Offshoring: Reasons For Failure

Offshoring has become a major topic of conversation lately as more and more firms look to leverage the economic benefits of lower labor costs and availability of skilled labor abroad. While politically many see offshoring in slow economic times, when jobs for U.S. workers are scarce, as taboo, for many firms currently considering or utilizing offshoring, it is the only option to remain competitive in the global marketplace. Offshoring helps firms shore up their labor force with knowledge and skills that are in short supply locally, but great supply elsewhere. Offshoring also helps firms compete globally on the basis of price by leveraging the pay differentials between different countries to keep labor costs down. Combined, these two issues enable firms to grow and compete while continuing to provide the margins investors have come to expect. Recruitment Offshoring Offshoring started with manufacturing jobs, and only in the last decade has it grown to encompass professional areas such as IT, finance, and HR. While offshoring in HR has been primarily limited to call centers, a number of offshore vendors now provide everything from centralized sourcing to full lifecycle recruiting. Offshoring part or all of the recruitment process does pose many legal issues for firms doing business with the federal government, but for the vast majority of U.S. firms, offshoring can provide a substantial return on investment. While I am against offshoring all of HR, I am for offshoring areas that provide low ROI and for which external vendors can provide service as good or better at lower cost. Offshoring Still Problem Ridden It seems that for every success story about offshoring, there are two corresponding stories of catastrophic failure. In recent months, several large corporations have pulled back from offshoring due to customer service and consumer privacy issues. Because offshoring is a relatively new business model, it is expected to go through a painful period as problems emerge and solutions develop. While getting into professional-level offshoring at this time would still make you one of the early adopters, several firms have already experienced a number of problems that your firm can learn from, which will help your firm strengthen its plans when offshoring or using an onshore vendor that relies on offshoring. Whether your firm manages offshoring itself or uses a vendor that does, problem are almost certain to occur, including the following:

Underestimating the difficulty of maintaining privacy in offshore locations.

Underestimating the difficulty of maintaining corporate security in offshore locations.
Failing to investigate or understand the importance of government or corporate restrictions on offshoring information related to national security.
Failing to take into account unreliable infrastructure, government instability or poor technology in the offshore country.
Underestimating the impacts of currency fluctuations on the project ROI.
Underestimating the impacts of rising wages on the project ROI.
Weak customer service measures.
No customer preference measures (many customers prefer, and in some cases demand, “local” service).
Not planning for the possible backlash when customers or the public finds out about offshore work (because of job loss fear or “buy U.S.” preferences).
Failing to realize that some offshore cultures and employees are unable to quickly adjust to the fast-changing production requirements of fast-changing corporations.
Offshoring weak or poorly designed processes that cannot be effectively outsourced until they are fixed.
Utilizing U.S.-based outsource managers who are not trained or skilled in handling the more complicated offshoring model.
Miscalculating the ramp-up time and costs of offshoring.
Failing to take into account high employee turnover in highly competitive offshore locations (especially among managers).
Failing to take into account U.S. managers resisting or sabotaging efforts for personal reasons.
Failing to understand complexities in offshore country hiring, firing, and benefits laws and practices.
Over-relying on a single consultant to guide the offshoring process.
Outsourcing the wrong tasks based on the education and training level of the local population.
Never planning for or considering the need to pull back from offshoring (for example, if local staff and infrastructure have been dismantled, leaving no options).
Failing to understand the difficulties in communication and interpretation that can occur between two different languages and cultures.
Failing to accurately assess technology and communications incompatibility.

If a vendor is used to perform the offshore work, a separate class of problems can also emerge:

Failing to restrict outsource vendors from further outsourcing your work to other vendors.
Failing to accurately assess the vendor’s privacy and security controls
Guarantees not being included in the contract or significant penalties for poor performance being omitted.
Not requiring a service-level agreement which outlines specific service requirements.
No measures of service quality delivery (such as error rates or responsiveness).
Relying on vendor reports rather than independently assessing service quality on your own.
Failing to check references and accurately assessing the vendor’s track record and capabilities (some vendors that have had a good track record can become overburdened when they too rapidly expand their business).
Failing to take into account that vendor service levels may drop dramatically after a long-term agreement is signed (once they know you have few options).
Selecting a vendor using subjective rather than objective screening criteria (which have been validated by other successful firms).
Vendors’ inability to rapidly adjust their processes and stay in sync with the rapidly changing world of business.

Conclusion When new business models arise, much like new products, it is often those who quickly follow the early adopters who reap the greatest benefits. The pioneers and early adopters experience the brunt of the problems, and then develop solutions which others can leverage to make their initial adoption of the model more successful. Despite political pressures, the necessity of participating in a global economy practically ensures that offshoring is here to stay. Most business are already dealing with offshoring issues, either those of their own doing or those of a vendor they have hired who utilizes offshoring. Smart business leaders will leverage the mistakes of others and learn from the past to decrease the probability of more errors in the future.