Making Offshoring Work
April 22 2008 by Fayazuddin A. Shirazi
Offshoring services has been a favorite and cost-effective exercise for many global companies based in the U.S. and the EU. But, owing to varying approaches, not everyone succeeds equally well. Offshoring operations simply to save direct labor costs has limited utility because over time labor costs rise. Offshoring to take advantage of lower direct costs and the skilled Indian labor force also gets you only so far in that skills, too, are bid up by virtue of the fact that many Western firms are drawing upon the same talent pool. Outsourcing services to offshore destinations is not just about cost management anymore.
“It’s more about knowledge transfer, adding value and time management, says Bharani Aroll, VP, service delivery, Butler International, a tech-outsourcing and engineering services company based in Ft. Lauderdale, Fla. Bharani explains that a company intending to move an internal organizational process offshore needs to have a foolproof transition management capability, a service Butler International, with its strategic offshore location in Hyderabad, India, offers to multi-billion dollar U.S. corporations.
In fact, one global consumer personal care products company reduced its manpower costs associated with quality assurance more than 60 percent as a result of moving this process offshore to India. This was accomplished in large measure by leveraging its service partner’s onsite skill in ERP software implementation.
Companies that have both onsite and offshore operational capabilities also play a role in knowledge transfer, which can be critical in taking any organizational process offshore without encountering interruptions in service or delays in production. For example, a large Midwest heavy construction equipment manufacturer, which is in the process of modernizing its fleet of vehicles in compliance with Tier 4 U.S. emission standards, was able to reduce the cost by about 20 percent from an estimated $43 per hour to $36 per hour by engaging offshore delivery services. Using the onsite-offshore model, companies that offshore non-core operations are also able to capitalize on time zone differences where project work begun in the home country is handed off at the end of the workday to teams in the offshore location so that the effort becomes continuous. The heavy equipment maker, for example, managed a 40 percent reduction in the project turnaround time.
Not surprisingly, leveraging time zone differences where the work never ceases is a major reason for companies to offload non-core competencies to places like India. “With these models, our clients have achieved significant reduction in the project turnaround time by about 50 percent,” says C. Praveen Reddy, SVP, manufacturing, Butler International. “When an onsite team is working for 12 hours, the offshore team makes up for the next 12 hours and this way a 24-hour cycle is achieved.”
India and China Competitiveness
India has already edged China in crucial factors. The latest World Economic Forum’s “Global Competitiveness Survey for 2006-2007 shows India at 43, well up the ladder compared to China, at 54, and even further ahead of Russia and Brazil. Efficient capital markets, quality of public institutions and a sound judicial system, as well as a vibrant civil society and vigilant media, accounted for India besting her competitors.
India‘s greatest weaknesses are its poor quality of universal modern education outside the sciences and its shortcomings in infrastructure and governance. China‘s principal weaknesses are its massive misallocation of capital by state-owned enterprises and a government-owned banking system that allocates funds on directives rather than on sound banking practices. A global CEO jet-setting to Shanghai would probably not notice this lack of soft infrastructure in China and instead would be wowed by the modern glowing ports, highways and airports. Nor would he worry unduly about how China is manipulating the yuan to its trade advantage. India‘s other strengths are its entrepreneurship, the global perspective of its leaders and managers and its ability to manage complex global businesses, thanks to several generations of Western-trained elite.
In China‘s defense, its strong points are an abundant access to capital and a healthy blend of good universal education. Allowing a small crack in the wall of Communism’s absolute control over all aspects of life and business, the Chinese government has opened a small degree of private ownership of companies. After all, the richest person in the country is a woman whose company recycles paper. But full freedom is not even on the drawing board.
Adapted from Think India-The Rise of the World’s Next Superpower and What it Means for Every American, by Vinay Rai and William L. Simon