What role does cost play in the decision to choose one strategy over the other?
Here’s the situation so far: there is a global economic crisis for which companies need to cut costs; the US elections are taking place later this month, which will help to determine a formal stance of US companies on outsourcing and offshoring; Pakistan is going through its own set of challenges and the global sentiment to work with the country or companies in it, isn’t all that positive. With the US economy going through one of its worst crunches since the Great Depression, US citizens are demanding the jobs that have been exported to countries like China, India or Pakistan, be brought back home to provide strengthen its own job market and economy And that’s just on the surface.
In order to attract the right customers, Pakistani companies need to understand what the global trends are. What are the reasons that companies want to still outsource their business processes? What do companies look at before deciding whether this is something they want to engage in. Once they settle on the reality that Outsourcing will, in fact, help their business, how do they identify the companies?
CIO Pakistan ran a QnA on the LinkedIn group and came across some great results and commentary that paved the way for some interesting points.
Atul Gupta, Chairman and CEO at Advanced Technologies Group, for example explains that costs tend to get the most attention by the media, a key decision point is whether the specific initiative, whether it is customer service, technology support or development, is tactical or strategic. “In case of the former, costs are an important decision factor, and if it is the first time, the cost improvement has to be very significant – more than 50% to offset the new risks being undertaken. However, if the decision is being made as a strategy execution, the cost is not a factor – in fact, it is the immediate and long-term availability of necessary skills. This need tends to be the overriding factor.”
Nishanth Rajan, an MBA who specializes in the area of International strategy – Outsourcing, Growth Strategies reinforces a part of that point by saying, “It really comes down to your decision making value drivers and the size of the organization. What’s the objective of the outsourcing exercise? If the objective is purely to drive down costs or if there are transformational opportunities that require skill sets that are a lot more expensive and riskier to manage, the company will react accordingly.”
As a starting point, explains Nishanth, you need to identify if this department or the tasks gives the organization a competitive advantage or in the future if managed better could help you differentiate in the market place. If neither of these get you an answer in the positive, then its time start drafting an RFP!            Tatyana Kanzaveli, Senior Sales and Business Development Executive; International Business Development demonstrates her belief in ‘having the right objectives’ by saying, “There are no generic answers to the question. The trend is very specific to what and how each company does and what the goals are”.
Goals mean strategies. Strategies call for long term planning. Long term planning requires a stringent assessment of the resources that are currently available within an organization. The CIO here will need to do a number of things to assess whether their company is geared up to manage services that businesses are ready to part with.
Nicholas Krymm VP Technology at Medem, Inc. says “Making an outsourcing decision should never be made on cost alone. As a matter of fact, cost savings in many cases, would hardly justify inevitable issues outsourcing will bring into organization. Whether you are selling, outsourcing or buying, you should not concentrate on the cost too much.”

Being economical is not a good thing?
Well it is. The fact that Pakistan has access to a large population that can work for rates who are cheaper than other parts of the world is a good thing, but companies look at other things beyond the economics. The media has always touted the ‘biggest selling point’ for countries like Pakistan to be a player in the outsourcing but the other strong points also need to be talked about.
Graham Dryden, an International oil and gas finder, shares some experiences with the group. He thinks the price differential is the main factor when dealing with simple tasks. “My company can buy a digital processing service from a US supplier for around $200 per unit. I outsource this process to India for $5 per unit. The turn around was slower but I solved this by lending the Indian company the money to buy more computer equipment. The US supplier outsources the same process to India so they are overcharging their clients by 20:1. With such a price differential, the choice is clear: outsource.”
The 20-to-1 ratio is quite a dramatic one but companies will need to establish their track record. Shakir Husain, CEO of Creative Chaos and BPO Specialist hits the nail on the head. “It doesn’t all have to do with costs. The main question the company has to answer is whether the expansion will increase their ability to deliver value to its customers or not in relation to their core business – and whether the outsourced partner will be able to deliver as per the company’s KPI’s. The cost becomes a secondary issue once this fundamental question can be answered.”
And reputation matters. So does the historical success record. That requires companies that manage services to be part of the relevant networking circles so that companies looking to outsource feel comfortable where they’re sending their data and intellectual property.
The recent issuance of recommendatory guidelines on data protection by the Pakistan Software Export Board to IT firms and allied businesses companies that conform to standards is a step in the forward direction. By adhering to these guidelines, Pakistani companies will be able to pitch for a lot more work from the EU. This is the kind of infrastructure support which will help companies increase their business and exposure.
Tahir Hameed, a Systems and Program Management Professional, drives the point home further by saying that cost and HR availability are short term considerations. That is a significant critique of trends. Look at it this way: if Tahir thinks that these two ‘reasons’ for outsourcing are short term, then the number of companies that pitch for services using the justification will need to innovate and diversify their offerings fairly quickly.
“However, for hi-tech and long term, foremost consideration, in my opinion, is going to be how many core competencies a BPO has,” adds Tahir. Developing in-house certainly contributes to capabilities of a firm through “learning by doing” and are important in the long term to nurture certain core competencies for competitiveness. “A firm” according to Tahir, “should not outsource its core competency areas or technological specialization otherwise there will be an unlearning process and it will lose its competitive edge.”
Cost matters most in areas such as MIS, BPO and custom software development because these matter the most and mature sectors. “But if you have specialized knowledge of certain domains not commonly available, that process should not be outsourced even if it is cheaper. Instead, focus should be on keeping that knowledge and practice updated and deepening of knowledge and skills. This can be said for both large and small firms.”
Fuad Ahmed Hasni Chief Operating Officer of Optimtec Technologies says the reason companies outsource is the trade off between investing in organizational skill set and expanding business avenues very rapidly. “We’ve seen recruitment agencies make a good market locally but that’s because when organizations tend to be agile in creating a market, they need to invest more towards the core business. Since the creation of skilled employees is an area which doesn’t directly affect core business areas, that process is usually outsourced.”
But isn’t it a good thing to invest in your own people? After all, what happened to capacity building or team building? Ali Junejo of Techsense says, “In order to deliver quality you need quality people. The big disadvantage is that Pakistan’s talent pool is great but not available in large numbers. Internal expansion through selected resource becomes a very slow, very calculated process and will have a natural side effect of letting go of business in hand simply because you can’t expand your resources as fast as the business coming towards you.”
Fuad thinks that the cut off comes for when to shift the trend from inhouse to outsource comes from both sides. “The outsourced process as it exposes your system to people who are expert in that specific field without building a long term employee infrastructure and while concentration to the core areas of business increases revenues.” Ali agrees commenting, “The answer is pretty simple. It will make sense to expand a department if you are the best, else just move it out of your internal infrastructure.”

Similar Posts:

• It’s Outsourcing! It’s Responsible!! It’s Outsourcing Responsibly!!!
• There is a Method to this CHAOS!
• Top Three Outsourcing Initiatives for 2009
• ERP Considerations for Midsize Businesses
• Technology Will Help Stabilize the Economy!

Popularity: 3% [?]