Wednesday, September 5, 2007
Let’s reduce costs by going offshore with some development or service functions! The board and management agree to set up offshore activities in a place like India, China, Russia, Slovenia, or Bulgaria. Time passes. Everyone is happy. Right? Well, maybe.
Many companies are finding that their goals are not being met in a consistent way. Issues creep into the picture. These issues are really symptoms of deeper problems. Issues that frequently arise are:
- Product schedules begin to slip. Your staff starts complaining that low productivity in the offshore operation is eliminating the cost benefits that you justified the movement to offshore in the first place. The offshore operation requests substantial added resources in the budget cycle.
- Customer satisfaction relative to functions provided by the offshore group starts to decline. Customers feel the product is moving away from their needs or the call center doesn’t seem to “understand our needs”.
- Politics develop between the marketing, product management and/or development functions in the US and the offshore operation. There is finger pointing and the US based groups complain about the offshore group doing their own thing and the offshore operation complains about lack of solid product requirements and communication problems with the US groups. Teamwork, a strong point of the company, seems to break down on any subject dealing with the offshore operation.
- Frequent changes occur in vendor personnel at the offshore location. Members of your US team, who provided training and support to the initial offshore activities, have been reassigned to other duties and now the changes in the vendor personnel need support from your staff once again.
Almost every company with offshore operations encounters these and other issues along the way. To determine if you need to take steps to assure your offshore operations are achieving the goals that you have set, please take a moment to complete the following score card on your offshore operation. Assign a score of 1 to 10, with 10 being the highest for each factor and total them up to see where you stand. For example take factor no 1; do you have a clear written statement specifying the company goals for going offshore? Do you have at least a 3 year plan for offshoring with expected financials? Does everyone associated with offshoring clearly understand the long term goals of offshoring? You assign a 10 if you answer yes to each of these questions. When you add up the scores for each of the following questions, if you score less than 80% (80), you need to consider undertaking assessment of your offshore initiative.
Assessment Score Card
Analyzing the Raise of Chinese Human Resource Management
Since 1979, China has undertaken a strategy of economic reform that is essentially based on the “Open Door Policy” being followed by the “Four Modernizations” of the most perspective industries: agriculture, manufacturing, defense, and science and technology. Consequently, there was a shift from command economy to the one mostly driven by market forces. China’s entry into the World Trade Organization, social and economic reforms, industrial consolidation have made it a highly perspective country for foreign investment. Within the past 5 years, Shanghai General Motors and Shanghai Volkswagen more then doubled output – from 280,000 to 600,000 units. Going even further, country reached the largest output of steel in excess of Japan and United States together.
Lets analyze production a can of soda. While production costs in China account for only $0.18-0.19, United States production costs reach $0.70. At the same time, entrance into the World Trade Organization and focus on global market go hand in hand with the increase in standards for goods and services produced. Given the direct relationship between quality of products produced and company’s ability to retain talent workforce through effective human resource practices, the issue of labor turnover becomes a critical factor of the HRM strategy undertaken by a company.
As reported by scholars, the present situation in the labor market in China is healthy and stable. As reported by the Current Employment Statistics (CES) survey, the payroll employment increased by 2.1 million in 2004, which accounts for the first gain since 2000. Payroll employment remains stable – 97,000 below the peak level reached in February of 2001. Job Openings and Labor Turnover Survey points out s light increase during 2004; however, it is still considerably below the pre-recession years. In this survey, the total number of hires and separations that occurred monthly alongside with the number of job openings was measured.
At the same time, China Employee Attraction and Retention Survey 2004 reports that companies in China are having significant difficulties in trying to sustain the labor force in China. Survey covered 24 percent of companies from high tech industry, consumer industry accounts for the share of 19 per cent, chemical industry for as much as 14 per cent, pharmaceutical – 11 percent, automotive – 8, and service – 6 percent. As much as 54 per cent of all organizations confirmed an increase in labor turnover from previous years when it comes to professional and highly skilled staff. Companies covered in the survey use different strategies to sustain staff: 83 per cent of all companies employ health care and insurance benefits, 41 per cent provides health and fitness plans, whereas 24 percent offer flexible working hours. Interestingly, only 21 per cent of all organizations offer supplementary pension plans, and only 10 per cent offers subsidized loans.
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How to determine true business value of offshore outsourcing
A question many executives are asking is "how can we tell whether our offshoring efforts are delivering value to our company?"
While you pay offshore vendors much less than what you would be paying a U.S. vendor, some members of your staff complain that offshore productivity is really low, that 2 or 3 offshore personnel are doing the same work that used to be done by one experienced person in the United States. And that’s not all: offshore outsourcing entails additional costs for travel, communications, and duplication of equipment and/or software tools, to name just a few expenses. At least some of your staff may be implying—or even loudly proclaiming—that offshore outsourcing is not saving money after all and that it was a bad idea. Even if offshore outsourcing may have saved you money in the beginning, it may not be doing so any longer. After all, offshore labor costs also tend to escalate over time.
The cost of offshoring isn’t only about money; it’s also about perception. If, for example, your management team must work into the night and arrive at work in the early morning to manage offshore projects, their perception about who is benefiting and who is hurting becomes personal. While added stress on your domestic staff should not be ignored, the way to address this issue is to develop an objective view of all facets of costs:
Direct labor cost which is the check you write to the vendor on a monthly basis
Cost of travel both for regular monitoring and for training
Communication costs: Additional data communication costs; in some cases companies have had to dedicate separate “communication pipes” in order to keep the offshore and local data bases synchronized. In addition, there is the cost of voice communication, video conferencing, e-mail and chat sessions. You need to evaluate how many of these costs are incremental additions because of offshoring.
Cost of training and quite often, re-training
Additional equipment and/or software tools you need to provide because you now have an additional location and the same tools/equipment quite often, cannot be shared.
You should, in addition, assess the offshore productivity and factor that in; even if offshore personnel are as competent as the local staff (which is your best case scenario and unlikely to be the case when you are getting started), there will a productivity loss because of systemic issues. If you are just launching the offshore initiative, add the costs of finding a suitable offshore vendor and launching the offshore operation for the first time.
Compare this against the benefits you are receiving from offshoring – both tangible and intangible such as reduced costs, easier round the clock coverage and so on. This will give you a balanced view of the situation.
Real World Example
This approach was recently applied in an organization with complex software products and a sizable offshore operation. Mid-level managers, Project managers were up in arms about offshoring; complaints about offshoring to senior execs including the CEO were wide spread. When an objective assessment of Business Value along the lines outlined here was conducted, many in the company was surprised to find that offshoring was indeed saving considerable sum of money; however there were issues they needed to address. This resulted in the staff gaining a better understanding of the situation and the need for the company to continue offshoring. Focuses shifted from a perception of offshoring as a bad move to identifying specific issues with the offshore operation and begin addressing them.
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