Offshoring Q&A

November 18, 2005

0 4 minutes read

Offshoring, despite the political controversy surrounding it, shows no sign of waning. In fact, just the opposite appears true. A new report by PricewaterhouseCoopers says the U.S. financial services sector, in particular, is set to double offshoring by 2008.*

According to John Berry, author of Offshoring Opportunities: Strategies and Tactics for Global Competitiveness, due out this month, PwC's report is on target.

“Basic accounting and lower-level bookkeeping processes are ripe for offshoring to leverage drastic wage differentials between CPAs in the United States and those in India or elsewhere,” said Berry.

SmartPros asked Berry to explain more about offshoring and what it's all about.

Q: What is offshoring? How is it different from outsourcing?

Offshoring happens when a company relocates internal business processes to a foreign country. The company either manages these processes internally in the new country or contracts with an offshoring service provider. Outsourcing is the domestic version of turning over daily management of business processes to a third party. A U.S. company hires a U.S. service provider or a Canadian company hires a Canadian service provider.

Q: What are some offshoring trends in this first decade of the 21st century? What are the common services/processes that companies are offshoring today?

21st century trends include maturity of business process offshoring management — that is as more companies do it, more sophistication will seep into management of these relationships. This will only improve the amount of value organization's will capture through these arrangements.

IT has been the most prevalent because of the rich history of outsourcing this kind of work. Call centers is also very popular.

Q: What business is an ideal candidate for offshoring?

It is less about what kind of business or industry vertical and more about whether the organization in whatever industry can either reduce costs dramatically or create value by virtue of offshoring. Some conditions suggest, however, that some organizations are more suitable than others for offshoring:

Experience. Companies experienced with domestic outsourcing have already built up a reservoir of tribal knowledge that will help them manage this type of relationship. Even though there are differences between offshoring and outsourcing, the essence is the same — relinquishing direct oversight of business processes to an outsider.

Culture. Organizations used to partnering, alliances — the relinquishing of control — will find the offshoring process far less painful than the buttondown, hidebound, control freak companies.

Resource constrained. Startups and fast growing smaller companies sometimes haven't fully developed internal capabilities to handle all the operational business processes that are candidates for offshoring — HR, finance, IT etc. Companies such as these would do well to consider offshoring these important but non-essential functions, concentrating on innovation and building a market.

Q: How does a company overlook/overcome the bad press that offshoring does nothing but lay off Americans?

If by virtue of offshoring a company can show that the cost savings go into more strategic internal activities–R&D, marketing–that create opportunities, this is the biggest weapon to silence critics.

Q: Where do you see it 10 years from now?

If I could accurately predict the future I'd run for Mayor of the Universe. I do think, however, that for offshoring to continue on its current path it must overcome:

Growing political resistance. The quickest way to end offshoring is to pass a law making it illegal — and don't think Congress won't consider it if the perception is that job losses are too high because of it.

International political instability. One of the most important attributes needed for markets to flourish is a stable political environment rooted in the rule of law. We have and always will live in a turbulent world. There is no guarantee that political conditions in other parts of the world will remain condusive to offshoring investment.

Economic maturity of popular offshoring locations. Offshoring targets — Czech Republic, India, the Philippines — are all popular offshoring locations because they offer drastic differences in wages and other costs. But as any nation matures economically that arbitrage between costs in these locations and the U.S. will tighten. At some point, the differences could narrow to the point where no arbitrage exists anymore. When will this happen who knows? The question is, what countries will emerge as offshoring candidates when the usual suspects are no longer attractive?

Q: Any thoughts you'd like to add?

Offshoring is much more complex than some organizations imagine, especially to those who have little experience in domestic outsourcing. The biggest favor a company can do itself if it pursues offshoring as a legitimate response to either cost structure or strategic imperatives (some offshoring is strategic and not just about cutting costs) is to develop a repeatable, consistent decision framework that injects discipline into the process of executing a business process offshoring initiative. It doesn't have to be set in stone — it can be flexible so it can be modified over time as the organization gains wisdon — but needs to provide structure enough that offshoring decisions don't end up being ad hoc or willy nilly. When decisions are approached this way, the results aren't good.

Conclusion

Returning to the topic of offshoring accounting processes, Berry concluded: “Accounting processes are the perfect kind of low value-added activity a company must conduct but doesn't reap any rewards for.”

* Offshoring in the financial services industry: Risks and rewards is a 28-page report available now in PDF from PricewaterhouseCoopers.

The author, JOHN BERRY can be reached at www.according2jb.com or 541.549.8964. His book, Offshoring Opportunities: Strategies and Tactics for Global Competitiveness, is available at Wiley.com.