Offshore Success Is Uneven, Says Kearney Study
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The British philosopher John Stuart Mill discovered he couldn't achieve happiness by pursuing it; happiness is a byproduct of focusing your energy on doing worthwhile things. The American consulting firm A.T. Kearney has found that a similar rule applies to with offshoring: you don't achieve savings by focusing on cost-cutting; it's a byproduct of targeting better performance. |
Like the Forrester study of captive outsourcing centers, Kearney studied a small group of companies: Just 42 Fortune 500 multinationals -- the type that ought to have the most success with offshoring because of their management depth and clout with Tier 1 offshore companies.
AT Kearney's study looked not just at IT outsourcing, but other kinds too, including business process outsourcing.
As we found in our March '07 outsourcing study, large companies in general tend to save money by offshoring. However, the results are uneven: although as a group they saved 44 percent by offshoring, 34 percent failed to save as much as expected. And 60 percent missed their operational performance targets.
What did the successful companies do differently? They focused "less on saving money and more on improving operational performance, and in so doing they saved more money." Companies that improved three or more operational measures saved more than those that improved only two.
Success also depends on what you measure: companies that saved more tended to focus on service levels, organizational capability, capacity and flexibility. It's the old rule the TQM movement learned long ago: improving quality doesn't cost money, it saves money.
Successful firms also invested in management. They set up a "strong offshore management team" and a "detailed implementation plan," and were also more likely to send a manager overseas to oversee the vendor. And, when picking an outsourcing supplier, they focused on the supplier's capabilities, not the price they were charging.
I can't say I'm surprised to read that, "Ironically, the companies that focused less on [supplier] price saved twice as much."
Worth noting: Unlike the Forrester study, which slammed captive outsourcing, this study finds that companies which set up captive outsourcing are saving more money and achieving better operational improvements.
Other than observe that three companies have spun off their captive centers, there's nothing to indicate the trouble that Forrester's researchers came across. However, I don't get the sense from the study that the Kearney study's authors dug into this as deeply as Forrester's analysts.
Comments (2)
Thanks for this article and the reference to John Stuart Mill. While the pursuit of happiness and self fulfilment is paradoxical in that it appears that the act of giving is the way one receives, reaping savings and benefit by not pursuing cost-saving goals directly is really a more straight-forward prospect than it initially seems. It stands to reason that well run companies with well designed processes probably are more efficient and profitable than those that are poorly or carelessly designed. The fact that chasing after savings as an outsourcing priority is typically less than successful probably simply reflects the absence of attention to process, no?
Posted by Steve Hamrin | June 20, 2007 6:05 AM
Control over requirements, good communication, and effective management of large teams have been the keys to success since the beginnings of the software industry. See Fred Brooks, "The Mythical Man Month." These principles apply regardless of the way in which development is paid for.
Processes alone are not enough. There are plenty of projects with very disciplined processes that have failed miserably. You need talented developers, good leaders, and good relationship management. If any of these are missing, your large project will fail.
Posted by Chris Weiss | November 13, 2007 1:36 PM