Offshore has been a hot topic for the last 24 months. During this time companies made their offshoring decisions based on anecdotal data, according to Scott Furlong, Principal, Archstone Consulting. His firm worked with Duke University’s Center for International Business Education and Research to study actual results.
So, how much did Fortune 500 companies actually save by offshoring? Sixty three percent achieved greater than 30 percent annual savings, according to the report. Fourteen percent reported savings greater than 50 percent. This finding matched company expectations. Eighty-eight percent expected to save more than 20 percent by offshoring, while 55 percent expected to bank 30 percent.
The respondents were overwhelmingly satisfied with their offshore operations. Three-quarters (72 percent) said their offshore implementations met or exceeded their expected savings. “A lot of programs get started with high expectations. When half the programs meet your expectations, you view that as a success. We view a 72 percent success rate as pretty phenomenal,” says Furlong.
A third of the respondents (31 percent) achieved their service level goals within the first five months of their contracts while 75 percent did so within 12 months. The study concluded “offshoring delivers faster results than average domestic improvement efforts.”
The early adapters have convinced the laggards. The study found companies planned to increase their use of offshore delivery models; the authors predicted offshore initiatives would grow 50 percent by the end of 2007. “We think we have just scratched the surface,” says Furlong.
He believes a growing number of US companies will turn to offshoring as a viable service delivery model. He points out Lou Dobbs ferreted out 186 American companies who have offshored staff. “That leaves a lot of American companies who have yet to try the model,” he says. However, Furlong is quick to point out that offshoring is not the answer for every situation or every company.
The reasons for offshoring were no surprise. The respondents told the researchers cost benefits were the No. 1 driver (93 percent) followed by a demand for improved service levels (56 percent).
What Functions Are Going Offshore and Why
While IT is still the function most offshored (66 percent), high value services like finance and accounting (60 percent), engineering services (44 percent), and research (32 percent) are more often offshored than transaction-process services like procurement (24 percent.) Human resources sent only seven percent of its operations offshore. “We were surprised about that,” says Furlong.
The finance and accounting people wanted to retain control of their offshore operations. The study found 70 percent of the finance and accounting operations were captives as opposed to just 10 percent of call center or IT shops. “American companies were more concerned about controlling their accounting than either their customers or employees,” says Furlong.
Companies view service levels as both a driver and a risk of offshoring. Respondents told the researchers they are moving offshore to improve their service levels. Yet 61 percent ranked quality of service as the No. 1 risk of sending work overseas.
The No. 2 risk: cultural fit (54 percent.) American companies were more worried about this than they were about disaster recovery (26 percent) even though their data was located halfway across the world.
What do these numbers mean? “Offshoring of white collar jobs has become a viable strategy for US companies needing to increase their global competitiveness,” says Furlong.
The Archstone executive says one of the most interesting findings was that 58 percent of the respondents decided to outsource to gain access to qualified personnel. Back in 1998 American companies turned to India to help them fix their Y2K bugs because their own software engineers were overwhelmed working on new projects. Then the dotcom crash put a lot of high tech workers out of work. Yet more than half of these companies had to go offshore to find the skill sets they needed. “The workforce in America may not be the correct fit for American businesses at the top–the highly skilled labor–or at the entry level positions,” posits Furlong.
While India is still the leader (82 percent) of offshore operations, only 52 percent of expansion plans with a specified location are targeted for India. Other countries that are growing in importance are: China, other Asian countries like Korea and Viet Nam, the Philippines, Latin America, and Canada/Mexico. “India may be losing market share,” says Furlong.
He says attrition is the big problem for India. “Employee turnover increases wage inflation, inflates hiring and training costs, and adds to the learning curve. That’s when you have the greatest risk of falling service levels,” says Furlong.
In June the partners will have another look at the market.
How the study was done: Archstone Consulting and Duke’s Center for International Business Education and Research surveyed 100 Fortune 500 companies who had offshore operations for at least 18 months. Together the respondents had 176 functional implementations. These companies, who were in the financial services, automotive, airline, consumer products, pharmaceutical, energy, retail, hospitality and high tech industries, had average revenues of $21 billion. The researchers conducted the study during the three-month period from October-December 2004. They presented the results at the 2004 National Forum on Trade Policy. It is the first in a series of studies. The team is working with academic organizations in Europe to launch a similar study there.