THE political heat around outsourcing has cooled as the threat it once seemed to pose to western service jobs has diminished. The emphasis now is on improving the process of outsourcing, both at home and offshore. In other words, if you have to do it, try and do it better. This book is a good place to start learning how—especially the penultimate chapter. Called “Five Key Areas to Focus On”, it looks at financial engineering, legal issues, communications, human resources and tax.
If these sound like the sort of areas you would focus on in mergers and acquisitions, don't be surprised. For Jean-Louis Bravard is a former investment banker who now works for EDS, a leading outsourcing firm, and he brings his banking experience to bear on the subject, arguing that outsourcing should be treated much like M&A, for which it is in many cases a substitute. That means fully involving the company's top executives in outsourcing decisions, and expecting outsourcing to be subject to the same “degree of public and shareholder scrutiny” as M&A. It also means looking at many of the same things when judging whether a deal will work or not.
By and large, the authors shy away from the political hot potato of offshoring. When they do touch on it, it is to do little more than make the case for using third parties, such as EDS, IBM or Accenture, for all an organisation's outsourcing requirements. Why tussle with the onshore/offshore decision, they ask, when it can be passed over to experts (such as EDS) to decide for you where to locate your operations?
The authors make an important distinction between offshoring and outsourcing—“most of the processing industry in India still consists of in-house captive operations owned by the businesses that use them”, they say. In other words, they are operations that have been sent offshore, but have not been outsourced to a third party. The authors then leave any further debate about offshoring for elsewhere.
Diana Farrell, director of the McKinsey Global Institute, the consulting firm's in-house think-tank, was one of the first to take the heat out of the issue. Initially, she pointed out how limited is the data on the phenomenon. In a report last year, the institute said that “the debate about offshoring has been fuelled by anecdote rather than fact.” It then set about gathering data which, in turn, suggested some limits to offshoring.
It estimated, for instance, that only “13% of the potential talent supply in low-wage nations is suitable to work for multinational companies”, and it cited three main reasons for this: the lack of language skills; the limited capacity of the educational systems of the offshoring hosts to impart practical skills; and the lack of cultural fit. Other evidence of limits—this time to the demand for offshoring rather than the supply—comes from a recent survey by Proudfoot, another firm of consultants. It found that over three-quarters of the companies it surveyed had no business functions carried out offshore; just over one-third had no business functions outsourced at all, neither at home nor abroad.
Now Ms Farrell has written an article called “Smarter Offshoring” (published in the June 2006 issue of the Harvard Business Review). Echoing Mr Bravard's title, it pleads for a more thoughtful approach to offshoring. She argues that “the most popular offshore sites for service functions are overheating.” It is time, she says, for companies to look “beyond these hotspots and to base investment decisions not just on costs but also on talent, markets, strategic aims and appetite for risk.” Much as you would with M&A.
From Economist
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