Which Approach Offers The Greatest Business Value To Your Company?
By J. Peter Donlon, Executive Vice President, API Outsourcing, Inc.
and John Kropp, MBA Candidate, University of St. Thomas
Learn more about Offshore vs. Onshore Outsourcing on our updated version here >
In this increasingly competitive global market place, leading-edge companies are evaluating the potential to significantly raise shareholder value by establishing business process outsourcing relationships. Pursuing this path offers the potential to dramatically raise business performance, but it is also a path surrounded by risks. One of the biggest strategic challenges involved in this outsourcing decision is answering the question of whether to partner with an offshore or onshore outsourcing firm.
Offshore business process outsourcing is the exporting of work from the United States to areas of the world where there is lower labor cost or tax savings. In this type of arrangement, the foreign-based firm provides services for a U.S.-based company that could also be, or usually has been, provided in the U.S. Onshore outsourcing keeps the business process that is being outsourced in the U.S. and utilizes a partner to supply U.S. based labor and expertise for the completion of the work.
Regardless of whether a company selects an offshore or onshore relationship the reasons are typically the same:
- Reduce and control operating costs
- Improve company focus on its core competencies and strategic imperatives
- Access to world-class capabilities and best of breed technology
- Re-allocate internal resources to higher-value purposes
- Address the issue of limited internal resources
- Accelerate re-engineering/transformation efforts
- Manage more effectively a difficult or problematic function
Before determining whether to establish an offshore or onshore outsourcing relationship, a company needs to fully recognize the implications from the two very different outsourcing business models and choose the one that most clearly addresses their unique strategic business needs. Included in this analysis must be a balance between cost, performance and risk objectives:
Labor Arbitrage versus Automation -- The work completed through an offshore business process outsourcing relationship is generally advantaged through labor arbitrage - the difference in labor rates between where the work is performed and the home country. Foreign-based outsourcing providers have grown significantly in recent years utilizing growing ranks of relatively low cost employees. Low labor costs allow these firms to offer a comparative labor cost advantage versus having the work performed in the U.S. with U.S. labor. Appropriate processes to outsource offshore include those with well-defined requirements and specifications and those with routine end-user interaction.
Alternatively, onshore outsourcing providers have had to develop and rely on technology and automation to a much greater extent to offset their relatively high labor structures. The technology-grounded business model completes work in an efficient and effective manner with fewer employees and offers clients automation and process transformation advantages. The average Fortune 1000 firm spends 60% of their IT budget on legacy system maintenance costs. An onshore outsourcer provides access to state-of-the-art technology with development and maintenance costs spread out across the broad client base. Suitable processes to outsource onshore include those which are now highly manual, error-prone and those that would profit from process reengineering advances. Such processes generally require achievement of rigorous quality standards and iterative, ongoing communication with the company and its customers and/or suppliers.
Hidden Costs -- It is very unusual that cost reduction doesn't play some role in a decision to outsource. Offshore firms certainly offer labor arbitrage but companies often ignore the hidden, ongoing costs for long distance communication, training and travel. Establishing and then maintaining a long distance business relationship can be very costly and time consuming. Onshore providers have much lower communication, training and travel costs, which in combination with automation, deliver a total cost structure (both direct and indirect) that is competitive with offshore providers without risk of an overseas engagement.
Vertical Market Expertise -- Many companies select an outsourcing provider based on extensive vertical market expertise due to unique process needs in their segment. The offshore provider business model generally emphasizes obtaining the maximum throughput from a process. The focus is on specific process transaction volume across numerous industry segments. Onshore providers, on the other hand, position themselves in their local market as process experts in a narrower number of vertical markets such as Transportation, Distribution, Health Care, Financial Services, etc. and develop services to address those unique segment needs. This industry acumen often allows U.S.-based onshore firms to offer sophisticated business transformation capabilities to their clients.
Business Continuity - Companies today are finding it difficult to accurately assess the international political and security risk from using offshore workers and housing proprietary customer data abroad. Many countries have limited intellectual property laws and operate in environments where economic espionage is rampant. Additionally, those countries offering the most attractive labor costs are often the same ones which are still actively developing their emerging political infrastructures.
Public Policy - Some U.S.- based companies have been confronted with negative customer reaction and adverse publicity from their decision to offshore work. It can be difficult to convince customers that their information is secure offshore in a country with different laws, language and culture. There has also been an increasing number of cases of union and displaced U.S. worker backlash. This has resulted in the proposal of numerous new Federal and state laws and regulations to penalize companies that outsource using offshore, rather than onshore, providers. Such regulatory changes impact income tax, transaction tax and transfer tax structures, as well as compliance with public company (Sarbanes-Oxley), industry sector, privacy and data regulations. Current proposed laws require location disclosure for call centers; restrictions on where work for government contracts can be performed; and restrictions on the offshore housing of personal medical and financial data.
There is little doubt that the trend by large, complex companies to outsource business processes will accelerate. The tactical and strategic business case for outsourcing is simply too compelling. The decision regarding partnering with an offshore or onshore outsourcing provider should include a disciplined evaluation of labor arbitrage, automation, total costs, vertical market expertise, business continuity, public policy issues and the operating culture of your organization.
About API Outsourcing, Inc.
API Outsourcing, Inc. is a leading provider of state-of-the-art billing and accounts payable automation solutions for Fortune 1000 Transportation and Distribution firms. Headquartered in St. Paul, MN, outsourcing services are delivered through production facilities located in Two Harbors, MN and Waunakee, WI. API delivers services to transform clients' manual paper-dependent processes into innovative automated processes. The company manages over 200 million billing and payable transactions annually. Clients benefit from the significant increase in process efficiency, profitability and financial control. API is a Six Sigma quality service provider. www.apioutsourcing.com