How to Create Effective Offshore Strategy?

For successful implementation, like any other business process, offshore outsourcing needs a well-developed strategy. In this article we tried to write the key aspects to be taken into account while developing an offshore outsourcing aspect.

To create an effective offshore outsourcing strategy management should perform the following 7 steps:

1. Strategy analysis: Objectives and Scope.

During this step you should decide whether offshore outsourcing is the right way for your company, what problems you expect to eliminate by going offshore and define the scope of the project (pick the process to offshore, define the process scope and expected ROI).

2. Create the offshore delivery model

At this stage you will have to think over following aspects:

1) The relationship decision: Build vs Buy vs Lease:

You will have to decide what relationship will connect you and your vendor: whether to build your own operation offshore, or buy into an existing one or create a sourcing relationship. Here is the list of existing offshore outsourcing business models (more detailed description of these models you will find in our upcoming articles):

- Global Delivery Model

- Hybrid Outsourcing

- ODC

- Captive Shared Services

- Build-Operate-Transfer

- Offshore Multisourcing

2) The location decision:

Offshore operation location is a critical aspect. Every location has a certain risk. When choosing a location for your offshore business, evaluate the country basing on following criteria:

- Distance

- Time zone difference

- Cultural differences

- Language barriers

- Quality of suppliers

- Legal framework

- Geopolitical stability

3) Governance decision

Your way or the vendor’s way? You’ll have to decide who will take the major part of management of the project: you or the service provider.

4) The vendor decision:

Create request for proposal and evaluate proposals from potential service providers.

3. Negotiate the offshore contract.

All services and costs must be clearly defined and the contract must be carefully worked out.

1) General Contract and Financial Framework

- Flexibility

- Price

- Price stability (in long-term agreements discuss annual percentage change before signing the contract)

- Hidden costs (discuss hidden costs before contract signing)

Reserve 5%-15% of your total budget for the internal management team (extra expenses such as time and travel)

- Quality

- Deadlines

- Payment terms

- Conflict resolution

- Term expiration and renewal

- Statement of work

- Performance measurement

- Service Level Agreement

2) Legal framework

Legal aspects of the contract are not less important than the financial. Pay attention of the following items:

- trade secrets and intellectual property protection

- Ensuring the security and privacy of your data

- Be aware of local regulations, such as labour and taxation laws

- Responding to a vendor that fails to perform its duties

- Termination of relationship

4. Design Service Level Agreement (SLA).

Elements of SLA:

- Start and end dates of the service

- Schedule for reviewing performance

- Documentation to be used in measuring the service level

- Types of service levels expected by customers and end users

- Measurements of the service levels?

- Measuring period

- Minimum quality of work

- Provisions and penalties for over- and underperformance

5. Manage the transition

This stage is probably the most difficult. There are many issues to consider. Here are the key aspects of this step.

1) Knowledge transfer between organizations. This is the task of bringing vendor’s employees up to speed on your process and procedures. Before you start transferring knowledge, you have to decide what knowledge should remain in-house and what should be transferred.

2) Communication management. There are two types of communication management: strategic and operational.

- Strategic communications apprise all employees within your company of your offshore outsourcing intentions and the reasons behind them.

- Operational communications are the day-to-day communications between you and the vendor. You will need to develop a plan that addresses such issues as the time, language and cultural differences, whether videoconferencing possibility exists, and when to schedule status meetings.

3) Employee management: redeploy, transfer or let go.

4) Quality management during transition

The contract should fulfill objectives for which the business was undertaken.

To guarantee quality many companies are emphasizing certifications (e.g. ISO 9001).

6. Manage the relationship for maximum value

Governance is an aspect of offshoring that can make or break the project.

Three levels of governance:

- Strategic level – aligning of the processes, projects and goals with business requirements.

- Program office - best practices benchmarking, vendor evaluation, project priorities and milestones.

- The operational level – day-to-day management of offshore projects.

7. Measure performance improvement.

- Continuous performance reports

Auditing. Here are some questions to answer:

1) How is performance monitored and reported?

2) Who is responsible for reporting?

3) What are the time frame, content and format of standard reporting?

4) Are SLA deadlines being met and adhered to?

5) Is reporting timely and accurate?

6) Is the quality of work consistent with the defined SLAs?

7) Invoice checks – is the number of people on the project accurate?

8) Does the vendor have valid software licenses in place?

- Continuous learning and recalibration

Many companies prefer to wait until outsourcing processes are settled down before entering of phase of re-engineering using management methods such as Six Sigma. During this phase you should analyze and give answers to following questions.

1) How much did my organization gain from offshoring?

2) Which offshore operations, data or activities are not performing according to plan?

3) How is our current business model – captive centre, sole sourcing, or multi sourcing – performing?

Keep in mind that successful offshore outsourcing relationships must be win-win situations for both clients and vendors.

The source for the article: Offshore Outsourcing. Business Models, ROI and Best Practices by Marcia Robinson, Ravi Kalakota.

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