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7 Offshoring Terms You Need To Be Familiar With

With steep increases every year, the world has taken off on an offshore pilgrimage searching for the scripted blueprints for successful relocation of corporate functions. But many companies are still unsure about how to slalom through the jungle of overseas offerings.

Different models, geographical locations and blurry track records all intersect in ways that are extremely difficult to untangle. This collection of offshoring terms provides the first tentative step towards pigeonholing vendors and making an informed decision for moving parts of your business somewhere else.

1. Offshoring

Offshoring is an umbrella term for relocating a business process to overseas territories. The problem is that offshore smartsourcing means everything and nothing, making it tricky to summarise. It is important to note, however, that offshore is both a model and a general term for various other models.

Because corporations are increasingly under pressure to optimise performance at minimal costs, relocating labor-intensive service industry functions can lift a company off the ground in a way that would not have been possible at home. Both costs and size of talent pools make offshoring destinations like Brazil, China, and India attractive.

With offshoring as well as other approaches, it all boils down to the groundwork preceding the move. If corporations manage to arrange a setup in cooperation with a partner that values structure, process, independence and ownership, the chances for success heighten. An offshore partner can fall anywhere on the spectrum ranging from consulting to project managers, depending on the model, so the corporation is question has everything to gain from a round of thorough self-assessment to understand in which direction it should go.

Context: The Politics of Offshoring

Economists generally hail offshoring as a win-win; the relocator benefits from the low costs that simultaneously generate jobs in the offshore destination.
However, the job market is not so easy to boss around. The bulk of factory jobs that flew off to China created a hollow gap in the American job market because, not surprisingly, the blue collar doesn’t become white overnight. When service sector jobs started waltzing towards India, it became a bit of a conundrum how to deflate mass unemployment.

Others, however, point to the forces of the global capitalist economy that will inevitably set off a redistribution of labour on an international scale. The BRIC countries and emerging markets compete for the financial shortlists as well.

McKinsey&Company joined the debate with a report in 2013 stating that the US in fact reaped as many benefits from the offshoring craze as the host countries. The equation is not as square as we imagine. Instead, the benefits materialise through new streams of revenue. As the destination country gets richer through the boom in the job market, so does the demand for American and Western products.

– Pros: Low costs, huge talent pools (greater choice/flexibility), vast experience working with foreign clients
– Cons: Geographical distance, cultural difference

2. Nearshoring

For Americans, it means Mexico. For Japan, it is China. And for Western Europeans, we need to look east.
Nearshoring is offshoring but with greater geographical proximity but has received significantly less media attention, perhaps because the economic gains haven’t been as pronounced as those for offshore. A more predictable supply chain sits at the top of reasons for picking a neighbour rather than the next country.

Skype’s Scandinavian founders used developers in Tallinn, buying the unicorn a significant advantage in terms of development. But prices in places like Poland, Estonia, Ukraine and Mexico are starting to lean up against those in France, Sweden and the US. So nearshoring distinguishes itself through talent and geography rather than low costs.

However, the vestiges of communism have interfered with the multiplication of software developers because curriculas are not where they should be. And however banal, the population size determines a great deal too.

– Pros: No time difference, cultural similarity, geographical proximity
– Cons: Relatively high costs, smaller talent pool

3. Outsourcing

Among the many terms sitting under the offshore umbrella, outsourcing has perhaps been the single most controversial of the bunch.
Outsourcing describes the activity of putting practically any corporate activity in the hands of an outside vendor. Colloquially, outsourcing has come to mean that this third party picked up the management responsibility of the IT department in the destination country.

Everything from war to the fabrication of underwear has been outsourced, and it can be a highly cost-effective method if done right. Economy of scale has been one of outsourcing’s wingmen in pulling in foreign clients.

At the same time, there has been a whirlwind of controversy spun off from outsourcing ventures. Some surfaced as colossal losses and others stemmed from a complete lack of control. Either way, outsourcing deprived enough companies of the tasty benefits to make many IT professionals shiver by the sheer thought. So corporates should double check that outsourcing is in fact a suitable model to achieve set goals.

– Pros: Economy of scale, quick start, availability of talent (check the vendor)
– Cons: Loss of control, poor (indirect) communication, lack of transparency

4. Smartsourcing

Smartsourcing is directly derived from the hard-won lessons of outsourcing. Smartsourcing is a paradigm supporting a division of labour where the company nurtures its core competencies while letting the external provider take charge of cost control and innovating change in non-core operations.

In many ways, the ideas behind smartsourcing apply to the full range of offshoring possibilities given that appropriate adjustments are made according to the model.
Smartsourcing entails homework that should be done because you will be scolded for procrastinating.
Performance benchmarking is a first step to tidying up the sheet of tasks for the vendor. Estimating where you currently excel and where you rank below average goes a long way in deciding what to hand to someone else. Deepening local market knowledge and carving out the vendor relationship are two additional components that make up the smartsourcing strategy that any company should take note of.

Benefits: Smartsourcing came about as an intelligent and well-informed approach to offshoring so it makes little sense to bifurcate it into pros and cons. Instead, smartsourcing should be utilised as a guideline and checklist.

5. BOT

BOT stands for Build-Operate-Transfer and is particularly popular in the engineering and construction industries. Essentially, the BOT is a client partner with a provider who builds the service center, runs it for a pre-agreed number of years, and then transfers ownership back to the client. The personnel working on the project are legally employed and fully supported by the provider, although the client has one hundred per cent operational control. In that way, The BOT model combines the advantages of outsourced and captive offshoring operations.

The BOT offers a hands off approach to offshoring/outsourcing (in this case, the two concepts are in fact mixed as the operations transition from being semi-outsourced to simply being offshore) because the provider is responsible for recruitment, training and retention and because the operations have a highly linear governance structure.

It is especially suited for larger corporations that lack expertise of the local market and the resources to embark on a project of this scale.

– Pros: Suited for large corporations, hands off, operational ownership, access to large talent pool, scalable
– Cons: Unclear transition agreements (check the vendor)

6. Captive centre

Captive centres are client-owned-and-operated service delivery centres. What sets captive centres apart is the key component of personnel, namely that these are employees of the organisation and not the vendor. Using this solution is therefore a key element in many larger companies’ outsourcing trajectories. Reclaiming ownership translates into moving the operations closer to the company’s core.

A McKinsey&Company article from 2013 captures the central feature of the model as follows:

“Operation centers that are located in low-cost countries and are owned and managed by the corporations they serve are not only pushing the boundaries on costs, productivity and quality. They are also beginning to drive superior customer experience and provide consumer insights that aid product managers in making better decisions.”

Especially for core functions, the captive model offers a more diligent set-up.

– Pros: Suited for large corporations, access to talent pool, ownership, scalable
– Cons: More preparatory work required (compared to BOT)

7. Dedicated Team

Dedicated teams are a somewhat different ballpark, although it shares similarities with the pillars of captive centres.
Dedicated teams is a strategy built upon the notion of ownership and control. Depending on the vendor, these teams can be employed by either the vendor (benched developers) or the corporation. Conveniently, this model is not geographically specific.

As straightforward as the idea may come across, reality is slightly less rosy. The level of dedication will vary on who the employer is (vendor or client). Other factors influence the outcome as well such as location, size of talent pool and the recruitment abilities of the vendor. What is key to the dedicated model is that the corporation assembles its own team whether from a portfolio or from scratch, adding greater transparency and enabling the corporation to match its requirements more directly with available skill sets.

This particular model has been applauded for its break with many of outsourcing’s innate errors. It conserves the onsite setup which has made it an attractive choice for many.

– Pros: Suitable for small and medium corporations, access to talent pool, low costs, ownership, scalable
– Cons: No project-based work (if developers employed by client)

In many ways, the majority of the groundwork for offshoring starts at home. Smartsourcing surfaced as a counteroffer to outsourcing by providing a blueprint for in-depth offshore preparation.
Key lessons to draw from these various terms are the central need for self-assessment to separate core competencies from peripheral ones and through that estimate what makes sense to send overseas. Once we have a clear overview of where the gaps start and end, only then are we able to make a well-informed decision on model and geographical location.

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