extent of that the more developed countries have in place. While this might seem like a true benefit that you don't have to deal with the same waste disposal regulations as back home, but the waste now becomes a problem for the offshore country that probably doesn't have the money and experience to deal with it. Who is to say that there won't be litigation later on to make you pay for clean up costs or for lawsuits from people claiming injury from your waste? I imagine that if you think about it, you don't really want to pollute these offshore locations (or any other location).

Much of the work now being offshored is totally new and businesses are taking big risks in areas that they don't know if it can really successfully be offshored. A lot of I.T. companies are making offshoring such a big part of their business plans and they're taking huge risks in areas that they don't know if offshoring can even work. They're moving work areas where the potential employees might have learned about the subject in school but they're certainly not experienced with the complexities of doing the work and some things, try as you might, can not be offshored, there will still need to have a certain proximity to the work that needs to be preformed. Not all data center work can be done remotely, some local support is still needed.

My competitors are doing it, so I have to do the same. When you move in the off-shore direction you're also taking your business in the "commodity pricing" direction. When businesses get caught in the "cheapest" price mode, it is hard to win. Someone can always come along and beat your price, it is a hard war to win. There is a great deal of complexity in a lot of businesses that doesn't lend itself to a lot of movement of labor, and all the training, retraining, and reorganizations that are needed don't happen quickly. If your product becomes a commodity, then your customers can buy from anyone, why should they buy for you? While it is not always possible, focusing on a quality product and a good reputation is a better route for the long run. The big mega deals are rare (if not already dead), so finding niches and going after smaller clients is probably a better direction. The big mega deals are more often than not, smaller and smaller with companies wanting to spread their risk over multiple suppliers, so the "big prise" is not so big.

Focus more on the long run. Many companies are so focused on this quarter that they're not willing to take the hard decisions that might not yield results in a quarter or two. The Big Three are a good example there, they put so much focus on SUVs when gas was cheap, looking at the longer term picture you knew that gas wouldn't stay cheap. Restucturing and Offshoring are so often about seeing quick returns, saving money, and not about having a solid company that will be around for your kids or grandkids to run (if they're able and qualified that is).

Cultural differences can not be overlooked. I've had a lot of experience with one country in particular and it is very hard to find people there that are able to show the drive needed to get the job done. They are very good at doing "exactly" as they're told, but they're not comfortable "thinking outside of the box" when problems arise. It is also very hard for them to admit when they don't understand something and ask the proper questions. After a longer period of time, some of the traits that you're looking for in employees are likely to appear, but you can't expect them to be there day one.

It is your business, livelihood, reputation, and legacy that is at stake. Is offshoring a direction that you really want to take your company, going back to my earlier question about the reason that you want to offshore. If you don't see the results you're expecting, the stakes can be pretty high and they might not be fixable. It is time to be a leader, if offshoring isn't a strategic part of your company's future, then take a stand.

Are you ready for the infrastructure problems that you're likely to face? In many of the emerging enconomies the infrasture is not in place to support your company. Are you willing to help build the infrastructure that you need via taxes and so on?

There is an element of policitcal instability in offshoring. When you look at all conflicts going on in the world, almost every area that you might think about going has its problems. India has problems with Pakistan that have recently raised their head again. China is a Communist country that has more recently welcomed more and more of the market economy, but they're still a Communist country. Are you willing to let your company fall prey to all the political struggles that you probably don't understand.

The idealist in me would like to see all parts of the world raised out of their proverty with everyone able to earn a living wage and be able to support their families. Offshoring does not usually lift the people of the country where the work is being done out of poverty. We've all heard stories about "slave labor", do you want one of those stories to come back an haunt your company? The argument is often made that some money is better than none, but so often people take jobs that pay "something" because it is what they can get. If you truly want to lift the opressed people of the world out of poverty that is very admireable, but this is generally not a goal of Offshoring.

The days of company and employee loyalty appear to be a thing of the past. Businesses have grown too big and become to corporate and the feeling of family that existed in the past is more or less dead. So many corporations are so far flung and widespread that many employees don't really even know their managers. The Japanese used to offer "lifetime employment", an alien concept to many corporate types today. It used to be that the company looked after its employees and the employees looked after the company both felt a sense of responsibility for each other, both were proud of each other. All the redundancies that we see today in favor of Offshoring, see how far we have come. You can debate corporate responsibility if you like, but shouldn't companies find that being responsible and a good citizen yields long term benefits that outweigh the costs today?

Offshoring can work. Many companies have seen some success in Offshoring. I don't wish to indicate that it can't ever work. One area where companies should probably give some thought to this is where you have the goal of being in close proximity to a key client, so it might make sense to set operations so that you can better support your client. As stated earlier, if you're really trying to break into a market, you'll probably want to perform some sort of work there. Company sales are often helped by having a local presence (being more than just a sales force and marketing unit). If you're providing a quality product and a good employer, you can be accepted and welcomed by the local community.

Offshoring is a passionate topic, but I've tried to show some of the things that are often not considered enough when companies are deciding if they should take the plunge or not. Offshoring can work, but you do need to consider a lot more than the difference in labor costs. Do you have anything to say about Offshoring? Civilized discussion is welcome.

Photo Credit: people 5 courtesy of erwinbacik
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