Offshoring not a cost-costing panacea

2007

It sounds counter-intuitive, but a new study argues that organisations offshoring operations in the hope of simply improving performance end up saving more money than those that do it because they want to slash costs.

A study by U.S. management consulting firm A.T. Kearney has concluded that companies that offshore for improving performance reasons ultimately save 3.5 times more money as those motivated by cost reasons.

The finding adds to growing evidence that offshoring is not a cost-costing panacea. A study in April by Compass Management Consulting found that Europe's €4bn outsourcing industry is facing a mid-life crisis because organisations are finding that, far from saving them money, IT and business processing outsourcing deals often end up costing far more than they would have done had the work been kept in-house.

Similarly, research last November by Duke University and management consulting firm Booz Allen Hamilton concluded that cost-cutting was becoming less of a driving factor for offshoring.

Companies, it argued, were increasingly offshoring sophisticated, mission-critical functions such as product design and research and development, largely because they couldn't find the skilled workers to do the job at home.

The A.T.Kearney study looked at 42 multinational companies that had implemented an offshore programme and found those that improved on at least three out of six operational performance areas also experienced higher rates of savings.

In fact companies with strong operational improvement experienced average savings of 44 per cent from offshoring.

Yet companies that improved on two or fewer measures saved only an average of 30 per cent.

The best performing group averaged 64 per cent savings – more than 3.5 times the poorest performing group.

"The message clearly is to focus on improving performance and the cost savings will come as well," said Arjun Sethi, A.T. Kearney vice president and leader of the study.

"Placing too much emphasis on cost reduction serves to limit performance improvement.

"Winning companies are viewing offshoring in an holistic fashion and striving to achieve improvements across the entire organisation," he added.

  Categories:

Older Comments

Great point: though it sounds counter-intuitive, but organisations offshoring operations in the hope of simply improving performance end up saving more money than those that do it because they want to slash costs.

This is certainly the 'value' argument that sourcing vendors have been making for a while - Mohan

Mohan Babu Global