Thought for the day: A question of risk

Cost is only one option to consider before outsourcing any part of your business abroad. Make sure you do all your groundwork...

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Cost is only one option to consider before outsourcing any part of your business abroad. Make sure you do all your groundwork properly, says Mike Lucas.



I am sure nobody is surprised by the number of companies who have recently announced a move to offshore outsourcing, especially when you consider the cost savings being proposed by outsourcers in India and the Far East.

However, companies need to ensure that they are not blinded by the short-term cost improvements, and consider the wider implications of moving business processes offshore.

This isn’t to say I am against the offshore model - in fact I think it offers real benefits - the point is businesses need to tread carefully to make sure they are not burned in the long term.

For any business, defining the outsourcing strategy is a critical starting point.  A detailed understanding of processes is required to determine which are core to the business and, will, therefore affect shareholder value, which are critical with an impact on competitive advantage, and which are commodity.

Convention suggests that commodity projects are the safest to outsource offshore, as the business process is not critical and the risks associated with moving it to another country are lower.

Measuring and understanding risk is an important issue with offshore outsourcing. For example, one of the risks associated with outsourcing projects critical to your business is that you run the risk of losing valuable knowledge and intellectual property. You may ask why you need to retain knowledge relating to a business process that you are outsourcing. Well, think about the outsourcing companies you are considering working with; many do not have a proven track record and some are already suffering from overcapacity problems. 

Although experts are predicting growth in offshore outsourcing they also expect to see a shakeup in the market that will result in many outsourcers disappearing. Now ask yourself, do you really want to hand over key knowledge and intellectual property to a company that could disappear in five years' time? The point is that there are risks associated with moving business processes offshore – political instability within the offshore country, cultural mismatch between the two businesses, union and shareholder revolts locally and conflicting management styles – to name just a few.

Once a business has considered the risks and identified "safe" projects, it will turn to look at cost savings before it makes any final decision. Although the cost savings on offer often look staggering it is important to remember that these savings may be offset by other factors. There are incremental costs to build into the equation, including the overhead of managing an overseas project, the cost of auditing offshore, the additional testing required for projects coming back to the UK and, fundamentally, the cost of the project going wrong.

However, there are cost savings to be made, maybe just not as high as some would have us believe. With a flood of companies moving business processes offshore, many organisations must be thinking they need to follow suit to stay competitive.

However, they need to ensure that striving to be competitive in the short term does not lead to long term-pain with competitive advantage being lost, as key knowledge and intellectual property have not been retained.

What do you think?

What are your criteria for outsourcing projects abroad? Tell us in an e-mail >> reserves the right to edit and publish answers on the website. Please state if your answer is not for publication.

Mike Lucas is regional technology manager of Compuware

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