Offshoring Spreads Its Wings

During the last U.S. Presidential campaign, offshoring was a particularly touchy subject. Candidates denounced "Benedict Arnold CEOs" for sending U.S. jobs offshore, while CNN anchor Lou Dobbs kept a disapproving tally of companies with offshore operations. This time around, even with the economy looming once again as a major issue, offshoring has generated little heat in the race for the Presidency.

That's largely because offshoring has become a fact of life for Corporate America. According to a new CFO survey, 36 percent of financial executives say their companies use offshore outsourcing. That's twice as many as in 2004. Among companies with annual revenues of more than $1 billion, the number of offshorers rises to 49 percent. Meanwhile, research firm Gartner estimated the size of the market for offshore IT and business process outsourcing at nearly $35 billion in 2006, and forecasts a market of $70 billion to $100 billion by 2011.

Companies and offshore service providers alike have expanded their views on which functions can be offshored, with everything from traditional call-center work to legal research on the table. They have also learned how to better manage the outsourcing process. At the same time, finance chiefs have gained a healthier respect for the hazards involved in sending work overseas (see "Staying Put" at the end of this article).

Far less fearful of a public backlash than before, companies today have a world of options when it comes to offshoring arrangements. "It's become a global bazaar," says Raffy Ohannesian of DLC, a finance and accounting-services firm. "Whatever you need, you will be able to find it at a lower cost, with a minimal or acceptable level of quality degradation, or sometimes even improvement. It's just a more mature market."

Offshoring, in short, has grown up.

Learning from Experience
This new maturity is reflected in the way executives now think about offshoring. "There is significantly more awareness," says Vivek Sharma, a director at THL Partners, a Boston-based private-equity firm. Sharma works with portfolio companies to help them choose and deal with offshore partners. "People no longer ask basic questions like, 'How can someone do this sitting in China?' They ask, 'How should I make this work?'"

Companies now regularly consider offshoring a strategic option, says Rohit Kapoor, president and chief operating officer at ExlService Holdings Inc., a New York–based business process outsourcing company with operations in India and the Philippines. "More and more companies are sitting down and planning on offshoring as part of their annual budgeting process, as opposed to just doing it on an ad hoc basis," he says. For many companies, the question is not whether to offshore but which functions to outsource, and when.

Finance executives are also thinking about considerations besides cost savings as they weigh the offshoring decision. Dallas-based Kimberly-Clark, for example, moved many of its back-office activities first into a captive shared-services center and then to a third-party offshore provider as part of a companywide strategic shift. "We're taking advantage of labor arbitrage, but it's equally about building an environment that gives us more flexibility and new capabilities from third parties," says Simon Newton, the company's vice president of North Atlantic finance and shared services.

Lisa Donahue, now interim CFO at San Jose, California-based Calpine Corp., an electric power company, formerly worked at an auto-parts manufacturer that decided to set up a call center outside of Paris — a city not known for its low costs. "Although intuitively we might have gone to Eastern Europe for cheaper labor, we needed stronger language skills because we wanted to provide a certain level of service to both internal and external customers," she says. The company found those skills near the Belgian border. "Cost savings isn't always the best driver," says Donahue, who also co-heads Alix-Partners's turnaround and restructuring practice.

Broader Horizons
U.S. executives have also learned a lot about which functions travel best. Information technology continues to lead the pack, with 57 percent of respondents to CFO's survey saying they outsource IT functions offshore. Finance and manufacturing tied for second place, with 31 percent offshoring those functions. Within finance departments, routine tasks like accounts payable, accounts receivable, and payroll processing are all popular candidates for offshoring (see "Workforce Migration" at the end of this article).

As executives have become more comfortable with their offshore partners, they have begun to experiment with offshoring a wider range of functions. "We are seeing companies outsourcing complete end-to-end processes rather than transactions," says Exl's Kapoor. In one example, a client in the utilities industry now uses Exl to handle customer dealings ranging from registering new customers to billing and collections, instead of offshoring only the billing part of the process.

"Four or five years ago, companies were offshoring IT applications maintenance, call centers, and the more routine aspects of finance, human resources, and back-office operations," says Vinay Couto, who leads the outsourcing practice at McLean, Virginia-based consultancy Booz Allen. "Now they are offshoring much more significant things." In health care, for example, the entire claims-management process is frequently offshored. Legal research, insurance-claims processing, and routine medical tasks (such as the reading of test results) are all activities that companies have handed over to offshore outsourcing providers.

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