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In today’s business climate, every organization is looking for ways to save money and improve company profit margins. Many companies are developing “sourcing strategies” that explore a range of cost reduction options.
Increasingly, offshore outsourcing has become a key component in that strategy. Over 75% of the top 2000 companies now deploy some form of offshore IT outsourcing.
Offshoring has now become a big-ticket spend. Offshore outsourcing contracts typically consume 20% or more of an organization’s IT vendor spend.
Cost reduction is usually cited as the number one reason for going down the path of IT offshoring. However, sometimes there isn’t a clear objective established for the desired savings, and at other times the savings objective could be as low as 15-20%; well short of the total potential savings to be had.
In addition, the offshoring pie is only going to get bigger. The hunger for continuing to lower costs will drive even more work offshore. Projects that were hitherto considered risky will now make the business case for handing over to the offshore vendor.
The main culprits that have continued to negate the achievement of true savings are ‘hidden’ and ‘unexpected’ costs which pop up regularly, especially when there are gaps in client-provider alignment. These unexpected or hidden cost items can appear both as internal or external costs.
The key to achieving deeper efficiencies from the IT offshoring program is to be able to expect the unexpected, and expose the hidden elements that eat into the savings.
Alsbridge offers Sequoia – a portfolio of client transition and supplier governance support services designed to assist clients in achieving their sourcing objectives and realizing the full potential value of their service provider relationship. The specific governance and transition support services offered by Sequoia are especially useful in making IT offshoring programs successful.
Minimizing Hidden Client-side Costs
In an IT offshoring transaction, there is the potential for hidden cost elements to appear, which can cause an overrun of anywhere from 5% to 15% of anticipated or budgeted costs of operating the Client-side retained organization. This overspending is usually caused by:
Recognizing the Offshore Provider’s Inherent Best Practices and Capabilities
We have seen offshore outsourcing transactions that do not sufficiently recognize some of the inherent capabilities of the provider, and consequently do not place sufficient demands for ongoing improvements to efficiency levels. Potentially, as much as 5% year-on-year productivity improvement may be getting left on the table, if the provider is given no motivation to deliver improvements over time, contractual or otherwise. Clients could recognize and establish goals for improvements through provider best practices in:
Restructured Governance Practices
Depending on where in the lifecycle of the offshoring transaction you are, there could be contractual productivity demands placed, to ensure that the year-on-year benefits flow through. Alsbridge offers specific services, including re-evaluation and benchmarking, which assist in contractually identifying and specifying efficiency improvement expectations and targets, and establishing a regime of ongoing measurement of these benefits.
Additionally, the key to allowing productivity improvements to smoothly flow through, is to allow for combined client-provider inclusion in innovation planning. While not compromising on the offshore provider’s autonomy on the ‘how to’, revised governance practices could be established to identify, measure and track as much as 5% year-on-year productivity improvements.
Who Owns the Responsibility for Efficiency Improvements?
The governance structure of a typical IT offshoring transaction has a number of components that each carries their own and sometimes conflicting objectives. These objectives could include:
The ownership for the responsibility to deliver deep efficiencies from the outsourced transaction is shared. It requires a new, consistent and joint focus that seeks the attention of both sides. Efficiency leakages can occur on either side. The key is to operate the relationship with trust, predictability, and the desired amount of flexibility, so as to avoid the frictions and their associated costs.
The Sequoia offering from Alsbridge includes an operational alignment services which is achieved through a series of joint sessions that ensure clarity between the client and provider regarding activities and responsibilities.
The scope includes both operational and governance processes. The services are equally applicable at the start of a new outsourcing transaction, or to seek collaborative improvements in the course of an existing transaction. The goals of operational alignment sessions are to:
Alsbridge is uniquely positioned to bring together the two parties in an offshore outsourcing relationship to bring about alignment through deep inside knowledge of offshore providers’ operations, capabilities and issues, and a true appreciation and concern for your business issues, goals and risks.