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The New Calculus of Offshoring

For years the offshoring boom was driven by one factor: savings. Today the decision is much more complicated.

And, potentially, a portfolio of headaches. Currency fluctuations, terrorist attacks, and financial fraud are but three complications to arise recently — and that’s just in India. Making sense of the options “has become more demanding than ever,” says Patrick Dupuis, CFO of Sitel, an outsourcing firm whose customers include many global giants. Below are some of the factors that any executive entering — or re-entering — the outsourcing realm ought to consider:

Put More Context Around Cost-Cutting

As recently as a year ago — or perhaps one should say particularly a year ago — cost-cutting was still the driving force behind offshoring.

But while some companies forged ahead, others focused on internal IT projects designed to lower costs, or moved toward shared-services models. Anupam Govil, chairman of the Global Sourcing Forum + Expo and CEO of Global Equations, an outsourcing advisory firm, believes that some companies are hesitating because they have become “a little more sensitive to the political aspects…. They don’t want to be seen as taking jobs out of the U.S.”

India’s outsourcing industry is expected to grow at just 7% this year, compared with 16% last year and 35% in 2007. That may, in fact, be good news for clients in search of lower costs, because the decline in business may prompt offshore businesses to cut their rates. Consulting firm Gartner predicts that outsourcing prices will drop an average of 10% this year. “We have people coming in and saying, ‘What can you do for me?’” says Sitel’s Dupuis. “In the rich times, we were saving them enough.” Now companies want assurances that prices are as low as they can go.

And yet there is also growing awareness that agreeing to specific cost-cutting goals isn’t the hard part; maintaining them is. Whether because of poor project management, a different work ethic, communications difficulties, or for other reasons, low hourly rates may not save much money if the total hours needed to accomplish a given task are higher, and that is often the case. “A lot of people who jumped on offshoring for the cost savings never truly understood the market,” says Iyer. “They got some savings, but generally not as much as they thought.” There were unexpected outlays — error rates that rose too high, or more-frequent trips to India and elsewhere — that affected underlying cost assumptions. Toss in wage inflation overseas and wage deflation at home and suddenly the calculus shifts again. Phil Fersht, an analyst at AMR Research and author of the outsourcing blog Horses for Sources, says that the wage differential between a call-center worker in Bangalore and one in Nebraska can be as low as 15%.

Structure Deals Based on Your Own Short-Term Interest

In first-generation outsourcing, contracts tended to be long-term; in fact, 10 years was common. The argument? Lock in the savings. Now, the watchword for every financial executive is flexibility. Circumstances change fast, as companies have painfully learned, and CFOs now place a renewed emphasis on being able to change any and all aspects of the agreement in response to whatever the economy is throwing at them. As a result, the fixed-price, fixed-term contract has become old-school, particularly in more-commoditized areas like IT and call centers. For certain professional services that require a higher percentage of highly skilled workers, such as finance and HR, contracts may tend toward longer terms; providers argue that they can’t attract the workers they need unless the contracts cover longer time periods.

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