Offshoring can be considered a byproduct of globalisation and the increasing pressure to cut down on costs.
Offshoring can be considered a strategic tool used by companies to configure their activities across borders. The focus has been on information technology. However, it has now become a common strategy for the services sector as well.
As our work is becoming geographically dispersed, Offshoring can be the alternate way of conducting business globally.
Offshoring as a concept
Offshoring may encounter some resistance with the cries that the practice is similar to exporting jobs. Such arguments ignore the offshoring benefits to enhance organisation capabilities & the essence of comparative advantage between economies.
Speaking from a policy perspective, the barriers to Offshoring should be low for organisations to operate efficiently and boost productivity.
But it does not necessarily mean that Offshoring is the best decision for every organisation. Whether it is an appropriate solution for any organisation is a complex decision.
Where has Offshoring been?
One of the biggest drivers of Finance and Accounting Offshoring (FAO) has been the realisation of cost savings through Offshoring of customer service, Information technology and Human Resources functions.
Companies who farmed out specific HR and IT functions to countries such as India, Pakistan, Singapore, Ireland, and Malaysia has claimed cost savings between 50-75 per cent.
Outsourcing may not be a new way of handling FAO functions. Still, Offshoring is driven by the motive to gain similar cost savings generated in other business functions.
Businesses have achieved dramatic savings using two different approaches: starting their captive offshore centre or entering into a contract with service providers.
The number of firms that have chosen to take the service provider route has spawned thousands of offshore start-ups to meet the rising demand and attract companies such as Accenture, GE, and IBM.
As a corporate function, FAO may have lagged for a number of reasons: concern about the loss of data control, timely accurate accounting information and fear of adding a layer of internal risk control in the light of the Sarbanes-Oxley act.
Also, with the pressure from the top management, accounting managers had no strong motivation to explore the business process of Offshoring.
However, the experience of early entrants into the field changed the game. The first movers were GM, Citigroup, and British Airways to move their back-office operations offshore.
When Offshoring began, the managers were hesitant to lose control, but as they saw the success of the FAO efforts, they gradually became comfortable with the process. This comfort factor coupled with new pressure to reduce overhead costs resulted in FAO moving to the top of many agendas.
Firms can successfully take advantage of offshoring benefits if they focus on moving the operations to a service provider, but not the responsibility of overall effectiveness and secondly, never outsource a broken operation as a method of fixing it up.
Where it's going
Over the years, Offshoring has undergone a significant transformation. It has become a common part of global organisations, particularly in accounting, legal, management consulting, technical and computer services.
After a slow-down following the Global Financial Crisis, organisations worldwide are moving their business functions overseas.
The four key drivers of change have enabled a greater rate of Offshoring
* Globalisation: Reduction of trade barriers with recent free trade agreements have enabled free movement of business, labour, investment and resources. Globalisation has increased the competitive pressure to cut down on costs and increase growth with Offshoring.
*Economic development: Rapid development in regions such as Asia has increased professionalism and skill level in mature offshoring markets. With higher skills come higher wages and movement along the value chain.
*Technological advancement: Rapid technology advancements have made offshoring cost viable and an effective business strategy. In this connected world, any work can be done anywhere. Cloud computing may drive increased future Offshoring with greater technology adoption such as big data, virtual desktops, and mobility.
*Global labour market: Offshoring isn’t simply about cost-cutting, and other motivations are becoming increasingly important. For example, having access to skilled employees where the local talent is scarce. The offshoring concept is itself changing, and tasks can easily be outsourced to freelancers or even automated.
Factors that will determine future offshoring success
A number of key issues will help determine the offshoring success for future organisations.
It can enable organisations to operate flexibly.
* Recognising the benefits: The offshoring benefits continue to shift from pure cost savings to productivity. The future benefits include access to diverse skills, higher value add-on work offshore and onshore employee retention.
*Getting buy-in: As Offshoring becomes significant, long term commitment and buy-in are essential for success. While a broader range of offshoring options will make it easier, a clear strategy and recalibration will be even more important in the future.
*Finding the right location: With the increase in the range of offshoring locations, organisations will find diversification easier and tap into a broad range of capabilities and skills across borders. Understanding the future benefits the different locations can provide is essential.
*Future planning: Offshoring is undergoing rapid change, and planning for the future may be challenging. At the same time, new trends like automation are likely to disrupt the offshoring model itself.
While traditionally about cost-cutting in back-office functions, Offshoring has become more complex and continues to evolve. Many offshore functions are becoming fully integrated into the operating model and extend well beyond the current services being traded.
As a result, Offshoring can play a key role in addressing future productivity challenges by maximising the value of the existing workforce and assisting organisations to be globally competitive.
The education sector will also need an overhaul to ensure future ready graduates have the skills and knowledge to perform high-value services that the workplace expects.