Building an offshore presence

...these engagements do result in lower costs for the customer organisation. The savings are achieved not only through the lower labour costs, but also through economies of scale and the providers' expertise in remotely managing teams.

Building one's own offshore presence in a particular country can depend upon a number of factors, including the customer organisation's experience of the selected country, building remote teams, selecting the best employees at all levels for the offshore location, and managing multiple teams at multiple locations. One should also check any projected costs carefully, as it is rare that an onshore firm can build an offshore team at a lower cost than a provider-assisted option. Only if the company has the necessary expertise and is thoroughly confident in the costs should a build approach be considered. Building a wholly-owned subsidiary, effectively Do It Yourself (DIY), can be very expensive (average cost in excess of $5m, or £3m, according to Business Insights) and suffers the biggest failure rate, at around two-thirds. The reasons for this include that the onshore company is responsible for everything, and perhaps does not have the expertise it needs to undertake the task.

If a medium- to long-term offshore presence is required, organisations are recommended to use a partner to build an offshore team — this can help to keep the costs under control, and give the customer organisation time to get comfortable with the location and team being built. The BOT model enables the transfer of the offshore facility to the customer organisation under pre-agreed terms, and can be very successful. By buying in expertise initially, via a local offshore outsourcing vendor building the team, customer organisations are provided with an organisation that knows the locale well and should have a strong understanding of the customer's requirements — a lower level of risk than the DIY model. Once the offshore facility is up and running (this can be anything up to three years), the customer can buy out the offshore facility.

The risk/reward approach has become very popular for customers looking for a relatively safe route for functional outsourcing. This would involve the customer organisation agreeing to give the offshore provider a share in profits (or a higher payment) dependant upon the success of the offshore model. This limits the risk for the customer organisation, but also helps demonstrate commitment and confidence in their abilities for the offshoring provider. Although there are some third-party providers that do not offer this model, it is likely to become more frequently requested by customers, and thus providers will be pushed into offering this.

Working with an offshore provider with a strong presence in the offshoring company is obvious, if some kind of buy option is chosen, but it is also important that the provider has a strong presence in the customer's country of origin. This is for a number of well-known reasons, but includes the fact that there are cultural differences to be overcome that individuals with knowledge of both cultures are able to address (and are experienced at doing so), and that the customer has the opportunity to see people face-to-face more regularly than having to visit the offshore location. Arrangements with this set-up in place have a lower cost base (than outsourcing onshore) and a strong chance of success.

In conclusion, the customer organisation must determine what is to be outsourced, before deciding that offshoring is the way to go (the reverse can often happen when a company is looking to cut costs). The country to be offshored to should be decided — some organisations want a close physical presence or cultural affinity, which is where nearshoring can be of use. Finally, the offshoring organisation must realistically assess its own ability to build an offshore presence in the selected location for the functionality decided, and if in any doubt, some kind of partnership should be entered into. Without this, there is a lower chance of success, which could indeed prove costly.