Proceed With Caution
The global marketplace is booming, and companies are responding to the lure of worlds to be conquered. Firms that transact business around the world are striving to reach new and emerging markets domestically and internationally and to operate more efficiently on a global basis. For some of the firms, their efforts to extend their marketing and operational reach beyond their traditional boundaries creates the need for assistance with their infrastructures. Many of them are turning to outsourcing as the bridge to reach their international growth strategies and customer base.
The numbers tell the story. Corporate spending on outsourcing services will nearly double over the next five years. International Data Corporation (IDC) projects that worldwide outsourcing spending will grow from $86 billion in 1996 to $140 billion by the year 2001, with a compound annual growth rate of 13 percent.
The forces driving the growth of outsourcing in nearly all world markets are varied. First, the role of information technology (IT) in business is expanding and becoming complex. Technologies like electronic commerce, distributed computing and networking are being adopted by a growing number of firms to transact business across the globe.
Then there are the economic factors. Globalization, privatization, deregulation, and inflation affect operating and competitive business environments significantly. Finally, there is a human resources challenge. Many nations face a critical shortage of skilled people to perform corporate tasks. To remain competitive, operate cost efficiently and pursue an appropriate mix of business opportunities, firms are looking to outsourcers for help with managing and transforming their organizations.
If your company is pursuing international outsourcing strategies, you face a host of challenges. The ultimate success of your outsourcing arrangement hinges on your ability to overcome these challenges, which fall into four major categories:
- The human resources issue is probably one of the greatest challenges to international outsourcing. There is a high concern for politics, downsizing, or layoffs among countries and companies considering outsourcing. This is an especially sensitive issue with unionized businesses and certain countries, such as Japan, which embrace a policy of lifetime employment.
- The cultural factors cannot be overlooked. If you operate in foreign markets, an understanding of cultural factors is vital. Cultural and social customs and traditions, language barriers and business norms are the characteristics that define the market. Beyond that lie specific industry conditions, which include awareness of outsourcing and technological advancement. Last but by no means least are the legal restrictions, the tariffs and taxes, operating restrictions and other legal considerations that impact doing business day-to-day.
- The geographic separation elemental to the very structure of international IT outsourcing can create communication obstacles. The lack of person-to-person contact and fewer information exchanges can exact a toll in the form of less effective communications. As a result, outsourcing performance expectations, goals and metrics may be misunderstood by either you or your outsourcer.
- Lack of niche expertise can undermine success. An outsourcer without expertise in the specific vertical markets or countries where you operate may be unable to meet your firm’s needs.
If your company has international interests, you can realize a wide range of opportunities by outsourcing your information systems, processing services, or business process activities. Depending on what is being outsourced and how many geographies are being served, you can accomplish cost savings, gain access to new skills and technologies, deliver higher quality service, and/or improve the company focus.
Cost savings frequently result from outsourcing relationships because the outsourcers’ economies of scale and geographic reach enable them to manage activities across country borders more cheaply than companies can manage the same processes internally. In addition, outsourcers absorb many of the assets and employees related to the outsourced services, so firms have lower long-term capital investments, depreciation expenses, and general and administrative (G&A) costs.
Outsourcers possess world-class capabilities, modern and efficient technologies, and other resources that an organization might lack internally. In particular, an outsourcer has access to more skilled human capital to make up for potential corporate shortages of talented manpower.
Little is more important to success than providing faster, more efficient, higher quality service.† An outsourcing relationship could result in increased efficiency in information systems or processes, beefed up and higher quality customer service activities, and other corporate operational improvements. An outsourcer manages those activities on a regular basis and can handle them more quickly and efficiently. In addition, many outsourcers have a wide global coverage and technological infrastructure, enabling them to reach most major and not-so-major world markets.
Finally, there is the freed-up internal energy that an outsourcing agreement can provide. By outsourcing certain international activities, your company can focus your financial, technological and employee resources on maintaining and improving your core competencies or your primary strengths and competitive differentiators.
Whether you are already involved in an international outsourcing arrangement or just considering one, IDC offers the following recommendations for success:
- Be cognizant — and be sure your outsourcer is cognizant — of all the factors that influence the local environments in which you operate. By understanding and† anticipating the numerous challenges you might encounter, you and your outsourcer can jointly plan appropriate strategies.†
- Define clear and precise performance objectives with your outsourcer and establish metrics to measure performance and satisfaction. The understanding of goals upfront should eliminate much confusion between both parties.†
- Have frequent communications with your outsourcer in order to retain a relative degree of control over your outsourced operations. These regular discussions will lead to greater awareness of your outsourcer’s performance and will facilitate conversations around goals and expectations.†
- Reassess your goals on a regular basis, as shifting domestic and international business environments could change your initial outsourcing agendas. If these changes affect your outsourced operations, inform your outsourcer.†
- Finally, and probably most importantly, you and your outsourcer must strive to create and maintain a solid working relationship. You should be able to work together smoothly and trust one another wholeheartedly for the relationship to be an ultimate success.
The global market is humming. More and more companies are turning to international outsourcing as a strategy to reach across borders and around the world to garner their share of the wealth. Those who make their decisions based on awareness of the challenges and rewards are more likely to succeed in their ventures.
Lessons from the Outsourcing Primer:
- Know the local environments in which you operate.
- Define precise outsourcing objectives.
- Communicate frequently with your outsourcer.
- Reassess your goals regularly.
- Strive to maintain a smooth working relationship with your outsourcer.
Lisa Maio Ross is a senior analyst in outsourcing for International Data Corporation (IDC). Her research and consulting activities focus around information systems (IS) outsourcing, processing services and business process outsourcing.