The revolution in telecommunication and computing allows corporations to benefit from tapping low cost, high quality labor from around the world. As corporations embark on outsourcing initiatives to leverage these benefits, a question corporations often grapple with is: How much to outsource and offshore?

The answers vary by company and have not been static over time.

Business process outsourcing (BPO) continues to focus on transactional processing work. Yet this is slowly changing. In the 1990s BPO usually meant cherry-picking a couple of processes like accounts payable and payroll for outsourcing; today more and more buyers are adopting the mind-set that the only must-haves for retained back-office functions are policy and strategy.

Exhibit one below provides two examples of increases in business process outsourcing (BPO). Exhibit 1a contrasts the scope of Finance and Accounting (FAO) services outsourced by buyers who have outsourced for less than three years with more mature buyers. As buyers mature, they expand the scope of outsourced services to include more judgment-intensive processes.

Exhibit 1b contrasts the scope of Human Resource (HR) services outsourced prior to 2006 with the scope of HR services outsourced after 2006. In the more recent deals we see a significant increase in the scope of judgment-intensive HR processes outsourced.

Exhibit One – How much buyers outsourced

How much work are buyers sending offshore?

In the early part of this decade, Everest Group helped a company outsource its U.S. accounting work. The buyer earmarked 50 percent of the work for India and moved the other half to a lower-cost location in the United States. Moving 50 percent of the accounting work to India required a lot of discussion on risks and risk mitigation to make key stakeholders comfortable enough to approve the move.

Today, such a solution would result in a very different discussion; everyone would ask why the company was sending only 50 percent of the outsourced work offshore. Today’s BPO agreements include a much more aggressive distribution of work between offshore and onshore.

Exhibit 2 below shows the significant increase in BPO offshoring in the last f few years. Exhibit 2a shows that only 73 percent of FAO outsourcing agreements established prior to 2005 had an offshore component; today more than 95 percent do.

Even more striking is the percentage of outsourced work performed offshore. Prior to 2005, offshore suppliers performed approximately 63 percent of FAO; today that number is approximately 90 percent.

Exhibit 2b shows the dramatic expansion of HR service centers by BPO providers.

Exhibit 2 – How much BPO work is going offshore

There are a number of factors, both intrinsic and extrinsic, that have influenced this increase in offshoring.

Key extrinsic factors causing the expanded use of offshoring include:

1. Performance: Better technologies and communications have allowed faster and efficient collaboration.
2. Capability: Improved tools and training allow service providers to better serve their customers in existing processes and acquire knowledge and skills in newer processes.
3. Transformation: Buyers now understand this is an opportunity to transform their business processes and improve the process output rather than just repeat the same inefficient processes again at an offshore location.
4. Scope of services: The ability to offshore smaller and smaller volumes has attracted more companies and newly offshored business processes.
5. Security: Improved physical and electronic security procedures and the lack of any major security scandals have reassured buyers.
6. Cultural/Social: Both buyers and service providers have a better understanding of the cultural and social nuances, which has made collaboration easier.

The evolving maturity of the industry continues to address many if not all of the extrinsic factors. The industry has proved itself to be more robust and reliable than ever before. All of the above factors have reduced the risk perception, brought new buyers into the marketplace, and sent a higher proportion of services offshore.

The case is different with the intrinsic factors, which by nature are unique to every organization and thus may well hold the key to how much each company offshores.

The key intrinsic factors include:

1. Centralization of services: Are the services distributed across the organization or have they already been consolidated into a single shared services entity? Centralization of services makes it easier to transfer an operation to an external service provider.
2. Location of services: If the services are already centralized, are they co-located with corporate headquarters (or with one of the business units) or are they set up as a stand-alone entity located apart from the other company facilities? An existing stand-alone service location offers some proof of location independence and allows companies to comfortably consider offshoring as an option.
3. Degree of automation: How much has the organization evolved to leverage electronic processes and digital authorizations? The greater the level of automation, the easier it will be to smoothly transition to an offshore provider.
4. Stability of operations: How stable is the operation? Does the operation require frequent support from other groups in the company to execute its activities or is it fairly self-sufficient? The more self-sufficient the operation is, the more it lends itself to external service provider offshoring.
5. Importance of operation: The importance of the operation to the business plays an important role in deciding the operating model and the proportion of resources offshored. Operations deemed critical to the business often start with a lower proportion of offshore resources that expand over time as the organization becomes more comfortable with the model.
6. Culture: What is the organization’s view toward outsourcing and offshoring? How risk averse is the organization? Does the organization have prior experience with outsourcing or offshoring? In nearly identical situations with respect to centralization, automation, stability, and criticality, we have seen different organizations reach very different conclusions on the feasibility of offshoring. The only material difference was the difference in mind-set.

A majority of the intrinsic factors deal with the degree of encapsulation of the business process. The better encapsulated a process is, the more readily it lends itself to a full-scope offshoring.

This discussion of extrinsic and intrinsic factors shows there are multiple facets to consider in trying to answer the “how much” question. There is no one-size-fits-all response. A structured assessment of these factors and other unique conditions helps organizations determine the appropriate service model and mix of offshore and onshore resources.

While the above discussion used Finance & Accounting and HR examples, the trends and factors are broadly applicable across the spectrum of BPO services buyers have outsourced.