Definition, Benefits, and Concerns

Before we delve into the offshoring trend, it is important to differentiate offshoring from business process outsourcing (BPO), which involves the migration of services to an external provider. Offshore outsourcing encompasses manufacturing, IT, and back-office services. Business process outsourcing includes call centers, finance and accounting, human resources, and transaction processing.

Offshoring refers to taking advantage of lower-cost labor in another country. A common misconception is that all offshoring involves outsourcing. This is not true. While outsourced processes are handed off to third-party vendors, offshored processes can be handed off to third-party vendors or remain in-house. The definition of offshoring includes organizations that build dedicated captive centers of their own in remote, lower-cost locations.

Case Study: General Electric
GE is a pioneer in the offshore outsourcing arena. In the early 1990s, Jack Welch, the former CEO of GE, introduced a new rule that governed GE's offshore actions. It is called the 70:70:70 rule. In an e-mail to GE employees, Welch mandated that 70% of GE's work would be outsourced. Out of this, 70% of that work would be completed from offshore development centers. And out of this, about 70% would be sent to India. This comes out to about 30% of GE's work being outsourced to India.

GE's BPO operations in India fall under GE Capital International Services (GECIS), which was set up in '97 to carry out back-office operations for GE Capital's businesses. Its service offerings include ERP and Oracle database consulting, IT help desks, knowledge services, software solutions, analytics, data mining and modeling, remote network monitoring, e-learning, and customer contact centers.

GECIS employs over 12,000 people and delivers over 450 processes to 30 different business units in the United States, Europe, Japan, and Australia. In India, it operates from Gurgaon, Hyderabad, Bangalore, and Jaipur. It has four sites in Gurgaon, two in Hyderabad, one in Bangalore, and one in Jaipur. Clearly, offshoring is a common delivery method of outsourcing for GE.

Companies used to think that foreign work lacked quality and was hard to supervise. These two mind-sets are no longer true as GECIS's example demonstrates.

The Benefits
The most obvious benefit of offshoring is the low cost. Compared to a U.S. call center, offshoring can save companies up to 50% in operational expenses. But there is more to why people are shipping call centers to countries such as India besides cost. Benefits such as an educated, English-speaking labor pool, low employee turnover, and complimentary time zones all make offshoring attractive.

Let's look at India. India is home to the largest educated English-speaking population in the world. Other than language, the geographical location of India lends itself well to a 24x7 operation. The time zone difference between the United States and India is about 12 hours. This means that a job submitted at 6 p.m. Pacific Standard Time (PST) reaches India at 6 a.m. and is completed by 6 a.m. PST the following morning. Another positive feature of India is the country's highly motivated workforce. U.S. call centers often experience low morale and very high turnover, usually 40%-70% annually. Considering the time and costs associated with training new agents, it becomes difficult to maintain quality service at a low cost. Currently, Indian call centers have an average turnover rate of 5%. We expect that this number will go up.

As offshoring grows, the cost of labor in India is also rising. Many of the same phenomena that the United States experienced in the early 2000s during the dot-com explosion are happening now in India. The competition for talent is heating up, and salaries are beginning to skyrocket. Employees are constantly looking to increase their salaries and are switching jobs quickly. Increasing salaries, competition for talent, turnover rate - all of these factors will affect the benefits of offshoring.

The Concerns
As with any endeavor that offers great benefits, you always need to wonder what the catch is. Outsourcing to offshore locations exposes countries to greater risks of many different types, such as country or political instability, regional turmoil, unstable economies, poor infrastructure, lack of exposure to Western business culture, and data insecurity. All these increased concerns need to be addressed when you are deciding on the best business model for your company and if you elect to outsource to a third-party company during the vendor selection phase.

Let's look again at India. India has been busy building and promoting its technology sector since the 1980s. Although it is currently safe to travel to India, tensions between Pakistan and India continue. In addition, whenever a company sends its customer data to another company, there is a risk of that data being misused. However, on the infrastructure side, India has recently made enormous infrastructure improvements in many cities that are becoming offshoring hubs, such as Hyderabad, Mumbai, and Bangalore.

The bottom line: The primary issues companies should think about when they relocate services offshore are their expertise in managing remote locations; the caliber and skill sets of the labor force; the cost of labor; language skills; telecom bandwidth, cost, and reliability; infrastructure; political stability; enforceability of intellectual property rights and business contracts; and the general maturity of the business environment.