IT Offshoring Savings Declined for Past 5 Years

The average savings achieved by IT offshoring has declined for the past five years, even as companies expanded their offshore initiatives, Duke University's sixth annual corporate offshoring study found.

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Page 2 of 3 Well, 27 percent savings on traditional IT services is still nothing to sneeze at-particularly today when every dollar counts. But you propose that cost reduction alone is no longer enough to justify moving operations offshore — that companies need a "multidimensional value proposition."

Lewin: Companies that stand out in our database are those that have implemented a corporate-wide strategy to guide offshoring decisions. For example, they already had in place strategy for tier two and tier three cities in India. They are among early companies locating in China. They were first in demanding that their providers provide nearshore options.

Unfortunately very few companies understand the strategic value of global sourcing. They think of [offshoring management] as a core capability, not something to patch on. This is a discipline. You can't do it just from one day to the next. You need to be thinking through the next thing that you'll be ready for. Think "cloud." Now that cloud is here, will you be a company that wait until it is perfect or be an early adopter on a fast learning trajectory? You found that as companies expand offshoring activities, they actually see a decline in overall efficiency, likely attributed to a loss of managerial control or the "hidden costs" involved such as training, staff recruitment and retention, and government and vendor relations. Why are companies still blindsided by the overhead required to make offshoring work?

Lewin: There are many companies just starting offshoring. But it is amazing to me that somehow they started down this path, and they don't recognize what they're getting into.

Two companies asked me to come in after they commissioned a McKinsey report [on their offshore option]. The report outlines all the important details about hidden costs. But most of the executives did not read or comprehend beyond the first two or three sections of the report. Much of the implementation process was one of trial-and-error discovery.

The bigger source of inefficiency is in companies in which offshoring gets C-level attention. They lay out guidelines and risks and may also prioritize strategic drivers. But they don't direct attention to creating and internal organization that can manage and coordinate the global sourcing strategy. So the different and functions find themselves reinventing the wheel.

There's not a central organizational unit—a center of excellence for global sourcing of business services—that, for example, does the vendor and country selection so that the business unit doing the outsourcing only has to deal with processes that they want to outsource. When you have an overall strategy, but much is still left to the business or function manager, there's going to be inefficiency.

When it comes to IT services offshoring, only five percent of companies are really phenomenal.

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