Outsourcing and offshoring are nothing new, corporates such as HP, IBM, Intel, AMD, Microsoft, Oracle Corporation, and Cisco have been taking advantage of competitive and flexible workforces in the developing world for over a decade now and investing heavily in those areas to support their business aims. But there is a new trend appearing with more and more SME’s looking further afield, to partners in China, Eastern Europe and India. In many ways the corporates have been blazing a trail for these SME’s, not only by fine tuning the processes from the point of view of the outsourcing company but also by establishing an understanding of the business culture and requirements of the outsourcing companies within the offshore partners.
IT, KPO and BPO business functions are obvious candidates for offshoring as improved technology allows information to be transferred immediately. This means that in principle an efficient offshored partnership can work as seamlessly as outsourcing to a domestic partner – In 2007 the global offshored BPO market was worth over £12billion with over £7billion of that going to Indian businesses.
But the opportunities are also there for more traditional business sectors, such as manufacturing, to gain a competitive advantage. While I was in India I spent 4 days with Srikanth G P, the Managing Director of Ibex Engineering, an export-focussed company that provides die-casting, tooling and precise machining services to businesses in Europe, New Zealand, The USA and Japan. Ibex have recently set up a successful partnership with HCM Engineering, a West Midlands based SME with a UK workforce of 25 and turnover of £1m. Simon Hanson, Managing Director of HCM said “The manufacture of tooling is very labour intensive and expensive in the UK, so by establishing a joint venture with Ibex, HCM can retain control over the quality and support services but gain a competitive advantage due to the reduction in costs. Currently the JV business turns over an extra £200,000 and is expected to double in size over the next 12 months, with some of that growth coming from sales to the Asian market generated in India”.
While talking with Srikanth G P about the potential for UK SME’s to make the most of the opportunities that India offers it became clear that many of the issues are exactly those that face a company outsourcing to a British partner, but that there are also important additional factors to consider, and while there is no reason that an SME cannot benefit in the same way as a larger company they will almost certainly have less resources available to them so will need to manage the project to a much finer degree.
So, here are my top tips for any SME that is considering partnering with an offshore company.
Make sure there is a business case:
Offshoring can bring massive benefits, but it may not be right for all companies. Don’t rush in and commit yourself without being sure that it’s a viable option, and think long term – the cost implications on moving business processes back to the UK in 2 or 3 years time if outsourcing doesn’t work could be very expensive.
Don’t just think of the savings:
Wages for workers are considerably below those in the UK, but it is important to bear in mind that the salaries of more skilled and senior managers are rising quickly. In addition to that you will have to factor in the costs of travel and possibly relocation expenses if you decide to move a UK member of staff to oversee the offshore operation.
And while outsourcing can be highly efficient, it is not necessarily cheap to set up. It will take time, and unless what you are outsourcing is a new business area, you will have to maintain your current set up until it is in place. You will also need to make a reasonable number of trips to visit the potential new partner, and a visit to India takes a little more time and money than a trip to see a potential new partner in Milton Keynes.
And of course don’t just look at cost, you wouldn’t automatically go for the cheapest supplier in the UK, nor should you when looking for a supplier in India. Remember that everyone in the chain from customer to outsourced supplier/JV Partner needs to be looked after, so don’t be greedy.
Be aware of cultural differences:
Even though business has been done between India and the UK for over 200 years and many Indian companies are used to dealing with UK clients, there will still be some cultural differences, and it is as much the responsibility of the outsourcing company to be aware of these and to accommodate them where possible as it is the responsibility of the offshore company to adapt.
Meeting face to face can go a long way to alleviate many of these problems, indeed I have developed a much deeper understanding of how things are done in India and why they are done that way since my visit, and this in turn will help me when dealing with Indian companies.
Be realistic and be prepared:
Be clear and realistic about what you expect, Set key performance indicators and have a service level agreement in place. You will probably have to allocate resources internally to manage the outsourced process from the inside, as well as to deal with any internal conflict that might arise from moving part of the business overseas. And like any partnership while you can hope for the best you should plan for the worse, if you have no plans in place for resolving conflicts and dealing with problems then, should they arise, they will have a more serious effect than they need to.
Get as much support and advice as you can:
Offshoring an area of your business is a big step, and as suggested above the risks are greater for an SME because they cannot just throw money at a problem in the same way that a corporate body could. But there are plenty of experienced people who you can, and should call on for help. Speak to the international trade team at your bank and bring in appropriate legal support. Remember that many of the offshored companies that you will be speaking to will have a lot of experience in dealing with companies wishing to outsource elements of their business. While this is very useful once you have found the ideal partner, when it comes to the negotiation stage it can give them an advantage – make sure that you have someone equally experienced in your corner.
Offshoring is becoming a much more viable and practical for smaller companies but while going in unprepared and unsupported can lead to all sorts of problems, when done right and with the right partners it can bring wonderful results in terms of cost reductions, increased capacity and new opportunities.
This article was provided by John Cave, Founder of Westhaven Worldwide Logistics.