Offshoring Spreads Its Wings

Demanding Quality
As executives have gained a better understanding of which functions work well offshore, they have also learned that they can't simply sign a contract with an offshore provider and assume their work is done. Companies have significantly expanded and improved their governance of offshore projects. "Executives are far more sophisticated in setting goals and objectives in their service agreements," says Deborah Kops, chief marketing officer at WNS Global Services, an offshore service provider based in Mumbai.

Instead of signing fixed, 10-year service contracts, they are creating more-flexible arrangements and measuring the qualitative aspects of performance as well as cost. "Contracts used to be set up around productivity and efficiency metrics, like the number of calls handled in a certain time frame," says Kapoor. "Now, companies are establishing metrics for things like customer satisfaction."

Some organizations are designating internal teams to manage the offshored function or provider relationship. Couto of Booz Allen says he advises clients to plan on reinvesting 3 to 5 percent of the value of a deal in managing the vendor.

Tom Byrne, CFO at Novi, Michigan-based BrassCraft Manufacturing, a maker of plumbing supplies with $350 million in revenue last year, says the key to a successful offshoring arrangement lies almost entirely in the communication process. He cites the example of a sink part — a drain basket — that began generating complaints from customers who were cutting their fingers on it. BrassCraft had failed to specify that the Chinese manufacturer should round the edge, so the rim was left "razor-sharp," says Byrne.

Now, says Byrne, "we reconfirm many times what we have communicated. Many people working with offshore partners assume that they can't hear us or understand us, but the truth is, very often we're not telling them."

Passage Beyond India
Vendors, too, have learned a lot in the last few years. The large Indian outsourcing providers, such as Tata Consulting Group, Wipro Technologies, and Infosys, are expanding their service offerings and improving their grasp of U.S. business practices. Sharma of THL Partners says he is working with a portfolio company that is seriously considering a bid on an enterprise software project from an Indian company alongside bids from global accounting firms.

As offshoring has matured, India's success in developing the industry has both created challenges for Indian firms and drawn competition from many other regions hoping to cash in on the trend. Faced with high turnover, the depreciation of the dollar, and double-digit annual wage increases, Indian providers themselves are looking to open shops in lower-cost locations. Wipro has a joint venture in Saudi Arabia and has announced plans for a center in Egypt. Tata is planning a location in Morocco to serve French speakers. Vendors are also moving to lower-cost locations within India, expanding from their bases in cities like Bangalore into cities with less labor turnover and lower wage rates.

U.S. companies are also looking further afield. Nearly a quarter of the respondents to CFO's survey have relocated their offshore operations — to achieve greater cost savings, diversify their operations to reduce risk, or tap into a more diverse labor pool. Eastern Europe has emerged as a destination of choice, particularly for European companies in need of extensive language skills. The Philippines, and to a lesser extent Malaysia, Thailand, Indonesia, and Vietnam, are providing other options in Asia, while some experts point to Latin America, Africa, and the Middle East as emerging locations in various stages of readiness.

Still, with its educated, English-speaking, business-savvy workforce and business-friendly government, India maintains its reputation for providing the highest-quality offshore service available. "Clients complain that they don't want to go to India, because of the wage inflation; then we take them to other places and they get a little spooked," says Couto. "The cost escalations in India have been matched by an improvement in the quality of the labor supply." Some companies are coping with this by sending noncore functions that don't require English-language sensitivity to lower-cost areas.

Taking the trend to its logical extreme, some Indian companies are even beginning to outsource work to the United States. They are establishing offices and large campuses in an effort to get closer to clients and compete with U.S. rivals. Tata Group, for example, has a call center in Ohio, and Wipro is opening an office in Atlanta. In theory, a U.S. company could offshore its call center to an Indian vendor and end up having its calls handled somewhere in the Midwest, or even down the street.

Says WNS Global's Kops: "It could be that Reno, Nevada, is the next offshoring hot spot."

Kate O'Sullivan is a senior writer at CFO.

Staying Put

Despite all that companies on both sides of the Atlantic have learned in the last few years, many CFOs remain cautious about offshoring. More than half of the finance executives responding to CFO's survey say they have no plans to outsource offshore.

Moreover, 13 percent of those who have done so have failed to achieve any savings. Concerns about quality, intellectual property, and internal controls continue to nag finance executives. Stories of abandoned projects abound; in the past year, a third of companies surveyed by Diamond Management & Technology Consultants canceled an offshore business-process outsourcing deal.

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