Is this gamble worth it?
- 12 August, 2005 12:37
Would you undertake a bold new cost-cutting initiative if you knew 28 per cent of companies that had tried it had instead seen costs rise, another 25 per cent never realized any savings and 31 per cent saved 20 per cent or less? Added up, that means 84 per cent of the pioneers that took the gamble did it for returns of, at best, 20 per cent. Only a lucky few did better.
The cost-cutting method? Offshore outsourcing.
This was one of many findings of a comprehensive new survey of more than 5,000 executives from the U.S. and Europe by Ventoro, a consulting company that specializes in the field. Ventoro's free, 115-page report touches on everything from offshore strategies to vendor engagement models and payment options (see www.ventoro.com).
As you might expect, the survey found the leading reason companies consider offshoring is to achieve cost savings. While a handful of respondents realized savings of more than 50 per cent, they were exceptional; the average is below 10 per cent, Ventoro writes. "If you are anticipating . . . offshore outsourcing savings of 50 per cent or more, you are not being realistic."
Engagements go wrong for any number of reasons, but more than half of the time it is inadequate planning on the part of the buyer and/or problems stemming from poor client/vendor planning, Ventoro says.
Some of the other leading causes (listed in descending order): offshoring turned out to be the wrong answer, client employee morale deteriorated, and miscommunication and cultural issues.
Companies that have managed to realize savings find them in unexpected quarters. Only 9 per cent of the savings stem from employee costs, Ventoro finds. Internal process improvements account for 46 per cent of the savings, while vendor execution accounts for 45 per cent.
Among the companies that are not pursuing outsourcing, the leading reasons cited are concerns about security (mentioned by 80 per cent of the respondents) and quality (cited by more than 70 per cent).
In fact, security issues even influence companies that embrace offshoring: Instead of outsourcing the work, many companies are building and staffing their own overseas facilities, a trend Ventoro labels knee-jerk and unwise.
Experience has shown "the best and brightest employees in the market want to work with the major local vendors . . . not U.S. or European multinationals. . . . Firms building their own offshore team are likely to spend 50 per cent more to achieve some form of offshore success when compared to those companies utilizing an offshore vendor."
One point is clear: Offshoring is mostly a game for larger companies. While 19 per cent of all respondents to the survey have an offshore strategy, that jumps to 95 per cent when the sample is narrowed to Fortune 1,000 firms.