Offshoring: A world of opportunity
Much like someone trying to watch their weight by adhering to the current diet fads, the divergent and seemingly contradictory viewpoints surrounding offshoring - or international outsourcing as it's also referred to - are sure to result in mass confusion and, ultimately, incorrect choices.
Here are just two examples of these divergent viewpoints: earlier this year, a report entitled Off-shore and Off-work, commissioned by the Australian Services Unions (ASU) and undertaken by the National Institute of Economic and Industry Research (NIEIR), found that one in 10 service sector jobs could be sent offshore over the next 20 years. The Australian service sector accounts for four out of five Australian jobs and 80% of our economic activity. It includes banking, insurance and finance, telecommunications, tourism, retail, and many others. According to the report, only services that require face to face contact (nursing, wait staff) would be tied to a particular location.
Yet a 2005 Deloitte Research report titled Annual Survey of Offshoring in Financial Services found that Australian companies are missing out on a savings bonanza because they have been slow to transfer jobs offshore. The report found that 42% of global companies that are shipping financial services overseas have experienced savings of 40% or more. Most of that money was saved in India, which attracts a significant 72% of the offshoring market.
What should be considered in a service level agreement or BPO contract?
Term & termination
Deflationary pricing over length of contract
Data security, privacy, confidentiality and continuity of business
Indemnification and insurance
Financial strength of vendor
While the experts weigh up the pros and cons, the court of public opinion appears to have already reached a verdict: offshoring is bad for Australian jobs; bad for Australian skills; and bad for the Australian economy. It appears the Australian public don't want to be dealing with call centres based in India or have their banking details handled by overseas workers in less regulated environments to those at home. Is this justified?
"I think there's a lot of confusion. The reactions are not always rational - they're political or emotional but it's not really understood what happens in these processes," says Lisa Barry, national practice leader, human capital, Deloitte Consulting. "People imagine that all the jobs that were once in Australian call centres are now going to India and they see it as simply as that. There are other issues at play - for example, the fact that the failure to sustain a call centre in Australia is likely based on the lack of labour - not just lack of talent but a genuine lack of labour."
If HR is to be intimately involved in the process of offshoring it cannot ignore the threats the practice presents to a company's reputation. The threat comes on two fronts: the internal brand; and the perception of the company from external stakeholders - particularly customers. "With the tight labour market, the designation as employer of choice and importance of employer branding, you need to be aware that offshoring can have a negative impact on your internal stakeholders - your employees in particular," says Andrew Collett, director of client services at branding and reputation consultants Hill & Knowlton. "From the external perspective, we've seen high profile cases where companies from Australia have looked at offshoring and have witnessed backlash from customers."
Candidates have become savvy in terms of the research they do and are making informed decisions about the type of companies they want to work for. Collett notes that a company offshoring to a country with a shady human rights record will not sit well with Gen Y candidates in particular. "Word of mouth is very powerful. People who are passionate about an organisation are very open about it and will tell others, but people who are slightly ashamed of their organisation don't talk about it, or talk about it negatively," he says.
Prior to undertaking an offshore exercise Collett recommends mapping out who the stakeholders are, as each group will have different areas of concern. Communication should be personalised and tailored to each group.
"You cannot lie. No reputable communication firm would recommend that. One of the concerns employees will have is 'how will it impact on me and what's in it for me?' You have to explain to your employees the rationale behind it. You need to talk to them on a personal level, engage with them and really answer their concerns and put into perspective the outsourcing program and how that fits with the bigger picture," he suggests.
What's being outsourced?
The targeted business processes generally fall into the six areas:
1. Sales, marketing, and customer service call centre, appointment setting, telesales, database marketing, web sales, and marketing.
2. HR payroll, benefits administration, education, and training.
3. Logistics/distribution procurement, transportation, warehouse management, and material management.
4. Payment services credit/debt card processing or check processing.
5. Finance/accounting accounts payable/receivable management, risk management, and general accounting.
6. Administration tax processing, claims processing, and document management.
7. Manufacturing design, production and component inventory management
8. IT application development and maintenance, desktop support and helpdesk support.
Taking the plunge
Stellar is one organisation that has already taken the plunge and has offshored a segment of its workforce. The company is a global business process outsourcing (BPO) provider, with over 6,000 employees across 19 contact centre sites in Australia, North America and UK. However, the company has also faced its own challenges around offshoring with the opening of an additional facility in The Philippines for domestic and international clients seeking a reduction in outsourcing costs.
"There's a growing acceptance of offshore outsourcing due to the benefits it can deliver, although many companies are recognising that the decision to move offshore cannot be taken lightly. Clients need to consider what industry they operate in, the type of service they wish to outsource offshore, comparable operating costs, and customer reactions and their long-term outsourcing objectives," says John Hollingsworth, CEO, Stellar (Asia-Pacific). "It's certainly an attractive option for lower value transactions, and will continue to gain popularity and acceptance in coming years."
Hollingsworth believes offshoring is a natural extension of domestic outsourcing, especially for international companies who can obtain cost reductions and quality improvements by consolidating global support needs. "Offshore options allow these organisations to adopt a follow-the-sun approach to service delivery and to take advantage of a single, low cost location for all their customer service or back office processing needs," he says.
Stellar opted to develop a joint venture agreement with an existing call centre provider in the Philippines, which allowed the company to leverage off the call centre capabilities of both companies and bypass many of the difficulties associated with a new set up. "We also spent a lot of time choosing a partner for the joint venture who had the same cultural values to delivering quality service with an emphasis on people first. We both have a very client-focused approach to service delivery and apply the same rigorous implementation and ongoing communication methodologies," Hollingsworth says.
Indeed, it's the culture that can make or break an offshoring arrangement. Barry notes that service level agreements (SLA's) between each 'portion' of the workforce may be essential but can also be mechanical and simply tick the boxes of expected service levels. "If you have a portion of your workforce offshore it's all about how you actually manage the change. Everybody knows how that segment needs to partner with the other. It's a partnering model that's not just about SLA's. It's the culture of how it all works between the portions and the parties. It gets off to a great start if you do the job properly upfront, warming people to the new model and how it works," she says.
As important as employer reputations and SLA's are, offshoring presents other challenges - and opportunities. Barry notes that many organisations - and HR professionals in particular - are missing the prime opportunity that offshoring creates to restructure and reshape the organisation. She explains a concept known as the 'retained organisation': "When a division or function is moved overseas, it obviously changes the onshore operating model as well. Often the onshore model is left standing to operate and interface with the offshore portion, but we know that organisations do a very ordinary job of redesigning the retained organisation," she says.
The focus goes into setting up the offshore component while the homefront is left to continue as before. "The problem is they need the people who are still here - and there are many people still here - but there are big holes in how things are designed. They don't close the surgery so to speak and take the opportunity to make remaining work more interesting and create something in its own right that is spectacular and more efficient. If organisations did more of that you'd limit the concerns about what's going offshore.
"The organisation will not feel the same after a move offshore, and that's because it's not the same. You've chopped a limb off and then you wonder why it doesn't work very well. It hasn't been properly reconfigured to work in its own right," Barry explains.
In the past, Barry notes that HR's role in offshoring may have been limited to informing people of their pending redundancy. Now, HR's role is far more extensive. "It's a major redesign opportunity, and it's a major opportunity for HR to align where people's talents and skills may slot into a new structure. In the past jobs may have been lost but now they may not be. But if you don't redesign the organisation properly you're not giving real thought to who you could keep in the system doing something different," she says.
In short, workforce planning needs to be more effective than people taking redundancies and then a few months down the track being rehired by the same company. "In a tight labour market that's very short-sighted. HR need to take these opportunities before and during the process because after the fact is too late," Barry says.
Indeed, offshoring has become a lot more complicated. It's significant that India, once the country of choice for IT offshoring, is facing a shortage of skilled labour of its own and is offshoring work to Russia. Labour arbitrage, or profiting from a price discrepancy in labour costs, has always been seen as a major plus for offshoring. This too is changing. "The idea that it costs nothing to outsource to India and that you stand to make a massive windfall are actually less and less likely because it gets more expensive every day to set up. Indian workers aren't cheap and they are the most highly qualified nation per capita in the world. They know what they're worth," says Barry.
If the choice of offshore location has become more complicated, so too has HR's role, especially if the organisation has opted to set up its own centres overseas. HR needs to be involved in the change management, the onboarding, the sustainability of the new model, the incentives, the talent, and the performance culture.
If the offshoring operation is one of the organisation's own entities there are further choices around whether you use local leaders or whether you set up Australian leaders, and if so for how long. Barry also notes that organisations without sophisticated mobility plans will struggle.
A third party BPO is a different matter, as Stellar's Hollingsworth explains: "We've established a very strong management approach to help our clients with their offshore solution. This includes an Australian-based client services manager who will co-ordinate contractual and change management issues and facilitate communications with the offshore call centre facilities. We establish key operational contact points as well as regular communication forums to ensure seamless service delivery. We encourage our clients to tell us what will work for them and set-up the appropriate mechanisms that allow them to interact with us in a way which best meets their business requirements."
When it comes to risk management, the primary concern is on the privacy of client and customer information. However, risk management also extends to recruitment practices and undertaking background checks of potential employees. "If you're looking at outsourcing you need to understand what sort of people they [the outsource company] engage, and what sort of governance is in place," says Shirley Liew, associate director, business risk services, Grant Thornton Sydney.
"You must conduct due diligence on your service provider. Do a review of your service provider's risk management practices as well as their corporate governance, and that would include understanding what sort of HR strategies and recruitment processes are in place. In this global world we are competing in a borderless environment, but in the rush to outsource, perhaps the risk management side of things isn't being addressed." Liew adds.
FooBooOnline.com (Front Office Outsourcing Back Office Outsourcing Online) is an advisory, consulting, and agency firm that helps connect business with high quality outsource service providers. Over the next five years, FooBooOnLine.com predicts three key trends:
1) Broader adoption of outsource models by companies of all sizes and in many more countries. Today much of the outsourcing is taking place in the US and to a lesser extent, the UK, and primarily in large companies. However, we are seeing significant interest and uptake in almost every country around the globe with countries such as Australia moving rapidly to an outsourcing model.
2) Movement from transaction-oriented, tactical outsourcing to transformational outsourcing on a strategic level. Businesses will expect much more than just being able to reduce costs although that will continue to be a key driver. Businesses will look to outsourcing to provide them with a faster time to market for products and services, greater market reach, and higher value out of their core set of employees.
3) Dramatic increase in numbers of countries that seriously develop and promote outsourcing through government policy and support and industry involvement. New countries coming to the forefront along with communications and IT technologies allow for work to shift in and out of countries more easily that ever before.
The next step in globalisation?
It can be a hazy line between offshoring and simply being a global organisation. Global tech giant Lenovo has weighed up the pros and cons of offshoring and has come to their own conclusions. Andrew Dahms, Lenovo's HR director for Australia-New Zealand, says his company considered offshoring its service call centres but reconsidered after consultation with customers. "Our customers said they preferred to deal with local Lenovo employees, plus we're keen to maintain a strong presence here in Australia," Dahms says.
Although Lenovo has since moved some telephone-based sales roles to Kuala Lumpur due to better time zone alignment, Dahms questions the validity of offshoring. "I think we've moved beyond outsourcing in some respects. Outsourcing was very big in the 1980s and 1990s and in the naughties it moved towards international outsourcing. Now I think there's a move to a Worldsourcing environment," he says.
Lenovo has set up a business model around the concept of Worldsourcing, which operates irrespective of the cost of a location. As a company with no single corporate HQ, Lenovo aims to merge engineering, cultural and marketing expertise from around the world into one fluid, borderless enterprise organised around hubs that serve as centres of excellence for different functions.
"The cost of doing business is always a factor but outsourcing is about where cost prevails. Worldsourcing is looking at how we can leverage the best out of our people - regardless of where they are situated," Dahms says.
Dahms cites a recent product launch as being typical of how operations work at Lenovo. The R&D team is based in Japan, which lies midway between R&D teams in the US and China, while the marketing execution was done out of the marketing hub in India. Sales execution came down to local markets around the world.
"It doesn't come down to just a choice of location based on cost. Our R&D development team is currently based in Japan, which is one of the most expensive locations in the world. It comes down to where innovation and excellence lies. I've worked in other organisations that have outsourced to offshore locations and I've found that customer service levels drop. Our overseas employees like those based in Kuala Lumpur are Lenovo employees - they aren't employed by a third party. When we're talking about Worldsourcing, Lenovo employees love our products and we're all glued together with the same passion for the company and its products," Dahms says.
As perhaps the ultimate example of how Worldsourcing removes centres of gravity from one country to many, Dahms notes that Lenovo recently ran a CSR initiative whereby Australian employees spent time in India to exchange information and implement strategies with their Indian colleagues around CSR projects. "It's Australians heading to India to show them how we do CSR in Australia but also to see if there are any initiatives they can bring back to Australia," he says.
Much like a successful M&A, if offshoring is not handled correctly it can wipe out a lot of the intended value of the exercise. Also like an M&A, HR's role should not be underestimated - the people elements of offshoring, whether it's done inhouse or handled by a third party BPO - are crucial.
"HR needs to have an opinion about this and be at the table. They can't wait and join the transaction after the fact. They need to be upfront, understanding what's going on, and providing counsel and strategy around the different options because it's a very viable option and one that many organisations should take for the benefit of their total talent strategy and sustainability. Be involved in the decision making and the design and scoping side of it," Barry concludes.