Lisa Donahue, now interim CFO at San Jose, California-based Calpine Corp., an electric power company, formerly worked at an auto-parts manufacturer that decided to set up a call center outside of Paris — a city not known for its low costs. “Although intuitively we might have gone to Eastern Europe for cheaper labor, we needed stronger language skills because we wanted to provide a certain level of service to both internal and external customers,” she says. The company found those skills near the Belgian border. “Cost savings isn’t always the best driver,” says Donahue, who also co-heads Alix-Partners’s turnaround and restructuring practice.
U.S. executives have also learned a lot about which functions travel best. Information technology continues to lead the pack, with 57 percent of respondents to CFO’s survey saying they outsource IT functions offshore. Finance and manufacturing tied for second place, with 31 percent offshoring those functions. Within finance departments, routine tasks like accounts payable, accounts receivable, and payroll processing are all popular candidates for offshoring (see “Workforce Migration” at the end of this article).
As executives have become more comfortable with their offshore partners, they have begun to experiment with offshoring a wider range of functions. “We are seeing companies outsourcing complete end-to-end processes rather than transactions,” says Exl’s Kapoor. In one example, a client in the utilities industry now uses Exl to handle customer dealings ranging from registering new customers to billing and collections, instead of offshoring only the billing part of the process.
“Four or five years ago, companies were offshoring IT applications maintenance, call centers, and the more routine aspects of finance, human resources, and back-office operations,” says Vinay Couto, who leads the outsourcing practice at McLean, Virginia-based consultancy Booz Allen. “Now they are offshoring much more significant things.” In health care, for example, the entire claims-management process is frequently offshored. Legal research, insurance-claims processing, and routine medical tasks (such as the reading of test results) are all activities that companies have handed over to offshore outsourcing providers.
As executives have gained a better understanding of which functions work well offshore, they have also learned that they can’t simply sign a contract with an offshore provider and assume their work is done. Companies have significantly expanded and improved their governance of offshore projects. “Executives are far more sophisticated in setting goals and objectives in their service agreements,” says Deborah Kops, chief marketing officer at WNS Global Services, an offshore service provider based in Mumbai.
Instead of signing fixed, 10-year service contracts, they are creating more-flexible arrangements and measuring the qualitative aspects of performance as well as cost. “Contracts used to be set up around productivity and efficiency metrics, like the number of calls handled in a certain time frame,” says Kapoor. “Now, companies are establishing metrics for things like customer satisfaction.”
Some organizations are designating internal teams to manage the offshored function or provider relationship. Couto of Booz Allen says he advises clients to plan on reinvesting 3 to 5 percent of the value of a deal in managing the vendor.