Outsourcing Services: The onshore/offshore debate

Outsourcing services is a common aspect of most organisations’ strategy, whether it is to save costs, make budgets go further, streamline, or take advantage of external skills and resources that don’t exist in the organisation. Many organisations now see it as a mainstream, standard, business practice.

If nothing else, COVID-19 has taught us that the physical location of your resources and service providers is no longer the major concern. Remote working and innovations in IT service provision have enabled suppliers to be far more agile when providing outsourced services. It has also forced many client organisations to rethink their provision for remote working practices.

With an increased need for collaboration from both parties, it has also brought a welcome shift towards more and more organisations working more closely with outsourced suppliers.

As Deloitte notes in its 2020 global outsourcing survey: “Providers’ offshore and nearshore resources have always been considered “outsiders.” But as the crisis imposes a remote working model on these firms, the nature of workplace relationships as we know them today is changing drastically…

“A remote work culture is being ingrained gradually within companies, and this will help them access global talent from the most cost-effective locations. It would also allow companies to hedge their risks by diversifying their delivery locations. Also, with the global economy expected to contract, firms are “looking at ways to preserve cash.” All these developments suggest that the needle will be tilting more towards outsourcing.”

So, as the world wakes up to the idea that ‘working from anywhere’ is not only a possibility but potentially a permanent shift, can we expect a more open attitude to outsourcing key services, regardless of location?

Maybe so. But there is still a decision to be made.

How do you decide whether to opt for an outsource provider based in the immediate vicinity of your organisation (near shore), close by (onshore) or whether to go further afield (offshoring) to service providers located in other countries?

First let’s consider what they each are.

What is the difference between offshore, nearshore and onshore outsourcing?

1. Offshoring, which is commonly understood to be the most cost-effective approach to outsourcing, is the practice of offshoring processes or outsourcing services to service providers located in distant countries. Examples might be India, China or the Philippines, where lower labour costs and overall expenses are the main attraction.
2. Nearshoring is when you outsource to a country close by – ideally a neighbouring country. Historically this was often chosen to enable ease of travel for face-to-face meetings, to maintain a close relationship with suppliers, without incurring high travel costs. Whereas with offshoring there can be cultural complications (as we explore below), with nearshoring there is more likelihood of a better cultural fit.
3. Onshoring is the practice of outsourcing services or BPO (Business Process Outsourcing) to a provider within your own country. This avoids any issues with distance and cultural difference. There is also a strong trend at the moment to ‘buy local’ and support local business to boost the local economy.

There is often a perception that outsourcing automatically means offshoring, despite many outsourced services being provided in the originating country. But what is the right decision for your organisation?

Then there is the small matter of Brexit to add into the mix.

As the UK begins to navigate the effects of exiting the EU on BPO, there is a common perception that onshoring services to the UK will be the best solution. But is this really the case?

Let’s look at offshoring and onshoring in more detail.

What are the benefits of offshoring?

To explore this a little further, we will use the example of outsourcing IT services to an Indian provider.

Indian outsource providers had often been seen as second rate to their global counterparts. However, attention to their service levels and the use of technology for remote management of data centre monitoring, servers and patching, means that this is no longer the case.

In many cases, they can provide an equal service, at lower cost than many competitors, as well as being armed with an endless supply of young, highly skilled workers. The time difference can also be a benefit as it ensures 24-hour business continuity for global operations.

Cultural differences can, however, cause misalignment of expectations along with breakdowns in communication and frustrations with outsource providers based offshore. Whilst it is easy to blame the provider for these faults, it is a two-way exercise where both parties will play a role in the failure of any contract. This is why good supplier relationship management is critical to successful outsourcing.

But why do offshore outsourcing agreements fail?

The most common reasons we see as procurement consultants include:

• Lack of granularity in the initial procurement specification
• Deficiencies of the individual enterprise staff involved
• Incomplete or poorly designed processes/policies
• Gaps in the contract governing the relationship
• The enterprise under-investing in the vendor management and governance function
• Poor execution of the roles and responsibilities that the enterprise controls under the outsourcing contract
• Insufficient mature and detailed SLAs, KPIs and Service Credits
• No contractual RPOs and RTOs

What about the benefits of onshoring?

Enterprises with offshore operations may consider bringing them back onshore for a number of reasons. Performance will be a key driver, but other motivations include business strategy and the belief that an onshore provider can perform the function better than the offshore provider.

Increased service quality may also play a factor, and the satisfaction this provides may outweigh any increase in costs, we have all suffered long waits to speak to offshore call centres where the customer service representative is in some cases impossible to communicate with. If onshore services are also more productive and enable costly management overheads to be reduced, savings can also be made.

There is an increasing interest in bringing outsourced services back onshore and this trend looks to continue as companies embrace the lack of issues relating to visas, time zone differences, language and cultural barriers and political uncertainty when using a domestic sourcing model.

As the UK adapts to the impact of Brexit, it may appear as if onshoring is the obvious solution, but there are a few key points to consider. Skilled migrants may struggle to enter the UK from the EU to work. This could be one of the primary motivations for UK businesses to take the decision to offshore to the EU, in order to access the skilled labour they need in a cost effective manner.

In recent years we have seen a particularly positive increase in the granting of tech visas for skilled tech workers to enter the UK. Let’s hope that this trend continues post-Brexit.

The truth is no one can fully predict the impact Brexit will have on BPOs in the UK.

We can expect higher costs for skilled labour and it will certainly be more difficult to outsource offshore (process, procedure and increased legislation) but it’s highly likely that businesses will continue to consider both options.

And let’s not forget that much of the UK’s offshore outsourcing has been outside of the EU anyway!

So, what will it be – onshore or offshore?

There is no ‘one size fits all’ answer. It’s important to consider the best solution to suit your organisation; spend time to understand the options and make an informed decision which is tailored to your needs.

Offshore companies may appear to present lower man-hour rates, but these will increase dramatically when visas and travel become part of the calculations and may bring them on a par with onshore providers. We would encourage decision makers to conduct due diligence in this area, alongside the exchange rate implications, post-Brexit.

Conversely, whilst there are effective methods to overcome cultural differences between offshore providers and clients, opting for an onshore team could mean a much faster on-boarding process and a better general understanding of your business. This could in turn help to build relationships and create a partnership rather than a supplier-client relationship.

What if you need help deciding on the right outsourcing model for your organisation?

Decisions about outsourcing services – and which model to use – are never simple or fast and will only become more complicated as more and more options from cloud, IaaS, PaaS, SaaS and SD WAN are presented to CIOs. As more controls are put in place post-Brexit, this could add an additional layer of complexity.

If you’re finding navigating the complexities of outsourcing overwhelming; don’t worry – we can help.

eXceeding employs some of the best outsourcing consultants in the country. They have managed complex projects across multiple public and private organisations – from moving entire operations to far away locations, to seeking onshore alternatives following irresolvable differences.

We offer a free consultation, during which we can better understand your needs. Following this initial discussion, we will provide you with a clear breakdown of the advantages and disadvantages of the outsourcing options available to your organisation. Use the link at the bottom of this blog to book your appointment now.