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Making It Work

How to avoid some common offshoring blunders -- and what to do when you can't.

Roy Harris is senior editor at CFO.

Avoiding the Pitfalls

Tips for arranging offshore operations through a vendor.

  • Design an exit strategy, such as month-to-month contract terms, for the early stages. Allow yourself to back away if goals aren’t met.
  • Level with employees about U.S. job reductions and cost savings, emphasizing competitiveness and any opportunities for new jobs.
  • Avoid making your company’s core competencies dependent on offshore operations.
  • For processes being relocated offshore — whether simple or sophisticated — make sure results, quality, and worker performance can be precisely measured. Then measure them.
  • Monitor the work being done for security lapses and performance, preferably by putting some of your own managers on-site.
  • Consult international-law specialists about the tax and labor laws that apply where you will be operating, particularly if you are setting up an offshore subsidiary. (For example, in India employees have certain “moral rights” to the property of their companies, unless a contract expressly deletes them.)
  • Review U.S. accounting regulations pertaining to offshore operations, such as Statement of Auditing Standards No. 70, “Reports on the Processing of Transactions by Service Organizations.”

Measuring the Miscues

Easily monitored tasks are better candidates for outsourcing.

What’s the best way to make offshoring work? Performance measurement and on-site tracking, says Ravi Aron of the University of Pennsylvania’s Wharton School. Aron has studied the types of errors made, and which can be detected and “codified” easily. Work monitored in that manner may be the best for offshoring.

“Direct” mistakes — like typos in many processed transactions — are easily measured and corrected. By contrast, more-subtle “carry-forward” errors in pricing defy easy detection, and can become embedded in a company’s operations. “Even when you catch a carry-forward error,” the offshore vendor “can point the finger back at you and say, ‘I based it on the data you gave me,’” says Aron.

Complexity alone doesn’t disqualify corporate activities from offshoring, because some extremely complicated functions lend themselves to precise measurement. Conversely, undetected errors in some simple-sounding operations, such as certain call centers, can expose a company to major damage. Below is a sampling of tasks and their risk levels.

Low Risk

  • Transaction processing
  • Telemarketing
  • Benefits administration

Moderate Risk

  • Underwriting insurance
  • Management information systems
  • Customer service
  • Loan-asset management
  • Tech support
  • Accounts receivable/payable

High Risk

  • Equity research
  • Yield analysis
  • Asset accounting
  • Investment analysis
  • Cash-flow forecasting
  • Customer data analytics
  • Pricing
  • Working-capital management
  • Executive-decision support

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