In Offshoring, Execution Is Everything

Despite the steady media drumbeat, the debate about whether or not to offshore is largely behind us. Companies continue to pursue offshoring aggressively—moving select functions or processes to places in the world where they can be conducted at lower cost, either by third parties (outsourcing) or by their own (captive) operations. The question now is how to succeed at it.

In broad terms, offshoring provides an opportunity for companies to compete globally, create value for their shareholders and improve their operational performance. How is it then that some offshore programs succeed in capturing offshoring’s greatest benefits—significant cost savings and improved operational performance—while others fall short?

Failing to find answers in the existing, largely anecdotal research on offshoring, A.T. Kearney conducted the Offshore Success Study. Our objective was to gather from leading offshoring companies a robust set of quantitative data, which, through rigorous analysis, would provide useful information about how offshore success is achieved (see sidebar: About the Study). Rounded out by executive interviews, the study yielded powerful insights into what determines offshore success.

We share these insights here, first highlighting the study participants’ offshore program performance, then focusing on what the study revealed about the keys to offshore success.

The Truth About Performance

As a group, the 35 companies that fully implemented their offshore programs were very successful. Through offshoring, they collectively saved 49 percent of their combined baseline costs and experienced net improvement across all six of the study’s operational performance measures: organizational capacity, capability, flexibility, process maturity, revenue and service levels.

Despite their impressive collective performance, 60 percent of these companies failed to meet their own operational performance targets, and 34 percent failed to meet their savings targets. There was also significant variation across the offshore programs; cost savings ranged from 0 to 75 percent, and performance ranged from improvements in all six measures to a decline in five of the six.

There were clear groups of best-performing and poorest-performing offshore programs. The best performers averaged 64 percent savings—more than 3.5 times the average 18 percent savings achieved by the poorest performers. They also improved an average 3.3 of the six operational performance metrics, whereas the poorest performers improved only an average 0.2 metrics (see figure 1).

We dug deeper to find out what drives this extreme performance variation and to determine what sets best performers apart from poorest performers. We broke down each program into its core components and correlated each to savings and operational performance. Did some industries perform better than others, particularly those further along the offshore learning curve, such as banking and telecom? Did savings deteriorate over time, particularly in more mature offshore locations such as India, where wages are on the rise? Did consolidating operations by geographic footprint cause a noticeable impact on savings or performance? The answer to all these questions was an emphatic no. Did large programs deliver more savings? We found that even small programs, such as research and analytics, can deliver substantially more on a per-FTE basis.1

We found that although function, location and business model influence performance, these strategic choices do not necessarily determine offshore success. Instead, execution is the difference between best and poorest performers. Companies with the best offshore performance share certain common practices in executing their programs, and interestingly, they also share a somewhat counterintuitive view of offshoring—they focus more on improving operational performance than on generating cost savings.

Want Savings? Don’t Focus on Savings
One of our most interesting conclusions was that the best performers emphasize improving operational performance rather than generating savings. Moreover, in doing so they achieved greater savings than companies that focused solely or primarily on generating savings. The lesson, in simple terms? If you want savings, don’t focus so much on achieving them.

What’s more, out of the survey’s six operational performance measures, the best performers primarily worked on and improved their organizational capability, service levels, capacity and flexibility. The poorest performers were concerned with building capacity and flexibility. The performance measures given greatest priority were roughly consistent with actual performance improvement, bearing out the link between focus and performance. This only stands to reason: Actions follow focus.

However, shouldn’t improving operations cost more and generate fewer savings? No. In fact, the study showed the opposite is true: Companies that improved three or four operational performance metrics achieved 51 percent average savings. Companies that focused on savings and achieved no performance improvement, or a deterioration in one performance metric, saved 39 percent and 29 percent respectively. Companies “stuck in the middle” achieved the least average savings of 18 percent to 31 percent (see figure 2).

Another unexpected study finding was that improved revenue performance might well be offshoring’s diamond in the rough. Although the surveyed companies placed little emphasis on this measure, 26 percent actually improved their revenue performance by offshoring. This raises the question of whether companies leave substantial opportunity on the table by not asking how they can take advantage of a lower-cost, higher-performance operation.

Companies focused on improving operational performance employ certain success-enhancing practices. These practices—including addressing cultural and communication challenges—are the keys to offshore success. Following them helps best performers achieve real improvements in operational performance, which in turn allows them to grow their companies and realize the greatest savings. Let’s look at each practice in turn.

Invest in the program management team and don’t outsource ownership. It is clear that a company aiming for operational performance improvement must keep its offshore program closely aligned with the rest of its business. It must take ownership of performance, understanding that the offshore program is an integral part of the overall business.

The survey results confirmed this. Not surprisingly, companies that invest more in managing their offshore programs achieve markedly better results—both in performance and savings. Although the program’s operational activities might be moving halfway around the world, accountability for performance must stay at home. Building an offshore management team is not about head-count reduction. Best performers invest in a centralized, dedicated on- and offshore team and link compensation directly to the offshore operation’s performance. They invest in larger teams, locate more of their management resources at the offshore location to ensure successful knowledge transfer and strong cultural integration, and—as appropriate—entice executives offshore with attractive expatriate compensation packages.

The program management team, a permanent function dedicated to managing offshore operations, will need to be appropriately sized to handle the workload and have the right balance of on- and offshore resources. The study’s best performers err on the side of allocating more management resources rather than less. For captive operations, depending on the function sent offshore, one manager for 10 to 20 FTEs is appropriate, whereas for third-party models, one manager for 50 to 75 FTEs is sufficient (though after the operation has stabilized, this ratio may improve).

The study showed expatriates, especially for captive offshore operations, to be a worthwhile investment. Companies that invested in expatriates averaged an operational performance score of 3.5 and savings of 60 percent; those that did not scored an average of 2.0 on operational performance and saved only an average of 35 percent. Not every program deserves an expatriate, however. Smaller third-party programs with fewer than 300 FTEs can be managed effectively from afar if the onshore management team frequently travels to the offshore site.

Among the companies surveyed, executives from finance, operations, procurement, IT and strategy served as executive owners of offshore programs. More important than which function owns the program is that the executive accountable for the program has clear authority and is personally committed to taking ownership. A good test of commitment is whether or not (and how often) he or she visits the offshore location.

Selecting the offshore program leader is often a challenge. There are not many experienced practitioners in the market, so best performers select their rising stars for this highly visible, challenging role.

Mitigate problems through open communication and cultural sensitivity. Focusing on operational performance improvements requires open communication and cultural sensitivity—which, according to the study, appear to be key contributors to offshore program success.

While executives often cite media backlash, data security and wrong country or supplier selection as their biggest offshoring concerns, our survey respondents say internal resistance to change and cross-border cultural and communication issues are their two biggest problems. Both issues are intrinsically linked, leading to reluctance to collaborate and communicate effectively with the offshore team, and ineffective knowledge transfer. Successfully avoiding these pitfalls requires a thoughtful communication and change-management plan.

Open communication is the key to mitigating resistance to change. Surprisingly, however, surveyed companies openly communicated about their offshore programs only 40 percent of the time. Why? Leadership, fearing uncertainty and disruption, is often reluctant to share information about an offshoring program. Ironically, just the opposite is true. Absent open communication, word will leak out anyway and rumor will ignite the very uncertainty and disruption that leaders fear. Best-performing companies have learned to mitigate resistance by being more transparent and open in communicating their offshore efforts.

It is crucial at the outset of an offshoring program to identify the likely main sources of both internal and external resistance and to tailor a comprehensive communication program that addresses their concerns (chiefly, what does this mean for me?). Once the offshoring plan is decided, executives should immediately announce it to the organization, and then regularly communicate program details and status. Equally important, they should inform and reassure customers, shifting potential concern into positive anticipation.

The residual organization must also understand the offshoring program. A U.K. telecommunications firm, for example, created a 30-minute documentary of its offshore operations that it then showed to all onshore staff. A leading U.S. high-tech firm develops periodic “Day in the Life” webcasts of its offshore operations and posts them on the company intranet.

Once the company communicates the program, the focus is on instilling the new organizational mindset and behaviors that will get the offshore operation up and running successfully. One executive with a best-performing company says he selects culturally adept individuals as offshore managers and invests in extensive orientation programs to immerse them in the offshore culture. In the most successful programs, offshore staff members go through the same company orientation program as onshore staff, and information systems are as accessible offshore as onshore.

Look to supplier capability, not merely price. When selecting suppliers, focus on their “softer” qualities and run an accelerated request-for-proposal (RFP) process with six or fewer short-listed candidates. Such an approach yields a better alignment and “fit” than a broader price-focused RFP process. Our survey results showed this to be a key contributor to program performance: Companies focused on price tend to perform less successfully.

Companies that employ a third-party operating model demonstrate clear differences in how they select suppliers. The best performers focus on supplier capability—domain expertise, culture and management—whereas poorest performers focus on supplier price. Ironically, companies that didn’t focus on price saved twice as much as the others. By the same token, the best performers focus less on the transaction and more on what comes afterward—migration, joint process improvements, reward- and risk-sharing agreements, and building collaborative partnerships.

Additionally, companies that issued RFPs to fewer suppliers achieved the same savings as others, but better operational performance. Those that sent RFPs to six or fewer suppliers averaged 34 percent savings and improved an average 1.9 operational performance metrics. Companies that issued RFPs to seven or more suppliers also averaged 34 percent savings, but only improved an average 0.5 operational metrics.

Companies that run an accelerated RFP process with six or fewer leading vendors enter into an open dialogue with suppliers sooner. Larger RFPs become overly quantitative; the “softer” but crucial offshore-supplier criteria, such as cultural fit and the quality of the management team, are outweighed by more measurable factors. Having a robust short list of leading suppliers is helpful, as is selecting best-of-breed versus one-stop-shop suppliers, which, again, points to the importance of capability (domain-specific expertise) over price.

Calibrate transition pace to experience and send staff overseas. Finally, when it is time to implement an offshore program, top companies have a realistic, detailed plan in place. Knowledgeable staff members who can articulate the desired levels of operational performance are clear contributors to program success.

Moving work to the offshore operation involves two key decisions: how fast to do it and how many resources to send overseas to transfer the know-how. Speed will be a function of the company’s experience, program size and the transition stage. Executives in the early stages of offshoring often either try to “ramp-up” too fast or too slowly. Going too fast can result in operational performance issues, such as poor levels of service and lower-quality staff. Going too slowly, conversely, not only delays savings realization, but also unnecessarily prolongs the transition period and increases any associated change-management risks.

The speed with which full-time employees are hired varied dramatically across survey participants. Some companies hired as few as one FTE per site per month, some as many as 150. Those that hired at a rate of 25 to 50 FTEs per month per site achieved the best average performance. More experienced companies, however, may add up to 150 FTEs per month. One of the best performers, which has offshored for more than five years, targets 125 to 150 FTEs per month per site regardless of the function and its complexity.

Execution Is Everything
While the game of offshoring will continue to be fraught with risks and challenges, A.T. Kearney’s new Offshore Success Study confirms that regardless of what offshore strategy a company adopts, performance ultimately depends on execution.

Consulting Authors

Marcy Beitle is a partner in A.T. Kearney's New York office. She can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Arjun Sethi is a partner in the firm's New York office and can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Adam Dixon is a principal in the firm's New York office and can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

The authors wish to acknowledge the contributions of their colleague Rodrigo Slelatt in writing this article.