Top 10 Risks of Offshore Outsourcing

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  • Topic: Outsourcing, Business process outsourcing, Offshoring
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Top 10 Risks of Offshore Outsourcing
Summary: Offshore outsourcing is growing 20%-25% per annum, with little evidence of slowing. Indeed, while most enterprises experience initial resistance, most technical issues are readily resolved and geopolitical risk is deemed insignificant after careful evaluation.

By Dean Davison | December 9, 2003 -- 00:00 GMT (16:00 PST)
Offshore outsourcing is growing 20%-25% per annum, with little evidence of slowing. Indeed, while most enterprises experience initial resistance, most technical issues are readily resolved and geopolitical risk is deemed insignificant after careful evaluation. Even the current political fervor about jobs being moved offshore via outsourcing is not impacting the demand or strategy of IT organizations. Offshore outsourcing will continue to grow as a "labor arbitrage" model until 2008/09. META Trend: During 2004/05, outsourcing will divide into commodity and transformational services. Infrastructure services will mirror grid-computing structures and develop consumption-based pricing (a.k.a., "utility services"). Through 2006/07, transformational services (e.g., application development maintenance and business process outsourcing) will segment along horizontal (function commonality) and vertical (specialized) business process/services outsourcing functions. Although vendors will attempt to bundle infrastructure with "value" services, clients will demand "line item" pricing by 2008/09. Through 2004/05, IT organizations will outsource discrete projects/functions offshore (e.g., from application development projects to specific call center support). Growth will continue at 20%+. Offshore strategies by domestic vendors will shift business from large, integrated outsourcing contracts, but most IT organizations will still develop strategies that focus on pure-play offshore vendors. The top 10 risks of offshore outsourcing are as follows. 1. Cost-Reduction Expectations

The biggest risk with offshore outsourcing has nothing to do with outsourcing - it involves the expectations the internal organization has about how much the savings from offshore will be. Unfortunately, many executives assume that labor arbitrage will yield savings comparable to person-to-person comparison (e.g., a full-time equivalent in India will cost 40% less) without regard for the hidden costs and differences in operating models. In reality, most IT organizations save 15%-25% during the first year; by the third year, cost savings often reach 35%-40% as companies “go up the learning curve” for offshore outsourcing and modify operations to align to an offshore model. 2. Data Security/Protection

IT organizations evaluating any kind of outsourcing question whether vendors have sufficiently robust security practices and if vendors can meet the security requirements they have internally. While most IT organizations find offshore vendor security practices impressive (often exceeding internal practices), the risk of security breaks or intellectual property protection is inherently raised when working in international business. Privacy concerns must be completely addressed. Although these issues rarely pose major impediments to outsourcing, the requirements must be documented and the methods and integration with vendors defined. 3. Process Discipline (CMM)

The Capability Maturity Model (CMM) becomes an important measure of a company’s readiness to adopt an offshore model. Offshore vendors require a standardized and repeatable model, which is why CMM Level 5 is a common characteristic. META Group observes that approximately 70% of IT organizations are at CMM Level 1 - creating a gap that is compensated for by additional vendor resources on-site (see Figure 1). Companies lacking internal process model maturity will undermine potential cost savings. 4. Loss of Business Knowledge

Most IT organizations have business knowledge that resides within the developers of applications. In some cases, this expertise...
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