Our customers shop based on value, so why don’t we?

Posted on August 29, 2011 by

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Our customers shop based on value, so why don’t we? The dark side of offshore outsourcing…
 
In this tough economy the lure of cheap labor abroad has become more appealing than ever. But are you getting what you pay for?
Offshore outsourcing has been around for years, companies both large and small, have been teaming up with overseas partners to gain what they believe is a competitive advantage. Their motives for engaging in overseas outsourcing revolve around:

  • Cost Savings: It is cheaper on an hourly rate when compared to hiring a domestic employee (or expanding their own operations).
  • Flexibility and risk reduction: Business investment has inherent risks (i.e. changes in the market, technology, regulations and government policies) through outsourcing the outsourcing company assumes these risks. This gives your company increased flexibility to quickly adapt to the dynamic market place.
  • Gain Expertise: Companies choose to leverage an external firm’s expertise and thus saving them time and energy so they can focus on their core business.
  • Capital conservation: There is no need to invest in new systems or assets to get tasks done (or an expansion of current business operations), this saves capital and improves cash flow.
  • Time savings: There is no way to get more than 24 hours out of one day, but you can definitely use those 24 hours more efficiently. By outsourcing repetitive and/or non essential and/or everyday tasks they can free up their team’s time so they can focus on growing the core of your business.

Outsourcing when taken at face value seems like a great arrangement. You get all these benefits much cheaper than you could if you partnered with a domestic outsourcing company. But is that really the case?
Unfortunately like most things in life, outsourcing is not that simple. There is a dark side that is not often talked about and hidden costs that come along with offshore outsourcing. As a responsible business owner you need to consider these costs before jumping into bed with an overseas partner – as they will affect your bottom line.
The biggest downside to offshore outsourcing is that the offshore team can work slower and more inefficiently than onshore teams due to a number of factors, these include:

    • Language barriers that make communication challenging and it often it takes longer to explain concepts and issues.
    • Time Zone Issues: When offshore issues arise your onshore team may be unavailable to address them (ie they could be asleep), causing either a slow down or stop in productivity until the following day.
    • Cultural difficulties: these may lead to misunderstandings and clashes in personalities (with their onshore counterparts).
    • Confidentiality and trade secret issues may arise, largely due to the fact local (USA) laws and practices don’t apply to offshore work done in overseas countries.
    • Foreign Government Stability: Many countries that are currently outsourcing hubs also have big internal problems and unstable governments.
    • Infrastructure Spend: Power and other utilities are not stable. Dedicated connections and telecom expense sometimes add 10-20% to labor costs
    • High churn: Offshore outsourcing firms often have churn rates of 10-30% making training cost go up significantly
    • Tax Implications: The government has recently passed a tax on offshore outsourcing where you must pay for each call answered offshore. This is only expected to get worse if the US financial situation continues to deteriorate.

 

More often, than not, the additional time taken to complete tasks (due to one or all of the above) will increase the number of hours (time) spent on a task and therefore increasing the total cost of the project. These hidden costs will reduce or neutralize the initial expected cost savings and in some cases may even end up paying more to outsource offshore than you would if you had have sourced the work locally. Simply, you will have to allocate more hours, to get work done and the final quality may not be on par to what you are used to.
Furthermore, your company may be viewed negative by the public and your customers. Largely due to the increased negative public opinions of companies that send work offshore (this has been exasperated by the high domestic unemployment rate).
Given these negative aspects of offshore outsourcing, how can you capitalize on the benefits of outsourcing while avoiding the downside?
One way is via ‘Rural Outsourcing’. Rural outsourcing companies are popping up all throughout rural America, capitalizing on the ability to hire cheap and qualified labor in Indian reservations and small towns due to the cheap cost of living and an increased number of good workers being unemployed.
So why would you consider rural outsourcing?

  • You are putting Americans back to work – doesn’t that make you feel good? If that alone isn’t enough to make you tingle inside, how about this:
    • You are paying a US company for services, that US company is paying US workers, those US workers will have more money, therefore, you are strengthening the US consumer thus improving the US economy. And, if your business depends on a thriving US economy – then your company has a better chance of survival. Ahhhh– that has to make you feel good!
  • These companies are hiring quality people and offering great training. Their staff is qualified to do the work and is usually grateful to have the job (especially given the high unemployment rate).
  • The companies are located in the USA, therefore when you have an issue; they can be contacted immediately to discuss the issue (they also speak the same language – thus cutting down the communications and training time).

People will argue that the major downside to rural outsourcing is that it is slightly more expensive (on an hourly dollar rate comparison) to offshore outsourcing. That said, if you factor in the hidden costs of offshore outsourcing, the costs between the two options are comparable. In theory, the rural outsourcing company should complete tasks in less time (lower number of hours) than their overseas counterparts. Thus, making them cheaper or comparable over the duration of the task.

But if you are convinced offshore outsourcing is the best option for you, think about these things before selecting an overseas partner:

  • How much will it cost over the lifetime of the project (or duration of the work)? You cannot only consider the $/per hour rate (as the offshore may take more hours to complete the task than their on shore counter parts)
  • Are those hidden costs adding more than you think to your bottom line? Be prudent and factor in an additional cost into your forecast to cover any loss in productivity due to various inefficiencies.
  • What is the true value that you are getting? Is your business partner making life easier by delivering a carefree and quality product or are you finding yourself spending more time holding their hand throughout the process (or constantly worrying about the outsources capabilities).
  • Are you able to quantify the current cost for the same service? Be careful not to have a per/person arrangement and instead get a cost/value arrangement.
  • And could you save money (and energy) by outsourcing domestically?
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