The search for outsourcing truths

A recent article in the March 2006 issue of Economists' Voice by Diana Farrell, director of the McKinsey Global Institute, describes, at length, the macro benefits that accrue to the US economy on account of offshoring. The study points out that offshoring gives firms access to distinctive skills abroad making them more competitive. In essence, offshoring represents an opportunity to improve operational efficiency and productivity that modern firms cannot afford to pass up on. For example, Farrell quotes past MGI research in support - for every $1 of cost on services that U.S. companies move offshore, the U.S. economy gains at least $1.14. The client reaps 56 cents of these gains, giving them the scope to invest in new opportunities that create jobs both at home and abroad.

However, this statement of benefits is credible only when firms do offshoring right. In the last year, there has been a plethora of studies which suggests otherwise. For example,

• 70% of the participants in a survey (April, 2005) by Deloitte Consulting cited significant negative experiences with outsourcing projects. The survey found that although BPO is largely driven by cost-related objectives, firms experienced hidden costs related to contract administration, profit margins, and in-house management.
• According to a Bain survey (2005), 82% of large firms in Europe, Asia and North America use outsourcing to service one or more business processes. However, almost half the respondents stated that their outsourcing programs fell short of expectations.
• In a study (June 2005) of 200 BPO customers by Information Week and Equa Terra, close to 60% of the respondents expressed moderate to low levels of satisfaction with their BPO arrangements.

So, if these studies be believed, all is not well in the world of offshoring. The benefits reflect a self-selection problem - they're not reflective of all firms but only of firms that ARE IN ACTUAL FACT successful at offshoring.

Understanding the truths behind these paradoxes in offshoring is critical because not only is the use of BPO rising across industries, but also firms’ boundary choices are increasingly shaping their competitive positions. If the value proposition of BPO is relatively difficult to attain, a large number of firms that have restructured their value chains to take advantage of BPO must question their investments and rethink their outsourcing strategies.