Strategy - What Should Managers Consider?

The vision for offshoring is simple: cost savings due to lower-cost workers, quality improvements due to highly educated workers, and access to scarce skills. The reality, however, does not always match the vision. The rewards are huge if offshoring is executed right, but the risks are great.

Questions to Consider
It is important to answer the following questions before you offshore:

• Do you have a compelling business case for offshoring that will win stakeholder commitment and approval?
• Which business processes are candidates for offshoring?
• What evaluation criteria should your company use to evaluate and choose offshore providers? What should be the primary location selection criteria? Where is the best location for your infrastructure needs? What skills and talents will the employees need?
• What service level agreement measurements are necessary?
• Which processes should be moved offshore to obtain maximum efficiency? How do you effectively transfer knowledge to the offshore center?
• What risks need to be mitigated when shifting business operations offshore? How do you maintain business continuity throughout the transition? What are the tax and legal requirements?
• What change management issues need to be addressed?

Whether you are exploring a pilot project or ramping up an established offshoring project, it is critical that you work through these questions.

The Case of the Financial Services Industry
The financial services industry is experienced in executing business process offshoring. Companies such as GE Finance, American Express, HSBC, and Lehman Brothers are considered offshoring leaders. Operating offshore is particularly attractive to companies in this industry because their operations depend primarily on data, which is becoming more expensive to process in the United States. If the processing is offshored, savings can be 10%-20% of overall overhead costs.

This trend will probably repeat with other financial institutions, which have had to continue to look for ways to reduce costs. U.S. investment bank Goldman Sachs is to relocate a "substantial part" of its British operations to India to slash overhead. Banks such as J.P. Morgan Chase, Morgan Stanley, and Citigroup have been moving IT application development and maintenance to countries such as India, where salaries for business graduates are as little as 10% of those in New York and London.

Take the case of GreenPoint Mortgage, the sixth-largest wholesale mortgage provider in the United States. Mortgage loan processing business is a data-intensive operation. In this business, companies are considering offshoring select origination functions, including application processing, direct sales, credit scoring and approval, and verification of title. Also, other functions like insurance tax and escrow processing, early collections calling, and much of the customer service call center function can be offshored along with at least a part of loan service setup, post-closing documentation, manual payoff processing, account balancing, printing statements, and refinancing. In addition to mortgage processing, insurance claims management and credit card processing are also beginning to be offshored.

Listing all of these candidates for offshoring leads to the interesting management question of how to decide which business process to offshore. The first question to ask is: Can the business process be performed remotely with just a PC and a phone, without being closely tied to other pieces of the value chain? Are the business processes mature and standardized? Are specialized skills required and available in the remote location? Is there a sufficient scale? Will regulatory constraints - data security and privacy - allow offshoring? If the answer to all of these questions is yes, then the process is a candidate. The savings can be enormous, even if some operations are kept onshore for redundancy.

The bottom line: Offshoring has its strengths, but it is not a panacea for every business. Companies must ask themselves: Which processes could we offshore? What is the magnitude of the opportunity? Are these processes stable? Is our company ready for the disruption? Can we identify and manage important risks?