Companies Considering Offshoring Must Carefully Weigh Risks vs. Rewards

Article ID: 510135

Released: 1-Mar-2005 11:30 AM EST

Source Newsroom: Conference Board

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Newswise — Most experts see no end in sight to the offshoring trend, as growing numbers of companies seek the cost savings and competitive advantage offshoring promises. But with an estimated half of all offshoring operations destined to fall short of expectations, companies are under increasing pressure to calculate the risks " not merely the rewards " that offshoring entails, according to a report released today by The Conference Board.

The report, Thinking Offshoring Through: A Framework for Decision Makers, reveals that unless corporate leaders address the full spectrum of offshoring challenges, underperformance will only grow " and the impact on corporate operations will be significant.

The report is a summary of an extensive study The Conference Board is releasing in installments over the next three months, which comprehensively examines the complex issues surrounding offshoring. It is designed to add reason, substance and perspective to an emotionally charged issue " one whose sensitivities pose particular challenges to corporate leaders who must reconcile the often conflicting interests of stakeholders.

"Companies now need a comprehensive decision-making framework to help senior executives rationally and systematically assess the risks and rewards of offshoring," says Ton Heijmen, Senior Advisor to The Conference Board on Offshoring and Outsourcing.


A wide variety of missteps can sink an offshoring effort, according to the report, from poor project management and inadequate communications (to internal as well as external stakeholders) to ill-conceived transition plans. While many companies tend to focus on security risks, a whole host of other risks, both at home and abroad, loom large: reputation/brand, social responsibility, geopolitical, human capital, regulatory and legal. Any one of these can turn once attractive potential savings into a costly endeavor.

The report provides an objective assessment of the risks and rewards across the multiple dimensions of offshoring " organizational, operational, human-resource, and external:

* Beyond Costs: Financial and Operational Risks, examines the hidden costs that can offset offshoring's touted savings, as well as methods to analyze cost and value and the pros and cons of vendor pricing arrangements. It also explores the multiple facets of operations, from service delivery models to the location decision, along with the raft of operational risks decision makers must weigh.

* The full ramifications of brand and market image and corporate reputation, environmental considerations and social responsibility are discussed in The New Corporate Reality: External and Market Considerations, with case examples highlighting failures and best practices.

* Organizing Offshore Operations: Management and Human Resource Concerns offers unique perspectives on the inevitably overlooked issue of organizational structure and management of the offshored operation. It includes a discussion of integrating offshoring into corporate strategy and structure.

The ultimate success of offshoring operations depends on successfully analyzing the full spectrum of implementational and operational factors " location, process, scope, participating business units, etc. In making their decision about where to offshore, companies must consider the tradeoffs of cost, proximity, convenience, time to market, and depth of resources. They must survey all of their options in each available market, from the quality of vendors and staff (skills, language, motivation) to the business environment and the availability of government incentives. The report endorses the use of a risk management framework for those organizations that decide to offshore " to manage the totality of risks effectively and conscientiously.

"Once a company outsources or offshores, it is on its way to creating a virtual corporation " a network of companies and operations that must work together and should act as if they were one integrated firm," says Heijmen. "Beyond advanced IT and communications capabilities, this virtual organization requires special approaches to organizational and behavioral management and the coordination of internal and external relationships."

ABOUT THE CONFERENCE BOARD ( Conference Board is the leading global business knowledge network for the world's largest corporations. The Conference Board is dedicated to helping companies improve performance and strengthening the role of business in society. More than 2,000 companies in 60 countries are members of The Conference Board, which produces the Consumer Confidence Index, the Help-Wanted Index and Business Cycle Indicators for nine countries worldwide.

Source: Thinking Offshoring ThroughExecutive Action #136, The Conference Board

The Conference Board announces a three-part web seminar series on:

" THINKING OFFSHORING THROUGH: A FRAMEWORK FOR DECISION MAKERS" Part I: Beyond Costs: Financial and Operational RisksTuesday, February 22, 200511:00 AM - 12:30 PM Eastern Time

Part II: The New Corporate Reality: External and Market ConsiderationsTuesday, March 8, 200511:00 AM - 12:30 PM Eastern Time

Part III: Organizing Offshore Operations: Management and Human Resource Concerns Thursday, March 17, 200511:00 AM - 12:30 PM Eastern Time

In addition, The Conference Board's Strategic Outsourcing Conference will be held in New York on April 27-29, 2005.


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