Why Customers Are Considering It
Many global and organizational factors have changed since the time that companies made their initial decisions to leverage a global model for service delivery. As a result, a number of important considerations and alternatives should be evaluated in determining what to do next, if radical change in contemplated.
Customers who have made use of various global locations to source business services or information technology services may consider the question of bringing work back for a variety of reasons. First,it is good business planning hygiene. Call it Plan B. Second, regulators such as the US Fed, corporate boards and other governance-minded stakeholders increasingly want a better understanding of how well-equipped subject firms are to deal with changes whether prompted by an outright failure of the current model, or,more likely, reasons that are ‘elective’ in nature.
It’s Not Always Binary
It is interesting to keep in mind that the prompts for bringing work back are probably not limited to the binary scenarios of either a Termination for Cause or for Convenience. On hardly an exhaustive basis, consider that in between these extremes lie a series of possible causes, including:
- Compliance or regulatory changes
- Scope or scale changes
- Changes in supplier competency
- Location issues
- Revenue model shifts
One example of a compliance-driven shift is a former client; call it “Bank A” which placed some first party collections activities in the Philippines on a co-sourced basis. Although pleased with the performance of the function, after an acquisition the prevailing view of its new senior compliance personnel was that the arrangement was inappropriate.
Another example, this one of a scope or scale-driven shift occurred with a large regional client; call it “Bank B” that had placed an Auto Leasing-related function in a nearshore location on an outsourced basis. Performance was hardly an issue. In fact, continuous improvements to the underlying process were so dramatic that ultimately the size of the delivery team needed was deemed too small to be effectively managed on a sourced basis. We should all have such problems, right?
Finally, clients seeking to enhance revenues in an emerging economy may eventually deem it attractive, imperative, or both to “own” their previously sourced operations in that country.
While any of these factors may prompt the organization to consider termination, and could likely be classified into the “Convenience” category, the more important point is the implications of each respective cause on potential Choices in taking the work back.
Where is Back?
And where exactly is “back” anyway? Does it mean back to the country of the process’s origin? Back to the same city or the same center? (Though, it is doubtful that the center was mothballed in anticipation of such a day). How about back to the same business model? Or does it mean somewhere else entirely? The right answer may well depend upon the reason for termination.
Recall that both of the Banks in the earlier Collections and Auto Leasing examples found that performing their processes “offshore” was acceptable, but doing so on an “outsourced basis was not deemed effective.
Now consider their differing possible solutions. Bank B with its outsourced auto leasing process could have made the choice of adding scale to its outsourced operation, rather than taking back the particular function. After all, it was pleased with both the outsourcer and its near-shore choice, while only the shrinking scale was problematic. By contrast, Bank A, performing outsourced collections, seemed to have little choice other than to shift the operation away from an outsourced partner.
The next question might be whether to move it back onshore,or keep it offshore – where it worked – and possibly domesticate the operation. By the time of its shift in compliance views, might the Bank also have other company-owned operations in the same or another offshore precinct that it should consider?
Further, if outsourcing had not become a compliance issue for the Bank, but instead factors such as resourcing or pricing in the country had become problematic, could another country work rather than bringing the function back onshore?
The point is that much has changed in the world in the short period of time since many organizations made their first or even second-round of global services sourcing decisions. In a world exploding with options, bringing work back in-house or onshore should not be the knee-jerk reactionary solution.
Consider that as recently as 2006, Pluto was still a planet, Apple hadn’t broached the iPhone, and India may have been the choice for low cost off-shoring – without serious significant competition.
Similar patterns of opportunity are taking shape in other buyer-populated areas such as Canada and Western Europe and other areas. In our own firm’s Global Supply Risk Monitor (GSRM), we carefully track more than 100 global destination countries, cities and suppliers looking at 500+ parameters of operating attractiveness and risk. Over time, it has not been unusual to witness profound changes in the GSRM risk profiles of cities, particularly as governments strive to make themselves attractive hubs to potential business partners. When faced with making complex choices about moving a function, the result of all this activity is a richer set of options. And these can be explored with far more geo-operationally-informed data in hand.
The Financial Case
This is not to say that a greater number of options make the financial case easy. Despite contrary claims, much globalization activity has been driven by a quest to find the lowest cost solution or destination. As a result, when a process must move, the financial case may not be obvious.
Returning to the earlier example of Bank A, there would not be an expectation of retaining the prior financial case if the collections process were brought onshore. But, given that compliance was the driver of change, then the shift should necessarily consider the broader business case. For example, would such a move reduce the likelihood of compliance infractions or monetary penalties? Would it lessen the likelihood of legal actions by borrowers, or the probability of the success of any such legal claims?
Similarly, if an application development process is relocated because of poor quality, when it is subsequently moved to a higher wage location, the outputs – inclusive of quality, turnaround time, user proximity, code flexibility, or how early an error is found in the testing cycle – rightly should be counted and quantified. Examining only input labor costs misses many of these factors.
The Performance Trough & Other Factors
There are numerous other factors to consider when the “back” question presents itself. For example, there is the challenge of managing the “Performance Trough” that follows the transition of work regardless of business model. For many, bringing work in-house harbingers a smooth return to experienced hands. Of course, those hands may be long gone. Even if not, the trough will likely persist.
Researchers from Carnegie Mellon and CalTech convincingly found that even when people trained in doing a specific, identical task did nothing more than rotate amongst themselves, their performance, as measured by such metrics as turnaround time, could get as much as 170% worse in the short term.
There is also the “Social Contract” with the resources or the locations in question that must be considered. If an employer, or client, is viewed favorably for creating 500 new jobs in an area, then the flip-side of their actions may engender ill-will –particularly if the resources aren’t quickly re-engaged.What is the social contract between globalizer and community? What is the potential impact on brand – even in the case where Termination for Cause exists?