In the past, we’ve talked about where outsourcing programs are headed when they finally reach their “mature” stage. That is to say, if you operate one or more lower cost locations, which have all passed their “training” phase, and are working efficiently. Within
this program, you logically assign work to each location based on cost and efficiency, there are no obvious location for a pilot program that can operate for a significantly lower cost or produce a significantly better product, three is no new software or management methodology that is expected to deliver double digit cost reductions, then your operation is mature.
After years of experience, you now intimately know the capabilities and limits of your program. Assuming that you have already renewed or rewritten your contract since your initial pilot (within the last two-three years), both your outsourced and total blended hourly cost (for all locations) has pretty much reached its lower limit. If your program has been operating for three or more years, your onshore/in-house staff costs will probably be headed upwards.
Since many outsourcing programs hit their height during periods of economic stress (mergers, recessions, etc.) the corporate expectation (not necessarily your expectation) at the start of your outsourcing program was that outsourcing will continue to cost less every year, and in-house staff will have a stable cost. Now, you’re hearing from all sides that it’s time for raises, promotion, higher salaries and “catch-up” for the missing years of cost of living adjustments.
Consider the rate of inflation for outsourced locations. When you first started your program, no one brought up the issue of offshore inflation. Now, you are learning that most offshore locations have 2 or more times the rate of inflation of on-shore. The next three to five year contract may have a startlingly high increase.
In a mature outsourcing program, you have undoubtedly focused on the reduction of staff in the most expensive locations, usually the big city. This gave you significant cost reduction in the early part of your program, but now you see that many of the best locations in smaller cities can have lower unemployment rates and higher wage increases.
Take Fargo North Dakota as a prime example. Fargo has been a preferred location for on-shore programs. It has also been a boom town for the oil industry. Over the last few years, Fargo’s unemployment rate has been a half to a third of that in New York City. Now that the price of oil is falling and the market is cooling, unemployment may rise in Fargo, but as of June 2015, Fargo’s unemployment is 3% compared to 6.5% in NYC.
If you haven’t had it yet, expect that call from your near shore operation about the need to raise salaries to retain staff. To offset costs, or to drive to a new level of savings, you need to do three things:
- Develop an “ultimate” in-house or on shore model.
- Identify location neutral production targets for every work function.
- Test each location for real production levels.
Not too difficult, right? Let’s look at each element. Separately and see what we can learn. For this example, we’re going to look at a mature Document Center. Document centers typically, have very structured functions that are well documented. Also, each individual tends to perform only a limited number of functions; the larger the program, the more restricted each individuals function.
The Ultimate Model: Well run off shoring programs continually test how well a function works offshore, iteratively reducing the size of the main center (in-house and/or onshore), sending functions to your outsourced centers. Eventually, the in-house center will be a similar but smaller version of the original model, with all or most of the management, quality control, and administrative functions.It’s a decent early model, but a mature operation still has room for improvement.
It makes sense to retain a limited production capacity onshore. There are individuals who need to work with someone in person, or at least in the same time zone. If someone shows up waving a cocktail napkin with a scribble on it and says, “I need to make this into a document”. This could be handled remotely, if you have invested in high quality scanners, allow customers to have video conferences with the offshore staff, etc. If not, some capacity to deal face to face with customers is reasonable. And, the ability to work with efficiently with exceptions will earn considerable good will.
Eventually, though, you do need to consider if most administration and management should move to where most of the production staff work. Likewise, IF each location is supposed to be truly functional, quality control should be there and not back in the main office. One of the reasons that “mature” offshore operations fail is that these centers never has the full set of functions that the original model had. The lack of these skills holds back the ability of the center to take on new skills, and maintain the old ones. It then becomes a self-fulfilling prophecy that, “The offshore facility is never able to do everything that the onshore operation did.”
With proper knowledge transfer and training, just about any function can be run from any location. You need to determine which location is the most efficient. Some may say that QC must remain onshore, but for highly documented and procedure based functions (a good description for document services), it’s just a question as to when the offshore staff has enough experience to take on a function.
Production Targets: The staff hired on shore, near shore and off shore should all be intelligent and capable. If a center does not eventually develop all of the skills needed to produce the products of your firm, then you should inform your outsourcing firm that they are not meeting your expectations. They need to identify what is holding back your center… the wrong recruiting strategy, the wrong salary ranges, or just a lack of promotional opportunities?
Back onshore, you need to consider one more step for your “final stage” model, the transformation of your in-house center into a customer service gateway. That gateway will include a small but vital emergency production capacity and customer service staff. The CS staff may be the former supervisors or it may require different staff with different skills. This small number of highly skilled managers will focus on the satisfaction of your customers. Because seats in the headquarters (where primary document center is usually located) are expensive, the functions performed here must provide the highest value or require proximity to customers.
Test Your Assumptions: What services have you outsourced? How have you planned for the final stage model for your services? Take another look at your model and carefully review where each service is performed: what does it cost, what is the level of quality and how does it differ by location? Has this discussion made you rethink where you place the resources for your services? Are there missing elements to your offshore program that need to be in place before it can truly be called “mature”? Examine each function and set the productivity bar based on whichever location is the most productive. There just might be room for greater productivity in your model.
If some of your locations are not at their highest levels of productivity, your outsourcing vendors need to start committing to a date (and milestones along the way) as to when they can deliver. Once you set these targets, you need to follow through with effective testing and reporting to ensure that all locations achieve and maintain their expected level of productivity. Not too difficult! Just, rethink your expectations and hold each site/vendor responsible for attaining productivity targets. I hope that this provides you with some new ideas for your operations, because that’s my Niccolls worth for today!