Offshoring strategy framework: A step-by-step guide

by Andy Nguyen
Offshoring strategy framework

Offshoring your projects to an overseas location has always been a key growth strategy. 

However, the demand for offshoring has burgeoned in recent years, thanks to the advances in internet and communication technology. A business can avail advantages of offshoring such as cost reduction, greater flexibility, and access to a global talent pool. 

That said, offshoring a business process isn’t easy. 

You need to have a solid offshoring strategy framework or a guideline to make the best offshoring decisions.

And we’re here to help you with that. 

In this article, we’ll provide you with a detailed offshoring strategy framework that you can follow to select the right offshoring business model, mitigate risks, hire the right vendors, and maintain your offshored processes. 

Let’s begin!

9 steps to create a fool-proof offshoring strategy framework

When it comes to offshoring or offshore outsourcing, companies need a solid business strategy to access the best global talent and lower-cost benefits.

It involves a firm level assessment to identify the processes for off shoring, evaluate risks, establish a governance process, and set the right KPIs and service levels expectations. 

Here are the key points that you should include in your offshoring strategy framework when establishing a business process in another geographic location: 

1. Assess processes by value

The first and most crucial step of an offshoring strategy is identifying the business operations you need to offshore. 

The more crucial the process is, the less you should think of offshoring it to another location or transferring it to a third-party service provider. 

To figure out which process not to offshore, people in charge of decision making need to analyze how important a process is in terms of value creation for all stakeholders. 

The answers could vary from business to business. For example, innovation could be more crucial than payroll management for a software company. In contrast, customer service will be more valuable for a telecom company than research and development. 

Rank your processes to create a value hierarchy of different business processes. The higher a process ranks, the more important it’s for your business and should be kept in-house.

Additionally, business owners can also use the Transaction Cost Theory (TCT) to assess the risks and rewards of offshoring or outsourcing that particular business function.

Transaction Cost Theory is a theoretical framework used in business research. It helps evaluate how companies can make business decisions based on the potential cost of any given decision. 

2. Identify risks and prepare carefully 

Once you’ve identified the business process for offshoring, the next step is to factor in all the risks involved in transferring the process to an offshore team. 

Essentially, there are two types of risks you need to consider in your decision making: 

A. Operational risks

A company will be more prone to operational risk (day-to-day functioning) in the initial phases of any offshoring or outsourcing activity. 

For example, if you offshore software development to a team in a distant location, the offshore developers will go through an initial learning curve. They might not be able to carry out the activity with the speed and efficiency of in-house employees. They may also make more errors, and the project deliveries can get delayed.

Moreover, if the offshored process requires an in-depth understanding of a domain or the geographic markets, the offshore development team may not get the process right for a very long time.

Nonetheless, you can still overcome such operational risks by:

  • Codifying your work: You can document your processes, best practices, use cases, and specific employee responses for particular situations. This will help you create uniformity in doing the job irrespective of the global sourcing of the workforce.
  • Using right metrics: Define the type of metrics you’ll use to measure the quality of offshored processes. Set up tolerance limits, define completion times, and measure employee performance of your offshore team. 

B. Structural risk

While an offshored project is more prone to operational risks initially, the structural risks grow in importance over time. 

Structural risks may sometimes arise due to the opportunistic behavior of the offshore outsourcing vendor. These include: 

  • The outsourcing vendor tries to cut corners.
  • Offshore vendor doesn’t follow best practices. 
  • Teams put in less effort than expected due to a lack of incentives.
  • The vendor stops investing in employee training.
  • Current employees aren’t as qualified as those agents presented during the outsourcing negotiations. 

Many companies don’t factor in such risks when entering into an offshore outsourcing relationship. However, such risks can affect your qualitative and quantitative benefits from offshoring services in the long run.  

To combat this, you can use different employee monitoring and productivity management tools like Time Doctor, which lets you track the work of a remote team in real-time. 

You can then use the tool’s reports and compare them with your defined KPIs and service levels. This can help you assess the time taken to complete a project and the quality of work offered by your offshore team. 

You can also employ project management tools to track offshored project life-cycles and collaborate with the offshore team working in different time zones. 

Another way to avoid structural and operational risks is to start small. Allow the offshore team to develop the required capabilities and earn your trust before you increase their scope of work. 

3. Choose the right organizational model 

Many companies believe that you can either perform a process in-house or outsource it to an external provider. 

However, this binary statement no longer stands true. 

Today, companies can open up offshore subsidiaries or enter into joint ventures with other firms. This way, you can still exercise control over the processes, enjoy cost benefits, and have ownership of the offshore setup. 

But if you plan to go with the traditional outsourcing model, you could split your offshored business functions between two vendors. So, if you ever want to discontinue your association with one offshore vendor, you can quickly transfer the operations to the other. This way, you won’t have to train a new team from scratch. 

4. Spread across geographies 

Even though popular offshore outsourcing countries may have experienced staff and better infrastructure, it also means higher global sourcing costs for companies. You need to anticipate the changes in costs due to local market conditions like higher wages, labor shortages, socio-political unrest, or inflation. 

This particularly stands true for the cost-sensitive Business Process Outsourcing (BPO) and Information Technology (IT services) industries. 

An excellent way to hedge such local risks is to add different geographies to your offshoring portfolio. Multinational companies often try to include countries with more stable economic profiles to make costs more predictable. 

For example, countries like India and China are hotspots for offshore software development. However, a company in New York, USA, can also consider other viable and stable locations like Mexico for nearshoring or Poland in Eastern Europe. 

Moreover, having employees from different countries can help you get a foothold in different markets by setting up operations there. A diversified offshoring portfolio can also act as a buffer against higher costs and talent shortages. 

best country to set up an offshore company

5. Diversify offshore services

In addition to global sourcing, you should also try to diversify the services that you offshore. 

Instead of offshoring the basic functions like payroll, human resource management, and finance, you could think about knowledge process outsourcing (intensive activities that are data-driven.) 

You can even offshore innovation, research and development (R&D), or market research and analytics if it’s not a part of your core competencies. 

For example, a car manufacturer should ideally keep its supply chain and production of new products in-house. However, its firm level offshoring strategies could include handing over non-engineering R&D to an offshoring company. This can cover a wide range of services that otherwise may exhaust the onshore, in-house staff.

It’s also worth noting that global outsourcing destinations like India and Malaysia are gaining popularity as major innovation and R&D hubs. It’s likely due to the concentration of elite universities and public-private research parks. The universities in these countries also offer some of the best international business studies and management studies courses globally. 

So, by offshoring/outsourcing such resource-intensive (but low-value output) jobs to specialized talent pools, you can release your in-house staff to work on more important and long-term projects. 

6. Get to know the offshored team

Offshoring involves the blending of different cultures, economic beliefs, and mindsets. 

To ensure a smoother business transition, you should try to visit the delivery center and get to know your team members better. This can help you build rapport and also understand the cultural differences.

You get an opportunity to look at their delivery model and verify their working standards, human resource processes, data security, local law compliance, etc.  

Additionally, you could use the CAGE Distance framework while crafting your international management strategy. It’s a popular conceptual framework that helps identify Cultural, Administrative, Geographic, and Economic differences between countries included in your offshoring strategy. 

7. Create a detailed contract

If you’re offshoring to an external vendor, the next step is to sign a business process outsourcing agreement.

A well-written agreement/contract can help you establish who is in charge of what in the offshore outsourcing relationship. It can also help avoid unanticipated costs that could later put you in a tight spot.

Here are some of the points that the contract should cover: 

  • The governance model – defining the roles, responsibilities, objectives, etc. 
  • Human resource and other pre-implementation activities.
  • Project management tools, information systems, and communication channels to be used. 
  • KPIs for the offshore team that’ll help you monitor and identify the cost savings achieved from offshore outsourcing. 
  • Guidelines for change management, incident management, and conflict management. 

Check out what exactly goes into a BPO agreement. 

8. Manage the transition

In a offshoring or outsourcing strategy, transition refers to the smooth transfer of services from the parent company to the offshored team. It involves:

  • Implementing technical connectivity to the offshoring location.
  • Creating a knowledge management plan. 
  • Completing readiness and impact assessment. 
  • Setting up performance monitoring. 

The transition begins on the service commencement date and continues until the team or the external provider reaches the desired capabilities. For the external provider, you should manage the transition as per the contract signed between the two parties.

Ideally, you should set up a shared workspace where representatives from both offices plan the deliverables, identify and resolve roadblocks, and decide on the reporting mechanisms. 

During the transition phase, you should try to maximize face-to-face interactions to ensure better cultural alignment. You should also expose the vendors to rich company data such as processes, tools, people, apps, and inventories. 

9. Evaluate and optimize 

Once the transition phase of your offshoring strategy is over, the offshored service becomes operational. At this stage, you as a company may experience and learn new things about offshoring. 

For example, you’ll gain more clarity about aspects of the outsourcing relationship (if there’s an external vendor involved), the management costs, and the roles and responsibilities of the offshore team. 

This can often lead to a desire to change certain aspects of the agreement for achieving operational efficiencies. 

But how do you justify the changes you desire? 

One way of doing that is gathering data on the performance of employees manning your offshored office. Accordingly, evaluate the current setup and how it’s impacting your business operations. 

Productivity management tools like Time Doctor can be of great help here to identify productivity roadblocks. It can also help ensure that your offshore team stays accountable and is committed to the service levels and KPIs. 

You can then conduct a post-transition review with the vendor to identify the key strengths of the offshoring agreement and the opportunities for improvement. 

Accordingly, together you can create an improvement plan that’ll help optimize the offshored or outsourced process not just for yourself but for the offshored team too. 

Wrapping up

Offshoring or outsourcing decisions aren’t easy. 

However, offshoring a non-core business function is an excellent way to achieve competitive advantage and profitability in world business. You get to enjoy low costs and can access the talent pool in other geographies. 

That said, you must be aware of all the nuances associated with offshoring a business function to another location or outsourcing vendor. You should also be clear on your top priorities and have solid reasons backing your offshoring decisions. 

And to do that, you can follow the nine steps of the offshoring strategy framework described in this article. It’ll help you set up your business operations in an offshore location and expand your international business systematically.

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