Offshore Outsourcing Can Boost Agility

Labor arbitrage fades. And easy access to qualified talent and service quality may be declining. But offshore outsourcing can deliver an unexpected but welcome benefit -- increased enterprise agility, according to Duke University researchers.

Most corporate leaders decide to offshore IT services to cut costs — that's as true today as it was at the dawn of the offshoring era. But labor arbitrage fades, according to an ongoing offshore outsourcing study researchers are conducting at Duke University. In fact, it disappears after three years.

And when it comes to other oft-cited drivers for shipping IT functions overseas, the benefits may be diminishing as well, researchers at the Center for International Business Education (CIBER) and the International Offshoring Research Network's (ORN) Project at Duke's Fuqua School of Business have found.

While 53 percent of corporate leaders surveyed by ORN in 2010 reported that offshoring provided them with better access to qualified personnel, just 40 percent said the same in 2011. And the 46 percent of executives who said offshoring resulted in improved service quality in 2010 decreased to 41 percent last year.

So what keeps IT leaders and other corporate executives going back for more?

Organizational Agility Jumps

Mature offshore outsourcers reap increased organizational flexibility, said Arie Lewin, Fuqua professor of strategy and director of CIBER. Taking another look at the results of ORN's 2011 corporate client survey, Lewin and his colleagues found that the ratio of respondents for whom offshoring had led to improved organizational flexibility jumped from 48 percent in 2010 to 66 percent in 2011. Companies with existing offshore operation said boosting organizational agility was one of the top three drivers guiding their sourcing decisions. Even among those companies that did not report it as an important strategic driver, nearly half said that their offshoring efforts nonetheless had led to greater flexibility within their organization.

Lewin and his team attempted to identify what these users of offshore outsourcing were doing differently to achieve the additional agility. They found that respondents with what they called a delivery model strategy — a combination of geographically dispersed delivery centers consisting to maximize flexibility amid contingencies such as currency fluctuations and infrastructure failure — were 2.8 times more likely to report having improved organizational flexibility. Companies with an enterprise strategy (as opposed to regional or business unit-level strategies) in place to guide global sourcing practices were 1.7 times more likely to report improved organizational flexibility.

And there were other common threads among the companies reporting greater enterprise flexibility. For instance, they offshored a more diverse set of activities and were more likely to operate a center of excellence around global sourcing management. They also more frequently chose to send work to second-tier cities over global sourcing hot spots. And, in terms of outcomes, they reported greater cost savings from their sourcing efforts than those that did not report an increase in agility, said Lewin.

U.S. companies are beginning to recognize that a global sourcing strategy is an integral part of corporate growth strategy, according to Lewin, who contends that organizational flexibility will be critical for U.S. companies to compete against international rivals in emerging markets. In most industries, more than half of U.S. companies reported a corporate outsourcing strategy, according to the ORN study.

"As U.S. firms increase the scale and scope of their global sourcing, they are laying the foundation for achieving far-reaching organizational flexibility," Lewin said. "[Our clients] say that with these capabilities, they can redesign processes, enhance efficiencies, improve service quality and enable more effective access to new markets and promoting innovation."

IT-related outsourcing — application development and maintenance, IT infrastructure and innovation services — accounted for more than half of the corporate offshoring reported by the survey respondents. In the area of IT offshoring, corporate leaders indicated that they were more likely to offshore entire processes (43 percent) than discrete tasks (32 percent) today.

Offshoring Still Draws Concerns

The survey also found that concerns remain. For offshoring application development, respondents said the biggest risks were data security and intellectual property protection, both 26 percent, followed by service quality (24 percent). For IT infrastructure offshoring, the concerns were data security (35 percent), service quality (29 percent) and —interestingly — maintaining flexibility (21 percent).

Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.

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