Offshoring: Reasons For Failure

Offshoring has become a major topic of conversation lately as more and more firms look to leverage the economic benefits of lower labor costs and availability of skilled labor abroad. While politically many see offshoring in slow economic times, when jobs for U.S. workers are scarce, as taboo, for many firms currently considering or utilizing offshoring, it is the only option to remain competitive in the global marketplace. Offshoring helps firms shore up their labor force with knowledge and skills that are in short supply locally, but great supply elsewhere. Offshoring also helps firms compete globally on the basis of price by leveraging the pay differentials between different countries to keep labor costs down. Combined, these two issues enable firms to grow and compete while continuing to provide the margins investors have come to expect. Recruitment Offshoring Offshoring started with manufacturing jobs, and only in the last decade has it grown to encompass professional areas such as IT, finance, and HR. While offshoring in HR has been primarily limited to call centers, a number of offshore vendors now provide everything from centralized sourcing to full lifecycle recruiting. Offshoring part or all of the recruitment process does pose many legal issues for firms doing business with the federal government, but for the vast majority of U.S. firms, offshoring can provide a substantial return on investment. While I am against offshoring all of HR, I am for offshoring areas that provide low ROI and for which external vendors can provide service as good or better at lower cost. Offshoring Still Problem Ridden It seems that for every success story about offshoring, there are two corresponding stories of catastrophic failure. In recent months, several large corporations have pulled back from offshoring due to customer service and consumer privacy issues. Because offshoring is a relatively new business model, it is expected to go through a painful period as problems emerge and solutions develop. While getting into professional-level offshoring at this time would still make you one of the early adopters, several firms have already experienced a number of problems that your firm can learn from, which will help your firm strengthen its plans when offshoring or using an onshore vendor that relies on offshoring. Whether your firm manages offshoring itself or uses a vendor that does, problem are almost certain to occur, including the following:

  • Underestimating the difficulty of maintaining privacy in offshore locations.
  • Underestimating the difficulty of maintaining corporate security in offshore locations.
  • Failing to investigate or understand the importance of government or corporate restrictions on offshoring information related to national security.
  • Failing to take into account unreliable infrastructure, government instability or poor technology in the offshore country.
  • Underestimating the impacts of currency fluctuations on the project ROI.
  • Underestimating the impacts of rising wages on the project ROI.
  • Weak customer service measures.
  • No customer preference measures (many customers prefer, and in some cases demand, “local” service).
  • Not planning for the possible backlash when customers or the public finds out about offshore work (because of job loss fear or “buy U.S.” preferences).
  • Failing to realize that some offshore cultures and employees are unable to quickly adjust to the fast-changing production requirements of fast-changing corporations.
  • Offshoring weak or poorly designed processes that cannot be effectively outsourced until they are fixed.
  • Utilizing U.S.-based outsource managers who are not trained or skilled in handling the more complicated offshoring model.
  • Miscalculating the ramp-up time and costs of offshoring.
  • Failing to take into account high employee turnover in highly competitive offshore locations (especially among managers).
  • Failing to take into account U.S. managers resisting or sabotaging efforts for personal reasons.
  • Failing to understand complexities in offshore country hiring, firing, and benefits laws and practices.
  • Over-relying on a single consultant to guide the offshoring process.
  • Outsourcing the wrong tasks based on the education and training level of the local population.
  • Never planning for or considering the need to pull back from offshoring (for example, if local staff and infrastructure have been dismantled, leaving no options).
  • Failing to understand the difficulties in communication and interpretation that can occur between two different languages and cultures.
  • Failing to accurately assess technology and communications incompatibility.

If a vendor is used to perform the offshore work, a separate class of problems can also emerge:

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  • Failing to restrict outsource vendors from further outsourcing your work to other vendors.
  • Failing to accurately assess the vendor’s privacy and security controls
  • Guarantees not being included in the contract or significant penalties for poor performance being omitted.
  • Not requiring a service-level agreement which outlines specific service requirements.
  • No measures of service quality delivery (such as error rates or responsiveness).
  • Relying on vendor reports rather than independently assessing service quality on your own.
  • Failing to check references and accurately assessing the vendor’s track record and capabilities (some vendors that have had a good track record can become overburdened when they too rapidly expand their business).
  • Failing to take into account that vendor service levels may drop dramatically after a long-term agreement is signed (once they know you have few options).
  • Selecting a vendor using subjective rather than objective screening criteria (which have been validated by other successful firms).
  • Vendors’ inability to rapidly adjust their processes and stay in sync with the rapidly changing world of business.

Conclusion When new business models arise, much like new products, it is often those who quickly follow the early adopters who reap the greatest benefits. The pioneers and early adopters experience the brunt of the problems, and then develop solutions which others can leverage to make their initial adoption of the model more successful. Despite political pressures, the necessity of participating in a global economy practically ensures that offshoring is here to stay. Most business are already dealing with offshoring issues, either those of their own doing or those of a vendor they have hired who utilizes offshoring. Smart business leaders will leverage the mistakes of others and learn from the past to decrease the probability of more errors in the future.

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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8 Comments on “Offshoring: Reasons For Failure

  1. let’s say your primary market for your manufactured products is the american consumer…getting rid of jobs, or closing/moving factories, or laying off workers in the usa and then offshoring these elements to china, india, or wherever–ask yourself this question: who’s going to buy the goods, products, or services?…the answer: u.s. working men and women aren’t your primary consumers anymore if they’re layed off, unemployed, or can’t find a job…and how about the issue of propretary information and technologies being sold to enemies of the usa?–that’s a whole other issue as well…look, you can give me 1001 reasons why offshoring is good, but i am of the assertion that it is suicidal for our economy–both short & long term…rest assured that if outsourcing overseas continues, our economy will be further thrown out of whack…

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  2. Outsourceing hurts American workers. With the massive amounts of illegal and legal immigration over the last 20 years, it will be a wonder if any jobs exist that offer pay we could aspire to earn. America was built on the backs of it’s people, yet that seems to be lost.

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  3. I’m so disappointed by the scapegoating on this board towards folks who have come over on H1-B’s. This week’s ‘Business Week’ has an article regarding outsourcing and the slow recovery of the economy. How many jobs have been outsourced? 300,000. A drop in the proverbial bucket. The real problem is a lack of jobs being created, NOT jobs going away. Extremely high productivity has led to a lower level of job creation than ever seen before.

    Not enough students born on American soil are going to school for the types of training for highly technical jobs-why shouldn’t US schools take students from other countries who are ready and willing to be trained in the fields that the future economy will need? American taxpayers have created their own monster-they cut math and science from the curriculum in public schools, and then seem confused when students don’t elect to go further in those disciplines later. With unemployment being high, higher education should be made a more attractive option. Instead, if we were to look at California, community colleges are raising their rates 40% next year, making it an impossible dream for many.

    I’m attaching the link to the Business Week article, and I look forward to reading more postings focused on how we can find top performers to improve the performance of our organization and those of our clients, not pointing fingers.

    http://www.businessweek.com/magazine/content/04_12/b3875601.htm

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  4. Why not ? Offshoring: Reasons for Success?

    Maybe it?s patriotic to take such a stance but I was disappointed to read this article as it paints such a negative picture of Offshoring. Many given ?Reasons for failure? stated in the article are generic and could apply to any outsourcing albeit Offshoring, or outsourcing to a vendor in your own country, state or even your own city.

    Any responsible organisation considering outsourcing offshore or locally has to address these and many other concerns during the due diligence process. Implementing a successful outsourcing program is usually a complex process but when managed correctly, will yield major rewards and ROI.

    As this is a Recruitment Forum I would like give you an overview of why Offshore Recruitment Process Outsourcing (RPO) offers US and European Recruiters the biggest non-technical break through in the Recruitment Industry since the invention of the Resume.

    However automated the recruitment process has become, a large portion of a Recruiters time is still taken up with Resume searching (Job Boards, ATS), Internet mining / sourcing, Resume screening, response management, candidates processing (online technical tests, assessment centres) and other functions which, when managed correctly, can be successfully outsourced.

    Recruiters can now outsource these functions to offshore Recruiters trained and managed by UK and US Recruiters living in India. Typically, most Recruiters would rather utilise their time; with Business Development, interviewing candidates or spending time with their Hiring managers than undertaking many of these outsourceable functions.

    Obviously, outsourcing these functions offshore and seeing true ROI brings us back to Dr. John Sullivan?s article. When considering the Offshoring option care must be taken to select the right RPO vendor for your specific needs.

    Below is a check list which will reduce the risk when selecting an offshore RPO Partner / Vendor:

    *** Due diligence ? Invest a large amount of time talking to existing and past clients of the offshore RPO vendor. It is easy for vendors to give you access to happy clients but to get a true picture you should also speak to clients where outsourcing has not been successful. (Ask the vendor for past clients but also source independent references using industry forums and networks)

    *** Contracts ? A large portion of ?reasons for failure? stated in this article can be avoided with strong contracts between the client and vendor. It is however acknowledged that pursuing contract grievances against vendors that are solely based in India or other offshore location makes this more problematic than if contracts were issued by a US or European branch / head-office.

    A good example of this would be outsourcing a software development project to EDS (USA). EDS get the project developed in India but the contract is issued in the US and falls under US law.

    If you do have the option of selecting a vendor with a US or European Head-office and they issue contracts you will enjoy a greater contractual peace of mind.

    *** SLA?s / Process Mapping ? During the due diligence process you should constantly be evaluating potential vendors for domain knowledge and a thorough understand of US/European Recruitment processes. Process mapping and establishing specific SLA?s can only be established once a solid foundation between parties has been made.

    Choosing a Vendor that either has US or a European Management based at the offshore location or a local representative assists greatly when process mapping and developing SLA?s. If your Vendor has first hand experience of the US / European Recruitment process, mapping and translating your specific needs to an SLA will not be difficult.

    *** Delivery ? Vendors adhering to a strict set of SLA?s with clear process guidelines, targets and QA procedures should remove the majority of Service Delivery uncertainties.

    Overview ? Like all outsourcing, success only comes when both parties are 100% committed to making the process work. There will always be teething problems with any form of outsourcing, but with a determination to make the process work, choosing the right vendor and some degree of patience the ROI in Offshoring Recruitment Process Outsourcing brings will greatly outweigh the disadvantages.

    If Offshoring was so riddled with failure why is it that 90% of Fortune 500?s are undertaking offshore initiatives?

    Regards
    Regan George
    CEO
    http://www.OS2i.co.uk

    PS ? Yes folks, if you haven?t guess I?m work for an offshore RPO vendor

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  5. this string shows both the evil and the good of both sides,. Looking at the short term it can be easy to see why offshore globalization and free trade may be considered to hurt the American Economy. Yet if one were to look at the long term there will be a tremendous benefit to the Nation http://www.iht.com/articles/128452.html and http://www.mckinsey.com/knowledge/mgi/offshore/
    These articles potray studies by the McKinsey Global Institute has found that offshoring benefits the American economy far more than previously thought.

    On a personal note – In saying NO to free enterprise then do we consider closing doors, boycotting or stop working with or for the Siemens, Sony, Nestle, Bayer Group, Toyota, Toshiba, BMW, Prudential Group, Nissan (which by the way has one of the largest plants here in San Diego), Shell, ING, Daimler Chrysler (now owned by Mercedes), Unilever. Just to name a few of the tob 100 Global 500 and who have plants in America, and provide considerable employment opts to American Workers.
    Should they Return to the countries they are from and give only their citizens jobs. Will you stop driving that new Jag, Beemer, Porsche or Mercedes, Toyota or Honda, what about your CD/DVD player, stereo, Toyota, ASPRIN, soap, shampoo, lap top… will you stop using their products….
    Is it accurate To say that Unemployment is down ONLY or Mainly because of Free Trade. Business is down because of the Economy. We are still at war, spending billions of dollars, which we don?t have every month. We are in a recession, not only because of trade leaving our borders, trade is leaving our borders in most part because there is a Recession. Yes Some manufacturing has left our borders, but at the same time ? Construction is down, Service is down (how many people fired their maids, their gardeners, pool man, and learnt to fix things on their own and are cutting down on people doing the jobs for them, what about the postponing getting your nails done, or cutting your hair), Travel is down, Tourism is down, eating out is down, sales of homes are down, stock market spending is down, and consumer spending is down.

    Locally we have had many strong businesses considering going out of business or considering bankruptcy due to the current economy. Americans have not spent as much as they have been accustomed to – we have seen companies like American Airlines, United Airlines, Lee Jeans consider closing doors or bankruptcy. California has been losing businesses every single month by the truckloads – way too high on the taxes and workers comp, especially for the manufacturers – those workers comp fees are outrageous over here. Then there is also the price of GAS and Electric….. – I live in San Diego, one of the worst hit Cities, we have 0 growth in business, (for every new business in San Diego, 1-3 are leaving town.) and heading South to Mexico some go to Arizona.

    Which brings us back to manufacturing. These companies need to stay in business, we the consumer will not spend 2000 dollars for a computer today, especially when we can spend 500 for the same thing, so the companies are moving with the economic times.
    We as American Consumers do want something but at the price of nothing. We will complain and barter to the bones for a lower price, we clip our coupons, and send in our rebates. Companies know this, and because of the beauty of America free trade they also realize that competition may be bad for them and business, (though great for the consumer), so they must maintain a lower cost and to do that a lower over head. I often try to maintain a lower overhead for my company, especially at these stressful times I am sure many of us understand that ;}
    We as consumers delegate the supply and demand. We depend on these companies for our welfare and sometimes even our future (stock market).

    As we put manufacturing outside of the borders of America, means we have to put more people to work shipping and receiving, sales, operations, customs, service, product development, and satisfaction locally. If things are cheaper, we spend more, which, leaving also more money in our pockets to afford to buy, or spend more, without so much stress, which will in turn create jobs internally. We live in a PERIOD that is financially ugly for many, and there has been these periods before, look at the 1800?s, 20?s-30, 40’s, 50?s, 70?s. We get out of them and we go back into them. War plays a big impact in all of this…. We also need to look at supply and demand. The workforce is declining as well as more and more people will retire (baby boomer)

    But globalization has been around for decades and will continue. Businesses have left our borders before, (Plastic was huge in Europe, as was steel, lumber and design, Hurst Castle was created mainly in Europe, stone by stone, marble by marble and tile by tile, and he had many euorpean workers put it together as well), Many of the companies were overseas, Nike, Coke, etc.. Then the booming 90’s came along, and they came back to the states.. History repeats itself, it always will, usually in 20 year cyles. Gas is outrageous again, we are at war again, and the economy has hit a bottom. Businesses will come back. It is called history, and it has a funny way of repeating itself.
    Much of the cost differential between standards of living in the US and India, for example, is well worth it…think of education, health care, cleaner environment, etc. But we are also incredibly wasteful (me too, don’t get me wrong) in terms of energy, extreme cases of litigation that has run amuck for years, etc etc. We have to come to grips with the fact that globalization will bring our standard of living a bit closer in line with the rest of the world ( In time it will cost more in India to do business and the industries will return home.. )

    In the interim you will see more non Americans who could not afford to do so before come to America to visit and purchase American goods. Even with the High taxes, and tarriffs, it is still cheaper to come to America and purchase what they need. They will put money in American Pockets. (they bought in America, at American stores, stayed in American Hotels, ate at their restaurants, rented vehicles, bought gas, and Payed American Taxes). American Airlines may have a strong chance in staying in business as more people have an opportunity to travel. Foreigners (including people from ASIA or India) come here to go to school, they even work and live here as well. Some stay and open businesses and hire American workers. I myself was a person who migrated here, NEVER took one dime from the system. Opened a business, have had employees, pay exuberant taxes, own 2 Gateway, 1 Dell computer, own a home (more taxes there), and hire American Residents to service the products I own. I own a Geo Tracker ? once owned by the Japanese, now owned by America.

    In time (and we are now seeing a surge in the American Economy)- we will see the benefits locally in offshore MFG and such.

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  6. Karen, your post is an anecdotal proof of simple economics 101 principals. And thank god for ’em! For they function as naturally as flowing water. A free-flowing economy ensures the highest and best use of scarce resources. And that is what drives the motivation of man. Take that away, and it fails every time its tried (i.e. socialism). It is ironic that it takes someone who was not born in America to realize that. To those Americans who have lost sight of their freedoms and the role that free enterprise plays in delivering and maintaining that freedom: Don’t let politicians and others with their agendas influence you without your having done your homework on this. It’s too important.

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  7. The offshoring discussion reminds me of a story that I heard years ago.

    How do you know when the economy is in a recession? When your neighbor loses their job.

    How do you know when the economy is in a depression? When you lose your job.

    How do you know when the economy is in a recovery? When the [insert least favorite politician’s name here] loses their job.

    Steven Rothberg
    CollegeRecruiter.com job board
    http://www.CollegeRecruiter.com
    (800) 835-4989

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