… one company, based in Paris, used [macro and micro level offshoring diversification] to its advantage… The company was looking to offshore 2,000 specialized, high-end IT jobs and initially planned on sourcing the entire project in India. It opted for an alternative scenario, however, after running the numbers as part of its due diligence. With a view to minimizing its exposure to geographic, currency, and labor issues, the company tiered the work across several locations, placing roughly two-thirds of the project in India and splitting the remaining third across three other regions. It kept 100 jobs in Lille, France, and nearshored 300 more in low-cost Romania, because of the proximity of these locations to European markets. A further 300 were placed in Egypt, where government programs have substantially broadened the talent base. The company then housed the remaining 1,300 roles in Bangalore. By diversifying in this way, the company significantly lowered its overall portfolio risk while incurring only marginally higher costs than it would have under the all-India approach.
Wow! Such a diversified offshoring model begs lots of questions about the details of the Paris company’s project, products, services, IT roles being outsourced, how it “ran the numbers” as part of its due diligence, etc. Anyone happen to know the details? What degree of collaboration (communication, coordination, etc) is required between all those offshore/outsourced centres and the client company in Paris? Have they fully taken into account all the hidden costs of offshoring? I would be very surprised if they did not factor in the hidden costs as part of their due diligence exercise. It’s hard to believe that such a diversified offshoring model could yield the right balance of cost savings and quality.
That excerpt is from McKinsey Quarterly’s recent publication called “Rethinking the model for offshoring services”. (If you’re on Facebook and become a Fan of the McKinsey Quarterly page your should be able to find and access the full publication … otherwise you will need a premium membership to read the full article from the McKinsey site).
The McKinsey publication makes the case that offshore providers should diversify at both the macro level (geographic … outside of the standard offshoring locations such as India) and micro level (expansion of range of work performed in any one offshore centre) in order to mitigate risk, obtain better cost certainty, and to foster better coordination, flexibility, and responsiveness. They liken it to the portfolio diversification approach taken by financial managers to manage investment risk.
Sure, diversification as a means to manage risk makes a lot of sense for all kinds of things, but the valuation of a multi-geographic, multi-language, multi-time zone offshoring model obviously needs to account for much more than the valuation of a portfolio of financial instruments. I sense that the same valuation mistakes will be made as when outsourcing first became popular. That is not factoring everything into the valuation and thereby overvaluing the diversified offshoring model (especially for offshored software development services). The publication does make mention of some factors that can diminish the value of offshoring but does not go into a deeper analysis:
Qualitative factors—such as time zone, the suitability of the local skill base, the region’s proximity to key customers, and the existence of government initiatives—also play an important role. Although Eastern European countries are more expensive, for example, they bring strong specialist talent, the requisite language skills, and excellent infrastructures; these factors may often compensate for the higher cost.
 | McKinsey, Offshoring, Diversification |