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Getting offshoring right.

Ravi Aron1, Jitendra V Singh

  • 1University of Pennsylvania's Wharton School, Philadelphia, USA. raviaron@wharton.upenn.edu

Harvard Business Review
|December 13, 2005
PubMed
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Offshoring business processes can fail to deliver expected benefits due to poor strategy. A three-part methodology helps companies prioritize processes, analyze risks, and select optimal locations and structures for successful offshoring.

Area of Science:

  • Business Strategy
  • Operations Management
  • Global Business

Background:

  • Offshoring and outsourcing business processes are common strategies for North American and European companies seeking cost reduction and competitive advantage.
  • However, studies indicate that many organizations experience mixed results, with up to 50% failing to achieve expected financial benefits and facing employee and consumer dissatisfaction.

Purpose of the Study:

  • To address the challenges in offshoring strategy formulation by proposing a structured, three-part methodology.
  • To provide tools and frameworks for companies to effectively select processes for offshoring and optimize organizational structures.

Main Methods:

  • Process Prioritization: Ranking processes based on customer value creation and value capture potential.
  • Risk Analysis: Systematically evaluating operational and structural risks associated with offshoring critical and commodity processes.

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  • Location and Structure Determination: Aligning process risks with potential offshore locations and organizational forms (e.g., captive centers, joint ventures).

    • Main Results:

    • A clear framework for differentiating between core, critical, and commodity processes to guide outsourcing decisions.
    • Identification of operational and structural risks to mitigate potential failures in offshoring.
    • Introduction of the 'extended organization' model for enhanced collaboration and service quality with providers.

    Conclusions:

    • Rethinking offshoring strategies is crucial for businesses to achieve desired outcomes.
    • A systematic methodology involving process prioritization, risk assessment, and strategic location/structure selection is essential for successful offshoring.
    • The extended organization model offers a new approach to managing offshore relationships and ensuring service quality.