Why offshore outsourcing? The events of September 11, 2001, severely affected the air travel sector. All major airport retailers, including Globshop, were hit hard by the drop in passenger traffic. The resulting cash flow crunch, store closures and halted expansion made cost-cutting imperative for the firm. This triggered offshoring IT tasks and realizing significant savings.
By outsourcing their IT needs to a specialist company, Globshop was able to focus on their core business without the financial and operational burden of managing an in-house IT team. This decision allowed them to reduce their fixed IT costs and make redundancies as part of their centralisation plan. Instead of hiring full-time staff, Globshop employed ISS under a flexible/fixed contract for the duration of specific projects, avoiding fixed overhead costs when capacity was not fully utilized.
Aside from financial considerations, an effective firm also puts in extra effort and has a clear agenda for managing user expectations.
There are two alternatives for sourcing: in-house and onshore outsourcing. In-house sourcing involves benchmarking to ensure that costs and efficiencies are comparable or better than those of other organizations. The graph below illustrates the relationship between company size and the potential need for outsourcing.
As a company grows to have 1,000-10,000 employees, the potential need for outsourcing decreases significantly. In organizations of this size, there are usually enough resources available in-house to perform a function and handle backup coverage. When considering all the tasks required to manage a service in-house, it becomes clear why many companies opt for outsourcing instead.
If a service is provided in-house, a company must take several steps including locating a qualified employee, providing training to the employee, paying their wages and benefits, providing them with physical workspace and required technology items such as computers, phones, internet access, copiers and fax machines. However, in some cases where services require continuous coverage and dedicated resources due to responses being generated randomly by outside forces instead of on an internal controlled schedule. Services of this type would also require coverage during absences of the primary resource such as scheduled breaks.
Vacations and unscheduled sick days can be a hassle for companies. However, with outsourcing, the company only needs to locate a reliable and high-quality vendor and pay them for their services.
Onshore outsourcing limits the outsourced work within the locality or country of origin. It poses less risk than offshore outsourcing but provides more benefits compared to in-house sourcing. However, these benefits may not be as great or rewarding as those from foreign outsourcing.
When deciding between onshore and offshore outsourcing, there are several factors to consider. One advantage of onshore outsourcing is its geographical proximity. Since the outsourcing provider is located within the same country, it is more accessible and closer to the company. This eliminates any potential travel issues and makes communication with the outsourcing team more comfortable and readily available.
In addition, onshore outsourcing typically involves working with a team that shares similar legal rules and regulations, which can simplify the process.
However, offshore outsourcing also has its advantages. For example, it may offer cost savings due to lower labor costs in certain countries. Additionally, some companies may prefer working with an offshore team for their expertise in certain areas or for their ability to work around-the-clock due to time zone differences.
Onshore outsourcing can help your company save on office space and costs while increasing efficiency. Being in the same geographical location as the team allows for daily contact and supervision of their operations. Additionally, both you and the outsourcing company are covered by the same legal rules regarding intellectual property rights.
When comparing onshore to offshore outsourcing, offshore tends to have lower operational costs and higher efficiency.
The monetary requirements for running back room tasks differ greatly between onshore and offshore outsourcing. It is undoubtedly cheaper to outsource to foreign countries such as the Philippines and India, where you can save 50% or more on the entire process, despite miscellaneous expenses that may arise. This can help firms increase their savings while also boosting productivity rates. However, it is important to note that offshore outsourcing may come with additional risks compared to local options.
However, if the firm has been cautious and wise in choosing the right vendor, everything will surely turn out fine. Offshore outsourcing business outperforms onshore outsourcing and in-house sourcing because it is rapidly picking up in today’s modern business trends due to the great advantages that it promises to every small, starting or even big business that desires success.
The dynamics of managing vendor relationships are fundamental since the relationship encounters greater challenges such as cultural differences, property rights protection, and other geographical variations.
Globshop started by exploring potential offshore locations and vendors. In terms of location, it assessed Canada, Eastern Europe, China, and India. However, the management found Eastern Europe to be a bit unstable while China had IT protection and intellectual property issues. On the other hand, India was the most matured segment with many players and a good legal system in place. When it comes to vendor selection, it is crucial to ensure systematic elimination of potential client-vendor mismatch and reduce search costs for future projects.
Therefore, the firm considered several criteria when selecting a vendor, including technical skill set, flexibility, delivery models, internal management, pricing structures, and industry know-how. They ultimately chose ISS, a medium-sized but growing company. The regional IT Director headed the company and reported to the President of the regional business unit with a dotted relationship to the corporate CIO. Each regional unit funded local IT projects and operated under a distinct IT budget. Globshop opted for this mid-tier growing company as opposed to an industry leader in order to mitigate risk.
Accounting for a large proportion of ISS work would make them a meaningful client (or partner) and gain more attention. ISS also had a presence in the USA, thus they had an understanding of western culture and knowledge of the systems used. Initially, Globshop outsourced only a small piece of production support to minimize risks and assess the benefits from offshore outsourcing. ISS started with little responsibility but 9/11 sped up the need for cost reduction. Globshop then extended its relationship with ISS to hand over all of its production support for its merchandising system.
After being satisfied with ISS’s performance in providing production support, Globshop decided to further experiment by focusing on more value-added projects. The firm engaged ISS to architect a data warehouse that would enable faster reporting and provide business leaders with a view of enterprise-level data. Globshop had a current arrangement with ISS, which was employed in 2000 for on-site maintenance and enhancement of merchandising systems. The agreement provides a mutually agreed-upon platform that specifies a range of accepted behaviors in an outsourced relationship.
Globshop conducted an effective contract customized according to the needs of the offshore project. For the initial support and data warehousing activities, Globshop and ISS had separate 90-day agreements. These agreements were preferred to be on a fixed-price basis because the requirements were specific and straightforward. The firm did not want any cost overruns or unexpected surprises. In November 2002, Globshop entered into a 3-year global offering agreement through which ISS became responsible for selected new application development and support.
One of the hallmarks of the Globshop-ISS agreement was the implicit gain-sharing incentives for the vendor. Instead of sharing a proportion of savings on a one-time basis, Globshop agreed to reinvest the savings from offshoring back into IT. This could translate into continued revenue generation for ISS. Another hallmark is the flexibility to plug-and-play IT resources according to the needs of IT initiatives.
Under this agreement, ISS committed to maintaining a talented pool of offshore staff with retail and Globshop-specific knowledge. Several IT tasks were offshored to ISS under this 3-year deal.
ISS was tasked with more than just consolidating, maintaining, and providing ongoing support for the core merchandising system. They were also responsible for supporting ERP modules and point-of-sale systems, as well as developing an intranet site and content management processes.
Communication was a key factor in working with vendors. Knowledge transfer and overcoming cultural diversity were important to avoid increased costs. Managing and integrating internal IS resources with vendor resources required the firm to develop the ability to understand ethnic and corporate cultures, appreciate individual psychological variations, and work routines that accommodate cross-cultural diversities.
Meanwhile, knowledge transfer was a serious concern. The firm needs to carefully assess the extent to which it needs to share its internal knowledge with the offshore vendor, and develop mechanisms for knowledge transfer. Initially, the working arrangement was informal but as more responsibility was passed over, a formal structure formed. There is clear communication between ISS and Globshop at a senior staff and management level. When ISS was entrusted with the responsibility of production support for core merchandising systems, it sent its personnel to each region.
These people spent several weeks on-site, learning and documenting the processes, systems, and related issues. Globshop’s IT staff worked closely with ISS’s personnel to enable easy knowledge transfer and transition. Globshop also took specific steps to help overcome the cultural and social differences between the offshore staff and the global IT team. Specific training sessions were conducted to impart an understanding of multiple cultures, value systems, and ways of addressing cultural differences. Workshops on diverse teams and teamwork were also organized.
Globshop conducted a user satisfaction study that showed an improvement from 2 to 3.5 on a 5-point scale since they started offshoring. The workforce has been reduced by laying off 50% of the internal IT staff in order to reengineer the old structure and accelerate consolidation. An aggressive offshore strategy was implemented to reduce a significant portion of the IT workforce, while staff retention was vital due to the need for transferring critical knowledge from affected workers to other staff and vendors. Globshop had well-established processes for dealing with these changes, including adopting an open communication policy.
The CEO and senior management reached out to employees, proactively communicating and working out a severance pay structure for those affected by downsizing. The downsizing was conducted in multiple phases, with employees being informed well in advance. Additionally, the firm provided career transition assistance through a third party. Transition teams were formed with offshore vendor staff and internal IS employees to extract and transfer knowledge of systems and applications before staff were reassigned or let go. Retained IT staff were trained in newer skills and tools.
