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Five Reasons Why Offshore Outsourcing Projects Fail

By Ravi Kalakota and Marcia Robinson, CEO and President, E-Business Strategies, Inc.

Although the topic of outsourcing continues to grab headlines, the unspoken corporate code of silence on offshore outsourcing projects still holds relatively steady whether companies experience success or failure. A few companies, however, have stepped forward to publicly offer complete versions of their offshore outsourcing experiences. Their experiences reveal, as many have been quick to say all along, that offshore outsourcing sometimes does more harm than good. Below we describe the top five reasons why offshore outsourcing projects fail.

1. Bargain Shopping — Selecting Vendors Based Solely on Cost
Companies experienced at offshore outsourcing choose high-quality service providers and negotiate the lowest price from them. It’s much more difficult to go the opposite route: select low-cost providers and then hope for high quality. The performance differences between the best offshore vendor and the worst offshore vendor are considerably larger than the performance differences between U.S. outsourcing companies such as Accenture, EDS, and IBM.

Since the outcome of the offshore vendor selection process can vary widely, companies have to evaluate prospective vendors on multiple fronts. Organizations have to conduct strict due diligence that looks not only at cost but also at the service provider’s people, processes, and technology. That means checking the vendor’s customer references, employee attrition, financial health, security procedures, intellectual property protection, infrastructure, and quality certifications.

Companies that select offshore vendors on the sole basis of cost do themselves an enormous disservice. Although businesses such as Agilent Technologies often turn to offshore outsourcing after posting consecutive quarterly losses, offshore outsourcing encompasses much more than reduced operating costs. Vendors often provide quality and process improvements or even business transformation.

Offshore vendors tend to shy away from using the term “low cost” to describe themselves and instead bill themselves as global technology services firms (Infosys) or business process outsourcing providers (Wipro) that offer “transformational outsourcing solutions” (Cognizant). Companies considering offshore outsourcing initiatives should evaluate all of the vendor’s qualifications rather than select a service provider on the basis of cost alone.

2. Failing to Consider the Offshore Destination’s Security
Security is another issue that can derail offshoring ventures. Offshoring destinations differ greatly in terms of political and economic stability. Generally, Canada and Ireland score high on these fronts, while Russia, China, India, Brazil, and the Philippines receive lower scores. The stability of the current regime; the risk of asset nationalization; the threat of war, strikes, terrorism, or medical outbreaks — all are possibilities that companies have to consider when they conduct vendor due diligence.

Delta Air Lines backed away from a proposed call center in the Philippines after its security people expressed concern about the existing political environment. Good vendors can alleviate client fears by explaining their disaster recovery capabilities, reliability of infrastructure, and security. For their part, clients apprehensive about sending work offshore can gain a better idea of the security issues that could await them in their chosen offshore destination by conducting political and economic risk assessments. Both parties benefit from taking steps to address the very real issue of security.

3. Inadequate Upfront Planning and Expectation Management
The third major reason why offshore outsourcing projects fail is that companies do not have a comprehensive plan in place for managing the process effectively. You can outsource parts of your offshore strategy execution, but you cannot outsource the responsibility for developing a strategy in the first place. Every company must build its own strategic plan and make sure the offshore vendor understands it. Taking the time to clearly communicate and document priorities, long-term direction, and metrics is one area where companies fall down.

Alignment of expectations with vendor capabilities is vital. Nothing creates distrust and dissatisfaction quicker than misalignment between what you expect from the vendor and what the vendor actually is providing. Lehman Brothers didn’t hesitate to pull back its internal computer help desk function after Wipro failed to provide the level of service and quality it expected. Wipro was handling Lehman’s employee reports of computer problems.

Companies that pay little attention to designing service level agreements (SLAs) contribute to misaligned client and vendor expectations. A good SLA describes the start and end dates for the service, the schedule for reviewing performance, and the documentation to be used in measuring the service. SLAs should clearly define the level of service, how the service will be measured, the provisions and penalties for over- and underperformance, and the escalation process for issue resolution. You cannot measure what you cannot define, so if it is not clearly defined in the SLA, it will be impossible to measure the vendor’s performance. Well-defined SLAs often lead to successful upfront planning and expectation management.


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