Study: Companies that offshore are the big losers

Focus on cost leads to failure

The majority (60 percent) of companies who send operations offshore fail to meet their operation performance expectations and over a third (34 percent) fail to meet their savings expectations, according to a new study from global management consulting firm A.T. Kearney.

The study of multinational companies also revealed that those with a focus on overall performance rather than cost, were the biggest winners, saving 3.5 times more money than companies that offshore simply to cut costs.

In fact, companies that improved on at least three out of six operational performance areas experienced average savings of 44 percent from offshoring, while companies that improved on two or fewer measures saved only an average of 30 percent.

The best performing group averaged 64 percent savings - more than 3.5 times the poorest performing group.

Arjun Sethi, A.T. Kearney vice president and leader of the study said the message is to focus on improving performance and the cost savings will come as well.

"Placing too much emphasis on cost reduction serves to limit performance improvement. Winning companies are viewing offshoring in a holistic fashion and striving to achieve improvements across the entire organisation," he said.

The study, "Execution is Everything: The Keys to Offshore Success," is among the first pieces of quantitative research looking at why some companies gain tremendous performance improvements and cost savings from offshoring while others find them elusive.

The research looked at the post-offshoring change in operational performance reported by 42 companies across six measures: capacity, organizational flexibility, revenue performance, organizational capability, process maturity and service levels.

It revealed that the success of offshoring varied widely, with reported cost savings ranging from 0 to 75 percent.

Peter Munro, vice president, AT Kearney Australia, said the study is a cautionary tale for local firms feeling the pressure to offshore.

"While it confirms the significant benefits that can be achieved from offshore strategies, the study also clearly demonstrates that sustainable cost reduction strategies need to be about much more than just going to India for cheap call centres," Munro said.

Sustainable cost savings, and therefore lasting profit improvement, come from a complex range of factors such as optimised business processes and supply chains, strategic procurement, increased automation and genuine cultural change within the organisation, so companies should fully explore these options before looking abroad.

"Offshoring may be part of a broader profit improvement strategy, but it needs to be viewed in the context of other improvement opportunities and is by no means a silver bullet for cutting costs ," he said.

The study also found companies achieved more savings and better operational performance improvement when they offshored medium-complexity processes such as IT, and advanced BPO functions.

Low-complexity functions (such as call centers or transaction processing) that were sent offshore saved an average of 28 percent in costs; medium-complexity functions saved an average of 38 percent.

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