08/11/10

By Daniel Naoum, co-founder, Valueshore

Traditionally, outsourcing has been seen as a luxury only accessible to large enterprises. It was a way for massive organisations to cut costs, access skilled staff and work with a range of experts that the company couldn’t afford to hire in-house. However, the reality today is that IT outsourcing — whether offshoring or nearshoring — is an accessible and beneficial solution for businesses of all different sizes.

The key to outsourcing success, no matter what size your business, is to understand how to manage the outsourcing process to ensure the best returns. For example, research conducted by Vanson Bourne recently found that the majority (78%) of organisations still select their outsourcing partner based on their day rate. Yet 94% recognised that by focusing too much on this cost they were increasing the likelihood of their IT projects failing to meet their requirements and needing more management time. The challenge for organisations, large and small, is to carefully weigh the cost versus quality of their outsourcer.

What should I outsource?
Just like any other company, small and medium-sized enterprises (SMEs) are looking for ways to improve efficiency and trim costs. The difference is that when it comes to IT, most SMEs have limited in-house skills and rarely have a dedicated IT team. Consequently, IT is a popular function to outsource as businesses look to take advantage of the cost savings and improved efficiency technology can bring. In fact, Vanson Bourne’s research found that 62% of companies already were, or were planning to, outsource custom applications following the recession. This included outsourcing the maintenance of packaged applications, with 50% of those asked saying they would outsource this function in the near future. The trick for savvy SMEs is to use outsourcing strategically to ensure that the business and its IT processes, including the staff paid to look after them, are working as efficiently as possible.

All things considered
While it is tempting to jump straight in to try and take advantage of the cost savings outsourcing affords, SMEs must try and get away from today’s cost-focused culture. This may seem counterintuitive but the fact is, although focusing on cost can seem logical, in the long term initial savings can be hit by hidden costs. While the current economic climate makes life more challenging for all businesses it is the smaller companies, which have very little resource to fall back on should income fall, that can be hit the hardest by hidden costs. For example, traditional offshore regions are generally far away from UK business hubs and, as such, a manager visiting a site can find themselves making expensive, week-long business trips to address an issue that actually took no more than an hour to solve, alternatively other issues may have to wait until the following day to be resolved. This is impractical for an SME where and one person could be responsible for numerous functions and unable to invest days in just one area of the business and issues need to be solved in an agile manner. However, such costs can be avoided if a more strategic approach is taken when looking at where and when to outsource.

SMEs must factor in the time it will take to successfully manage the project. Someone from the business might need to periodically travel to the offshore location so this travel time must be considered. In addition, time zones are also a critical factor as the closer the outsourcer is to the SME’s time zone, the less disruptive it will be as problems and questions can be addressed much more quickly.

It is also important to remember that even though a project is being offshored, the company still needs to ensure that it complies with relevant legislation such as the Data Protection Act. Ensuring this compliance becomes a lot harder when the outsourcing company is based outside the EU where the laws are different and they are not used to meeting EU regulations. This can mean extra work for the SME, which must be taken into account when selecting an outsourcing partner.

Certain countries will also have specialist sectors and a proven track record in that industry, or technology. For example, IT outsourcing in Spain is on the rise primarily because the country's workers are highly skilled in IT and European business. For instance, two of the top business schools in Spain are in the top ten worldwide. The region also has a proven track-record, developing efficient and innovative IT processes for both large and small businesses. It's important that businesses consider what their requirements are and what region offers them the best outsourcing option based on those needs.

All of these factors mean that selecting the right outsourcing partner may come down to where they are located and the skills that they can offer, rather than simply cost. Basing the decision on more than just the cheapest price means that the chances of getting the project completed on time and to an accurate budget are significantly increased. This can even lower the unforeseen troubleshooting costs which companies that outsource traditionally complain about.

Bearing all this in mind, traditional offshore destinations might not necessarily be the best option for smaller businesses which often need, or want, a more hands-on role in the outsourced project. This means that the country that your outsourcer is based in has a huge impact. The right choice can see the business tapping into the world's more skilled talent pools and benefitting from the considerable experience certain regions have in specific sectors. However, the wrong choice could leave the organisation struggling to understand where its money has gone.

On the other hand, nearshoring to a company that is based closer to home, such as in the EU, can be a more suitable alternative. It allows SMEs to experience the cost savings realised from outsourcing while offering a team with more expertise and experience in complex and strategic projects than other offshoring destinations like India.

Getting value for money
While it is tempting to select the cheapest outsourcer that comes along, smaller businesses are vulnerable to unexpected costs which can quickly negate the initial cost savings if they do not select their outsourcing partner carefully. Rather than putting the emphasis on cost, innovation and value for money must be the new outsourcing focus and the quality of work should be the deciding factor. Businesses should look at both offshoring and nearshoring and decide which is the right fit for their business. If an outsourcer provides quality work then the business will see return on investment, no matter what their size.

In the end, achieving the balance between cost and quality will ensure long term cost savings and will consistently improve process efficiency as the outsourcer and in-house employees innovate further and improve business and IT functions. This will guarantee both sustainable company growth and profits, creating a more agile and streamlined organisation equipped to deal with whatever the future holds.