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New Strategies for a New Global Economy: On or offshore, what makes sense and what doesn't?

by Ahmed Refky, Senior Vice President, Xceed - January 4, 2010

New Strategies for a New Global Economy:

On or offshore, what makes sense and what doesn’t?

By Ahmed Refky, Senior Vice President, Xceed

Offshore outsourcing is a proven phenomenon that makes business sense in terms of cost and efficiency and is a reality in all mature economies. However, there are varying degrees of success in achieving the balance between customer satisfaction, quality and cost.

The debate has always been whether to stay onshore or to go offshore; the reality is that neither offshore nor onshore are good for all service types. Both can offer advantages and benefits based on the objectives and goals that the specific company is looking for. Therefore, an ideal sourcing strategy is based on deploying a "global service delivery model" leveraging the benefits of various geographies and ensuring ultimate risk mitigation, and an optimum balance between client satisfaction, quality and cost.

"The World is flat" by New York Times feature columnist Thomas Friedman, conceptualizes the significance of global service delivery models, in IT enabled services and the BPO industry. According to Freidman the boom of "dot com" phenomena, has virtualized human interactions across all facets and created a "flat" (connected) world. Making talent for the first time in history, more important than geography in determining a person’s opportunity in life and thus where businesses are located. With this in mind, looking into IT and BPO industry, it is to the best interest of businesses in these sectors to segregate IT enabled services/BPO activities into components, with each component performed in the geography that guarantees the most efficient outcome. Certain types of services have to be onshore outsourced, and some of the already offshore outsourced services need to be brought back; while other types of services need to stay offshore to get the optimum benefits.

We believe that any market can be served domestically, more specifically the US market that is usually perceived as one of the largest markets that offshore outsource. For some types of services and/or clients an onshore model can provide an excellent value proposition that balances the relatively high cost of operation versus quality and customer satisfaction.

Offshore outsourcing to labor intensive markets like India, China, Philippines and lately the North African region with relatively competitive labor wage rates, is most evidently justified for long term projects that span several years and stipulate operation and human scalability. Only in such scenarios that offshore economies of scale can leverage the costs incurred as a result of high travel, labor training and project management, which are common costs, associated with offshore development models. However, cost is not the only driver to offshore outsourcing, it is the hunt after scalable pools of talents and skill sets is what has been fueling the off shoring industry.

The onshoring model on the other hand contends on services that can not lend itself to offshoring, due to the sensitivity and/or complexity of the service components. Additionally there are the small to medium scale projects that an offshore model does not represent an added dollar value to it. The Government agencies are also another sector that has rising needs to outsource certain functions in an effort to elevate national service levels as well liberate resources to focus on core functions, yet are not able to offshore.

The cost benefits from the onshore delivery model more specifically in the U.S, are to further increase, after the US broadband stimulus adopted by President Obama administration early this year. So instead of setting up a contact center facility in New York or Washington DC where the cost of living is quite high, a contact center facility can be relocated to a rural area of Iowa for instance that was initially under served by broadband prior to the broadband stimulus program.

From a BPO service provider perspective, research analysts firms like Gartner and IDC are vying the sustainability of the pervasive offshore outsourcing models that rests on a "labor intensive" approach. With the continuous boom of technology platforms that automate and merge processes the conventional outsourcing model could lead to futile human capital and scalability could reach a point of serious glitch. This reinforces the significance of creating “Global Service Delivery Models” that utilize geographies and technologies as well, mitigating the risk of reaching a complete halt of service delivery as technologies advancements abate the cost and human scalability factors.

The hybrid service delivery model is in essence the ideal shore model with virtual platforms connecting all service delivery locations to guarantee maximum flexibility and seamless consolidation. Deciding on what will stay onshore versus what will go offshore and where; is as important as the initial decision of whether to outsource or not. Companies should strive to get the right mix of on and offshore strategies.

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