Capturing the Full Cost Benefits of Offshoring

By Ben Trowbridge

Diminishing returns…increasing competition and the economic climate of the day are leading more and more companies to seek the cost advantages presented by offshoring, but those advantages are no longer so easily attained. As demand grows so does provider sophistication, and the number of sourcing alternatives begins to multiply. Capturing the full cost benefits of offshoring requires a thorough and comprehensive process that must analyze many factors to include: the current cost state, the transition timeline, the sourcing models available, and offshoring location options. The Trowbridge Group has created an innovative process called FastSource^TM, which develops a true business case analysis, and provides corporations who are seeking to explore offshore alternatives with solutions that will successfully initiate, implement and improve their sourcing initiatives. Our sourcing methodology will not only confirm the cost benefits, but also generate a business model and timeline for cash flow and investment purposes.

Introduction to FastSource^TM Methodology

Many companies today are evaluating the advantages to be gained by offshoring their non-core competencies such as: finance and accounting, software development, IT and call centers. However, the increasing number of offshore locations and the variety of sourcing models available has significantly complicated the process.

India’s dominance in the IT arena is being challenged by the emergence of the Chinese market. Meanwhile, the Philippines offer an attractive cultural fit with the U.S., but at what price? Can nearshore options such as Canada truly provide adequate cost savings to justify the transition? Even a cursory glance at the variety of offshore options reveals the complexity of the decisions facing a corporation seeking to source functions overseas.

Further complicating matters, there are many different offshoring models available today, each with its pros and cons. One option involves creating a shared service center in a low cost location, allowing you to maintain ownership of the functions sent overseas. In contrast, you can directly outsource to an offshore provider, but your contracts must be carefully crafted to mitigate the risks and reduce the loss of control. Some companies choose the Build Operate Transfer model, enabling you to receive the expertise of the offshore company who will pave the way for you by building the center (clearing any legal hurdles and start up issues) and then transfer ownership to you once the center is successfully up and running. These are just a few of the many options available, and the optimal solution for your offshoring needs might involve a combination of the above models.

We believe that before deciding on a location and a model(s) you will need to build a business case that outlines the scope of services to be included, as well as the current and future costs. The Trowbridge Group has provided many clients with the FASTSOURCE^TM methodology, which enables the development of such a business case:

Steps:

Develop a team to evaluate offshoring.
Attain a high-level assessment of functional areas to offshore.
Develop process maps to determine key activities and processes.
Gather all of the current state costs.
Determine what is in-scope and out-of-scope.
Location Evaluations: Gather demographic specifications and match to specific client requirements.
Develop a timeline for the movement of the in-scope processes to the offshore locations.
Develop an Income Statement, Balance Sheet and Cash Flow Statement.
Compare the Income Statement for the offshoring case with the Income Statement for the in-scope current state as projected into the future.

Bear in mind that cost is just one factor that must be considered. The financial analysis that this methodology produces is key not only in defining the cost savings, but also in forming a plan for the implementation of the project and initiating discussions with the legal authorities at your offshore location(s).

Step 1. Develop a team to evaluate offshoring.

By its very nature, the process of evaluating offshoring is an inherently sensitive political subject. In order to be able to extract the information necessary to accurately assess your company’s current state, you will need significant “buy-in” from the managers of each functional area of the company. This, of course, is not an easy matter. A properly formed evaluation team serves to legitimize the process and acts as a motivating force to keep the process moving forward. The presence of an outside consultant on this team enables the internal team members to focus on their day-to-day roles, while leaving the heavy lifting of data gathering to the consultants.

The client and Trowbridge Group usually lead the initial kickoff meeting jointly. Discussion naturally arises as to why this is being considered and what the expectations are for the team members. The first task that the team must face is to decide the functional areas that will be considered for offshoring.

Step 2. Attain a high-level assessment of functional areas to offshore.

Much has been written on how to evaluate the functions to be offshored. At Trowbridge Group, our methods involve mapping the processes of the functional areas that are candidates for offshoring. A complete documentation of each relevant function is necessary to accurately determine the functions to consider. For example, you might include Order Entry in your considerations, even though there are specific areas of order entry that would not be a good cultural fit overseas. Certain customers and clients may require service in your home country, but at this early stage the whole function should be evaluated. As we move to the next steps and examine the processes, we will be able to determine the exact factors we should use to filter portions of the function out-of-scope.

Step 3. Develop process maps to determine key activities and processes.

Mapping out the processes that make up each function allows us to uncover the dependencies and infrastructure required by each process. Returning to the Order Entry example, one part of the process you might consider is Web Order Entry. Here we would list the function, number of employees, the shifts, and the process. We would answer questions such as:

What processes do they follow?
What other groups do they depend on for information?
Is the process being run efficiently?
How thoroughly is it documented?
Is it repeatable?
Are there specific language requirements that you will need to duplicate offshore?
What systems are required?

By thoroughly mapping the processes, we can accurately gather the current state costs.

Step 4. Gather all of the current state costs.

Gathering current state costs can be very time consuming and requires great attention to detail, but much of the groundwork has been laid during the process mapping. While fleshing out the details of each process, many of the necessary costs are concurrently gathered.

Employing an outside financial expert facilitates the collection of the costs. The Trowbridge Group has clients across many industries, and we are familiar with the cost structures unique to each. This experience enables us to analyze your current costs and compare them with those of similar companies to determine the existence of hidden costs or cross-charges that must be uncovered.

A department’s budget is a good place to start, but does not always present an accurate picture of the costs thereof. For example, overhead costs directly related to a function are often not included in the budget of the department responsible for that function. Conversely, many costs may be improperly allocated to a department’s budget, and include extraneous costs that are irrelevant to the processes as they have been mapped out. An accurate assessment of the current state costs is essential for properly measuring the true cost advantages to be found offshore.

Rules of thumb are often helpful in gathering costs. When examining IT and telecom, you must always ask if there are enough dollars allocated to cover the cost of each employee. Budgets are often understated with the additional costs distributed in other overhead departments. Determine if all of the software maintenance costs are included and consider if there are any impending upgrades that may result in a substantial capital outlay. A full examination of cross charges and costs is vital to obtaining an accurate handle on the current state costs of your company.

This step paints an accurate picture of the true costs of those functions you have chosen as potential areas to offshore. Later, when we compare the current and future states, we will use these costs to determine the Net Present Value of the project.

Step 5. Determine what is in-scope and out-of-scope.

Which functions should stay domestic and which functions are suitable for moving offshore? Often a function can be moved, but first must be documented and reengineered before being transferred overseas. Using the rating system generated by our financial analysis enables you to make an informed decision regarding what is in-scope and out-of-scope, and also to determine the proper sequence of activities during the offshore transition.

There are many factors used to determine what is in-scope and out-of-scope. Some functions require either internal or external customers to meet face-to-face. Obviously, many sales positions are likely to be taken out-of-scope. Customer service, on the other hand, can often be moved offshore with the possible exception of repair centers. Some functions are out-of-scope because of their dependence on another function located in the home country. Here, you must examine the dependency carefully, because, unless close contact is required, email and telecommunications often serve to adequately facilitate communication. Again, it is important to remember that many functions can be easily partitioned to allow only certain portions to remain domestic.

While more and more functions are being performed overseas, the last few years have certainly shown that specific functions must be performed at home. The FastSource? methodology breaks down each function and thoroughly examines each aspect to determine whether it is a proper fit for the specific model and shore chosen. This step creates a master list of all the processes, and allows the team to begin a thorough evaluation of possible offshore locations.

Step 6. Location Evaluations: Gather demographic specifications and match to specific client requirements

Each location is evaluated based on its suitability to the nature of the work to be offshored. This evaluation includes both the external factors present in each location and the client-specific factors determined by the client’s strategy and objectives.

Extensive research and experience with both the primary and emerging offshore locations enables the Trowbridge Group to provide our clients with information on external factors to include:

Costs – labor, infrastructure, tax and compliance
Labor Pool – language skills, capability, availability, culture
Infrastructure – telecom & tech, business & social, transportation
Business Environment – economy, stability, legal, corruption, crime
Process Quality – number of providers, experience, availability

Each location must also be evaluated based on its fit with the client’s short-term and long-term goals. A company’s overall business strategy must be considered to properly measure the intangible advantages and disadvantages of a particular location. We must consider the client’s strategy for that country: Do they currently have a presence there? Does the country represent a market for the client’s goods or services? Another factor that must be taken into account is the degree of control over the process required by the client. Likewise, the proximity of the location to the customers being served by the offshored function is often a determinative factor. Lastly, given the attention currently focused on the industry, we consider the PR attractiveness of each location when evaluating its suitability for the client’s needs.

At this point, we have determined the offshore locations that meet a minimum threshold for suitability to the client’s needs. In light of this, it is useful to reevaluate the functions that are currently in-scope and those that have been taken out-of-scope to assess any possible changes based on the locations considered. Next, we configure the in-scope functions amongst the offshore locations in a variety of combinations to determine the client’s optimal sourcing strategy.

The location study summarized above is a separate and complete process that we run parallel to the creation of the business case. Once the location(s) have been determined, we begin drafting a timeline for the migration offshore.

Step 7. Develop a timeline for the movement of the in-scope processes to the offshore locations.

Developing a timeline for in-scope processes using the FastSource? methodology provides a seamless transition from one step to the next allowing for maximum efficiency without sacrificing accuracy.

Now that we have determined the scope of the movement and the functions to be included, it is time to examine the sequence of the movement offshore. There are many questions to be considered such as:

During what months should each process move offshore?
Is it possible to bring up more than one center at a time?
How many providers should we use and what are their capacities?
How many people can start in a month?
How many people should be in one center?
How soon should we begin work-shadowing?
What jobs will require work-shadowing?
Will people starting in the new location need to be physically located in the home country for training for a few months in advance?
How long will it take to hire the employees?

Once you have a general idea for the length of time required for work-shadowing, you can begin to draw a timeline for each function. If you have selected a shared services model or joint venture, you must also consider when to start the build and set-up of the new center. Our depth of experience and expert knowledge can also provide clients with specific answers to more detail-oriented questions such as the following:

How quickly will you need to take on additional floors?
How many support people do you need offshore and when?
How do companies hire in the offshore location?
What are the norms and customs?
How prevalent is the machinery and equipment I will need?
How long does it take for the office to be fit out?
What are the experiences of other companies with these operations?

Step 8. Develop an Income Statement, Balance Sheet and Cash Flow Statement.

Now comes the fun part – modeling the cost savings to your company. There are literally hundreds of inputs to a good cost model, and the model that the Trowbridge Group designed includes elements such as: the timing of the job starting offshore, the timing of work-shadowing, the cost of equity, the timing of cash flow associated with purchasing the capital equipment and paying your employees, as well as the severance and retainer bonuses required to retain your employees locally. In order to develop an Income Statement, Balance Sheet and Cash Flow Statement you will need to answer question such as:

How many buildings or floors do I need?
How will we finance this operation?
Do we need to consider the cost of equity?
Will it be set up as a profit center and charge the rest of the company for the use of the center?
What are the tax implications?
Will the offshore location offer incentives?
What are the migration sequencing and work-shadowing requirements?

In addition to the ongoing costs such as staff, turnover, and overhead, you will need to consider the cost for the Program Office necessary to execute the transition. The Program Office is usually made up of internal and external staff. The internal staff is familiar with your functional areas and is responsible for making sure the setup is done with your quality standards in place. External experts are required to handle change management and communication for the transfer of functions offshore. The Trowbridge Group has extensive experience serving as the external experts of the Program Office and can provide invaluable assistance in scouting locations, negotiating with contractors, working with the legal teams involved, and facilitating the process of setting up a new center.

Step 9. Compare the income statement for the offshoring case with the income
statement for the in-scope current state as projected into the future.

Once you have created the Income Statement, Balance Sheet and Cash Flow Statement for both the current state and the future state you can compare the two states to determine the Net Present Value and see where most of the savings are derived. Figure 1.below illustrates a breakdown of the cost comparisons in Asia, Europe, and the U.S.

In addition to the current-state and future-state projections our methodology produces a risk-based costing model by utilizing the future-state projections based on assumptions of varying degrees of risk. Consider asking what happens if inflation soars or turnover increases. What about the relative global valuation of the dollar? In addition to global variables and local inflation, another way of examining costs would be to examine what would happen if you brought up a center over a three-year period rather than a one-year period. All of these factors and more will affect your NPV. The outcome of the cost study and sensitivity analysis will lead you to the offshoring strategy that provides your company with the proper balance of risk and return.

Conclusion

Our methodology enables our clients to conduct a thorough business case analysis for offshoring strategies. Using our FastSource? process we can initiate, implement and improve sourcing strategies by capturing the full cost benefits of Offshoring. Before implementing your offshoring strategy the Trowbridge Group can provide you with the resources necessary to successfully engage in negotiations with both service providers and internal management when deciding upon the optimal offshoring model and location for your company. Knowing your current and future costs will enable you to move forward with confidence and certainty to whatever shores your sourcing initiative may take you.

As independent advisors, innovative business solution experts and experienced global BPO and IT negotiators, we take the art and science of creative deal structuring to new heights. Whether your solution demands a shared service center, a joint venture or traditional outsourcing, the Trowbridge Group can develop the optimal sourcing strategy that’s right for your situation. We assist organizations around the world in navigating the sourcing lifecycle, and our clients are leading their organizations into the future, today.