Recent years have seen a marked increase in offshoring to service providers in low-cost countries such as India, China and Poland. A growing number of companies are leveraging offshore-based white-collar talent pools that cost one-fourth the rates of comparable resources in the United States. A clear indicator of this trend is the fact that India exported $9.5 billion in IT services (mostly to the U.S.) in 2002-2003, a growth of 25% compared to 2001-2002.
Outsourcing is the process of transferring a business task, like a call center or payroll, from company control to a third party provider. While the term "offshoring" is often interchanged with "outsourcing," the two are not equivalent. Rather, offshoring is the process of moving a business operation to a location overseas, whether through a third party provider (an outsourcer) or through the creation of a company's own subsidiary.
Much is said about how Fortune 500 companies benefit from offshoring, but one aspect of the rhetoric that has been left unexamined is how small and mid-sized businesses (SMBs) can use the practice. When done properly, outsourcing can become the linchpin of their corporate success and their primary means of competing in an increasingly global market. Small business owners and entrepreneurs are learning that outsourcing to India, with its low-cost workforce, valuable resources and 24 hour workday, can significantly reduce operating costs and accelerate a product's time to market -- a competitive advantage for any business.
Traditionally, the way to utilize offshoring has been through third party providers. Previously, these providers have offered a two-tier service where U.S.-based consultants package work for offshore-based colleagues. Traditional outsourcing has proved to be problematic, and it seems as if everyone is familiar with at least one outsourcing horror story. While this model has proven successful for some companies, there are numerous pitfalls that can befall a company, ruining an outsourcing project:
- Incomplete leverage of the cost arbitrage: Offshore outsourcers earn a healthy margin on their overall costs. For companies that wish to leverage offshore resources for long periods of time, outsourcer margins can add up to substantial unnecessary costs.
- Limited control over resources: There is limited guarantee that staff trained with valuable customer process/technical experience and knowledge will be available on an ongoing basis.
- Handing over intellectual property to a third party: Even with confidentiality and non-compete agreements in place, there is still the potential for misuse, especially in countries with loose IP laws.
- Quality directly proportional to the size of the account: Of the hundreds of offshore providers, the large and medium-sized providers often provide world-class service. However, many of the smaller providers often have to cut corners in terms of infrastructure and resources to compete. Thus, the large providers prefer serving large customers. A SMB in need of services that entails 5-10 people can be "deprioritized" by large providers in favor of larger revenue generators.
An alternative to the traditional offshoring model that has recently gained ground is the captive site model. Captive sites are any corporate offices owned by the corporate entity. In this model, a company creates its own captive site or subsidiary at an offshore location and staffs it with locals who become the company's own employees.
Through the use of captive sites, companies create their own subsidiaries offshore to take greater advantage of the financial benefits of outsourcing, while assuming greater resource control and more effectively managing and protecting intellectual property, and allowing them to preserve their corporate culture overseas. Captive sites also offer significant cost savings through cheap labor, resources and tax benefits. These companies use subsidiaries to access specialized labor and resource pools and gain access new markets.
Because of the large financial requirements for opening a facility overseas, SMBs traditionally have been unable to leverage the captive site option. To overcome this hurdle, SMBs have begun seeking guidance from consultants who specialize in helping these companies set up their own subsidiaries. The consultants remove the challenges involved in setting up shop in a foreign country and manage unfamiliar accounting and legal, regulatory, operational, political and business process practices.
Offshoring is growing like never before. While third party offshoring is a well-accepted model, captive site offshoring is quickly becoming a viable and more attractive alternative for a growing number of SMBs. Captive site offshoring can be more cost effective than traditional offshoring, but there are certain challenges that companies need to address to be successful. Done properly, captive site offshoring can make half-a-world-away seem much closer.
Amit Maheshwari is the CEO of i-Vantage, a Boston-based provider of IT-enabled solutions and a former senior technology strategy consultant at Mainspring Inc. He was also a director at GE Medical Systems and has worked with major Indian outsourcers such as Tata Consultancy Services, Wipro InfoTech, Mascot Systems and Satyam Computers.