Getting Off Shoring Right

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TOOL KI

It's not easy to make m oney by

offshoring business processes,

many CEOs are discovering.

Companies benefit oniy when

they pick the right processes,

caicuiate both the operational

and structural risks, and match

organizational forms to needs

Getting Offshoring Rightby Ravi A ron and Jitendra V. Singh

I N 2003, ALPHA CORP., a well-known

U.S.-based organiza tion, offshored and

outsourced several customer-retention

processes. When the company found

that some of its customers seemed likely

to switch to rivals, it provided data on

them to an outsourcing firm in India.

The service provider called those cus-

tomers and, on Alpha Corp.'s behalf,

offered them fee waivers, upgrades,and free financial products as incentives

to remain with Alpha Corp.

A common, but rarely discussed, off-

shoring scenario then played out.

The vendor's employees were enthu-

siastic, but they didn't have much expe-

rience selling sophisticated financial

products such as disability and loss-of-

income insurance. As a result,they didn't

know how to interpret customers' re-

sponsesto

the incentives they were offer-ing and found it difficult to decide w hat

to do when customers asked them for

other incentives. In fact, the provider'

employees often placed people on hold

in order t o con tact A lpha Corp.'s super

visors and ask whether to give custom

ers what they w anted.^ As the demand

on Alpha Corp.'s marketing manager

rose and the vendor was unable to re

tain as many customers as it had hop ed

Alpha Corp.'s executives began to w on

der, "What have we done?"

They aren't the only executives ask

ing that question today. Cut through

the hype, and you'll find th at, like Alph

Corp., many companies are waking up

and smelling the harsh realities of off

shoring. Sure, the prospect of offshoring

and outsourcing business processe

has captured the imagination of CEOs

everyw here. In the last five y ears, many

companies in North America and Eu

rope have experimented with this strategy, hoping to reduce costs, become

mo re efficient, and gain a little strategic



TOO L K IT ' Gett ing Offshoring Right

advantage. However, contrary to popu-

lar perception, many businesses have

had, at best, mixed results. According to

several studies, half the organizations

that shifted processes offshore failed

to generate the financial benefits they

expected t o. Many also faced resistancefrom employees as well as consumer

dissatisfaction. In early 2005, both the

Boston Consulting Group and Gartner

predic ted t ha t 50% of th e offshoring

contracts that companies in North Am er-

ica had signed between 2001 and 2004

would fail to meet expectations. No

wonde r th e "I" words, inshoring and

insourcing, have become almost as pop-

ular in business circles as the two "O"

words.

As academics who have studied the

subject in several countries, industries,

and companies for more than four

years, we can't say we're shocked. Most

companies believe it's easy to offshore

business processes-easier than it was

in the 1980s to procure components

from global suppliers or to set up man-

ufacturing plants overseas. Businesses

therefore don't make decisions about

offshoring systematically enough. As

a result, they commit at least one ofthree fundamental mistakes.

First, most companies focus their ef-

forts on choosing countries, cities, and

vendors, as well as on ne gotiating prices,

but they don't spend time evaluating

which processes they should offshore

and which they shouldn't. Without a

standard methodology for differentiat-

ing processes, most executives find it

tough to distinguish among core pro-

cesses that they must control, critical

processes that they might buy from best-in-class vendors, and commodity pro-

cesses that they can outsource. They

endlessly debate the differences be-

tween the core and critical ones, and

after political tussles break out, diktats

Ravi Aron (raviaron@w harton.upenn.edu)

is an assistant professor of operations and

information management, and Jitendra

V. Singh (singhj(a)wharton.upenn.edu) is

the Saul P. Steinberg Professor of Man-agement, at the University of Pennsylva-

nia's Wharton Schoo l in Philadelphia.

from the top mandate that some pro-

cesses be sent offshore. Companies in-

evitably make the wrong choices and,

after offshoring or outsourcing pro-

cesses that they think aren't strategic,

have to bring some back in-house.

Second, most organizations don't takeinto account all the risks that accom-

pany offshoring. Executives use simple

cost/benefit analyses to make decisions

withou t realizing, for instance, that after

they transfer processes, their vendo rs

will gain the upper hand. Providers can

hold companies to ransom; it's almost im-

possible for organizations to reabsorb

business processes on short notice. Most

organizations naively ignore these la-

tent risks and are shocked when ven-

dors dem and price hikes that erode thesavings from outsourcing.

Finally, most companies don't realize

that outsourcing is no longer an all-or-

nothing choi ce-th at they have a contin-

uum of options. At one end, there's exe-

cuting processes in-house; at the other,

there's outsourcing them to service

outline tools that will help compan

choose the right processes to offsh

and discuss the associated risks. We

also describe a new kind of organ

tional structure and show how com

nies can use it to bene fit from

shoring. Don't misunderstand; smcompanies have gained strategic adv

tage by offshoring processes. Your c

pany can also harness the power of

services revolution by taking three st

one at a time.

Rank Processes by Valu eExecutives can distinguish, at the

set, between business processes t

should and shouldn't offshore by fi

ing out how each process helps them

create value for customers and to c

ture some of that value. The relative

portance of a process along those

dimensions indicates the risks and

wards associated w ith moving its ex

tion outside the organization or co

try. Executives instinctively know

importance of these criteria but usu

According to several studies, half th e organ ization

that shift processes offshore fail to generate the

expected financial benefits.

providers. Along th at continuum , com-

panies can buy services from ocal provid-

ers (a lot of outsourcing is local), enter

into joint ventures, or set up captive cen-

ters overseas. Most businesses don't con-

sider all the available options and end

up using organizational forms that are

inappropriate for their purposes. They

also analyze processes too narrowly,

looking only at direct costs and failing

to examine interdependencies that

might tip the cost/benefit analysis in

favor of keeping services in-house. Mak-

ing the right governance choices is crit-

ical; our research shows that both loca-

tion and organizational form decide the

fate of offshoring strategies.

Clearly, companies have to rethink

the manner in which they formulatetheir offshoring strategies if they wish to

succeed. !n the following pages, we'll

don't know how to factor the m into

cisions about offshoring.

There's a simple way executives

do that. They should answer the q

tion. How crucial is each process (or

process) compared with others in cr

ing value for my company's custom

The answers will differ from busito business and, often, by industry

the consumer goods industry, for

stance, executives usually rate prod

development processes higher t

customer-service processes, while in

hotel industry, the opposite is t

Next, managers must ask. In rela

terms, to w hat degree does each pro

enable my company to capture s

of the value that it has created for

tomers? They must rank each pro

along these two dimensions, then

the two rankings together to arriv



Getting Offshoring Right • TOOL KIT

a total ranking for each process. Some-

times, executives may feel that one of

the two dimensions is more important

in the industry or for their company. In

that case, they must calculate the total

rankings after assigning greater weight

to the more important aspect. For in-stance, retail banks helieve tha t making

money is tougher tha n developing new

consumer finance products. They tend

to rate the value-capture aspect of their

processes higher than they do the value-

creation dimension.

By ranking all the company's pro-

cesses, executives can crea te a value hi-

erarchy. The higher a process's rank in

the hierarchy, the more crucial it is to the

comp any's strategy, and the less the or-

ganization should think about moving

it offshore or outsou rcing it. The hierar-

chy tells companies where the fault

lines betw een processes are and lays ou t

an offshore migration pa th. For exam-

ple, at one U.S.-based computer and

communications equipment manufac-

turer we worked w ith, senior executives

unanimously agreed that of six pro-

cesses in the finance function, manag-

ing the float for suppliers and dealers

had the highest relative importance(see the exhibit "Creating a Value Hier-

archy of Processes"). That alerted man-

agers that it would he risky to offshore

or outsource the process; even if the

service provider made only a few er-

rors, it would hurt the firm's dealers

and suppliers financially and tarnish

the company's reputation. The execu-

tives also felt that managing the com-

pany's working capital was too impor-

tant to offshore. At the same time, the

group decided that three other pro-

cesses - invoice verification, pay me nt

authorization, and revenue and expense

repo rting -w ere less valuahle and that

the company could think about off-

Creating a Value H ierarchy of Processes

Executives in a company's f inance dep artmen t, charged with ident ifyin g business

processes to offshore, ranked six processes on the ir abi lity to create value for cu stom-ers and on their abil ity to capture vaiue for the business. They then added the value-

creation rankin g and the value-capture rankin g togethe r to arrive at a total for each

process. Wh en they stud ied the fin al rankings, or hierarchy, the executives agreed

tha tth ey c ould offshore the three low est-ranking processes; the tw o highe st-ranking

processes, they de cided , were to o strategically valuable to offshore.

Value-creation Value-capture TotalProcess ranking'

Float managementfor suppliers and dealers 1

Working capital

management 2

Cash-flow forecasting 4

Revenue and

expense reporting 3

Payment authorization 5

Invoice verification 6"Determ ined by executive consensus

ranking' ranking

Processes

the company

shouldn't

offshore

Processes

the company

might offshore

shoring or even outsourcing them.

Some of the executives also believed

that at a later date, the business could

offshore the cash-flow forecasting oper-

ation. This analysis became the basis

of the company's offshoring strategy,

which so far has been successful.When executives, usually from the

same department, sit around a table

and draw up a value hierarchy, it serves

several purposes. The ranking provides

a standard basis for comparing pro-

cesses across the company, which makes

discussions about offshoring more

constructive. Executives often rank the

same business process differently; draw-

ing up the hierarchy highlights these

differences. That helps surface tensions

around offshoring decisions. Ahove all,

the value hierarchy allows managers

to think systematically about the impor-

tance of processes without getting into

interminable debates ahout what the

company's core processes are or how

critical its critical processes are .

Identify and M anag e RiskOnce a company has established that

some of its processes can he offshored or

outsourced, it must tackle all the risksthat could affect their migration. Com-

panies face two very different kinds of

risk: operational and structural. The for-

mer may be more critical in the initial

stages of offshoring and outso urcing , but

over time, the latter swells in importance.

Operational Risk. Smart companies

start off assuming that service provid-

ers won't be able to execute business

processes as well as their employees

perform them in-house - at least, notfor a long time. Unlike the manufacture

of comp onents, firms can't provide ven-

dors with specifications and expect

them to carry out tasks perfectly. Until

service providers move up the leaming

curve, they will make more errors and

execute tasks more slovwly than compa-

nies' employees do. That often results

in lower customer satisfaction.

Businesses can try to lower opera-

tional risk hy tackling its twin causes,

the first of which is an organization'sability to codify work. When companies



TOOL KIT • Gett ing Offshoring Right

Evaluating Operational Risk

To evaluate operational risk (the risk that processes won't operate smoothly after

being o ffshored), compa nies shou ld classify processes by how precise their metrics

for quality are, as well as the extent to which work can be codified. We've listed some

processes that, our research shows, fall into each category.

MODERATE RISK

(opaque processes)

Insurance underwrit ing,

invoice management.

cash-flow forecasting

HIGH RISK

(codifiable processes)

Equity research.

yield analysis,

l i t igat ion support

HIGHEST RISK

(nonco difiable processes)

Pricing,

working capital management

LOW RISK

(transparent processes)

Transaction processing.

telecollection.

technical support

MODERATE RISK

(codifiable processes)

Customer service,

account management

HIGH RISK

(nonco difiable processes)

Supply chain coordination,

custome r data analysis

imprecise/subjective precise/objective

Precision of metrics used to measure process quality

Eva luating Struc tural Risk

To ascertain structural risk (the risk that relationships with service providers may not

work as expected), comp anies shou ld look at how precise their qu ality metr ics are,

as well as the extent to which the execut ion of processes can be monitered. Most

processes fall into one of four categories.

HIGH RISK

Equity research.

lit igation support.

R&D sup port

HIGHEST RISK

Pricing,

product design

LOW RISK

Transaction processing.

insurance claims processing.

customer service

MODERATE RISK

Supply chain coordina tion.

custome r data analysis

imprecise/subjective precise/objective

Precision of metrics used to measure process quality

do , describe th e different situations

face, and stipulate w hat em ployee

sponses should he in each scenario,

ple anywhere In the world can do th

for them . For instance, if a Europea

tail bank has drawn up rules about w

it will give customers loans, has slated th e procedures for resolving e

tions to accounting norms, and has

down when it will hold financial in

ments in suspense accounts, mana

on any continent can perform t

tasks for the bank with minimal su

vision. Investment banks can o utso

even complex tasks like equity rese

as long as they codify the tasks invo

However, if a service provider's

ployees require a great deal of do

experience-information about thent's customers, a deep understan

of how its product and geogra

markets function, and knowledge

the client's managers carry in

heads-to execute processes, they

unlikely to get those processes righ

a long time. (For more on codif

knowledge in the workplace, see

othy Leonard and Walter Swap's a

"Deep Smarts," HBR September 2

The second cause of operationalis a company's use of metrics to

sure th e quality of processes. Many

nesses, we find, haven't developed

tive metrics, or they formulate me

for the first time when they outso

processes. Both increase operat

risk because, when such co mpan ie

shore or outsource processes, they

no way of knowing if providers

executed those processes bette

worse than their employees did.

nesses would do better to create

rics, measure the quality of proc

for a while, and improve their qu

in-house before deciding to offsho

outsource them .

We cannot stress enough the im

tance of drawing up metrics; what a

doesn't measure, it can't offshore

According to our research, comp

that define metrics subjectively us

end up with costly errors and long

tation periods before their provexecu te processes effectively. Only

tha t set tolerance lim its for errors,



G e t t i n g O f f s h o r i n g R i g h t • T O O L K I T

up completion times and productivity

norms, and continuously measure em-

ployees' performance are able to move

processes offshore. In 2002, when Leh-

man Brothers decided to offshore the

development of some information

technology-related processes, it iden-tified lower costs, higher quality, and

faster deployment of new systems as

its goals. The investment bank drew

up several metrics that allowed it to

measure its service providers' perfor-

mance along each of those d imensions.

Lehman Brothers measured vendors'

performance every month and, after a

year, found that its providers had ex-

ceeded the cost-savings targets while

delivering the same quality of execu-

tion as fhe bank's in-house operations.However, the time th e vendors took to

develop new systems was below expec-

tations. Not only was Lehman Brothers

able to take corrective action, but its

focus on continuous measurem ent also

allowed it to quickly ramp up its off-

shore operations, both In terms of vol-

ume and complexity.

Interestingly, the belief that off-

shoring linear processes - where one

person hands off work to another per-son - poses less operational risk tban

offshoring processes where work flows

back and forth between people is dead

wrong. Just because a process is linear

doesn't mean that it's easy to outsource.

We've seen several linear processes, such

as inventory control in consumer goods

industries and wealth management-

related processes in financial services,

that businesses couldn't offshore be-

cause they didn't have good metrics to

measu re process quality. Moreover, ourstudies show that the nature of infor-

mation flows doesn't affect the quality

of execution. If companies codify work

and develop m etrics to evaluate quality,

they can contain operational risk even

if work con stantly moves betw een com-

panies'employees and vendors'agents.

When comp anies look at the extent to

which they codify work and use metrics

to measure process quality, they'll see

that their processes fall into four dis-tinct categories (see the exhibit "Evalu-

ating Ope rational Risk").

Transparent Processes. Companieshave metrics to measure the quality of

processes, and they can codity the work.

The operational risk of offshoring and

outsourcing these processes is very low.

Codifiable Processes. Companies have

some ability to measure the quality of

execution and can codify most of th e

work. Still, only people who have for-

mally mastered a body of knowledge,

such as accountants and lawyers, can

execute these tasks. It's also inherently

difficult to manage the quality of th e

work in real time . If firms can measu re

the quality of the end result, the risk of

offshoring or outsourcing the pro-

cesses becomes manageable. However,

if mea suring the results is difficult, the

risk of offshoring becomes very high.

Opaque Processes. Companies can cod-

ify the work, but they cannot measure

the quality of process outputs. When

firms underwrite insurance policies,

for instance, it's difficult for them tomeasure how well their employees have

executed th e task since the events th at

policy buyers are protecting themselvesfrom may never occur. Although the

risks of offshoring these processes are

moderate, companies have to inspect

samples to ensure that the outpu t m eets

their quality standards. That's often

cumbersome and expensive. If compa

nies specify how the outsourcer's agents

should do their work and offer them

performance-based rewards and penal-

ties, they can lower the risk of offshoring

these processes.

Noncodifiable Processes. Compan

cannot easily codify fhe work because

the variation in business events and

employees' responses are too great to

permit standard responses. Although

it's often to ugh, companies may be able

to evaluate the quality of execution.

For instance, if employees don't fulfill

orders correctly, customers will cancel

those orders or return products. These

processes are prone to a high degree

of operational risk. If organizations dooutsource the m , they should closely su-



pervise the service provider's agents.

TO OL KI T • Gett ing Offshoring Right

For examp le, in 2003, Ford Motor Com-

pany outsourced the task of handling

supplier inquiries to India-based Allsec

Technologies. Ford insisted that the In-

dian employees w ho handle those calls

work under the supervision of Ford

managers on the company's premisesin Chennai. That allows the American

giant to monitor the agents' work

closely and to provide decision-making

input in real time. Ford has compen-

sated for the difficulty in codifying

work by getting its managers to help

the vendor's agents do that w ork.

Structural Risk. Most companies

don't worry ahout the behavior of ser-

vice providers when they enter into

contracts with them . They assume ven-dors will always act in ways that maxi-

mize both groups' interests. That isn't

a wise assumption to make, even when

had reduced their own capabilities to

a bare minimum. They had no choice

but to bear the costs of training and up-

grading the provider's agents until

they came up to speed. Another prob-

lem is that service providers sometimes

put in less effort than they initiallyagreed to. For instance, an offshore

transactions processor hired by a large

American bank agreed to check at ran-

dom 12% of all the transactio ns it would

process. The bank later found that, once

its representatives stopped monitoring

the provider, the prov ider checked only

5% of transactions. That reduced the

provider's costs, but t he ban k had to ab-

sorb larger costs because of a rise in th e

number of undetected errors.

When companies supervise provid-

ers' work, structura l risk falls. Thanks to

advances in information technology,

W hat a firm doesn't m easure, it can't offshore wel l .

companies are buying services from cap-

tive centers th at they have set up. Like

all supply chain partners, service pro-

viders can, and do, have incentives to

behave in ways that reduce buyers' fi-

nancial benefits from outsourcing. (For

more on t he role of incentives in supply

chains, see V.G. Narayanan and Ananth

Raman's article "Aligning Incentives in

Supply Chains," HBR N ovember 2004.}

Some structural risk arises because

vendors can stop investing in training

or employ people who aren't as quali-

fied as the agents they presented during

negotiations. Take the case of one Asian

vendor that designs surveys, analyzes

data, and develops customer profiles

to help clients segment their markets

better. When it signed contracts, the

firm said that it would hire peo ple only

with postgraduate degrees in statistics

or marketing and with four to six years

of experience. However, as the firm's

business grew, it began staffing projects

with managers who had master's de-

grees, but not necessarily in statistics

or marketing, and with less than two

years of relevant experience. The qualityof its services fell, but clients couldn't

stop using the provider because they

businesses can track providers' efforts

in real tim e. In fact, most successful out-

sourcers monitor their agents as they're

working, and the best service providers

encourage this practice. Structural riskalso falls when companies have met-

rics to gauge the quality of providers'

work (see the exhibit"Evaluating Struc-

tural Risk").

Companies face anoth er kind of struc-

tural risk when service providers alter

the te rms of contracts after clients have

turned over processes to them. That

happens because, as outsourcing con-

tracts mature, the power in relation-

ships shifts from the buyers to the sell-ers. Once companies have transferred

processes to providers and terminated

the services of employees who per-

formed th e tasks, they canno t bring

those processes back into the organiza-

tion on short notice. Knowing that,

providers can demand exorbitant price

increases when contracts come up for

renewal. For instance, one vendor that

archives, documents, and analyzes in-

surance claims raised its price by 65%

when a contract came up for renewal.The client couldn't cancel the contract

with the vendo r because it had virtually

elimin ated its processing capacity.

luctantly paid the vendor the new p

for a year and later shifted all its b

ness to ano ther provider.

Two factors amplify the se la

risks. First, when firms outsource

cesses that require the transfer of a amount of tacit knowledge, they h

to invest time and effort in trai

providers' employees. Second, s

processes take a long time to stab

when companies offshore them

bo th cases, th e cost of switching f

existing providers is very h igh. Tha

centuates the risk that over time,

dors will dictate terms to buyers.

Buyers are never powerless, and

can hedge structural risks in sevways. When a firm negotiates a con

with a provider, it should specify a

riod after the contract's expiry du

which the provider must continu

offer the service at a certain price.

rule of thu m b, the buffer should sp

150% of the time that it took the

vider to deliver output that matched

company's quality standards. If it to

months for the vendor to come u

speed, the vendor must continue to

vide the service for 18 months aftecontract has expired. Lehman Brot

for instance, has insisted on add ing

clause to all its contracts w ith provi

Although it may be difficult, com

nies should also split business betw

two providers. In the event a com

wants to discontinue doing busi

with one of them, it can then tran

a process to the other vendor th

already executing the same proc

however small the volumes may bwill take the company less time t

that than to train a new provider f

scratch. Having a second provider

also lower costs since the junior

vider will bid low for contracts in

change for greater volumes. That

put pressure on the senior prov

For exam ple. Bank of America has d

oped relationships with two offs

providers of IT services. The ven

are comparable in many ways,

both realize that the bank can tranwork from one to the other if it w

to . When companies transfer com



Getting Offshoring Right • TOOL KIT

processes, like equity research, cash-flow

management, and forecasting, they

should also retain some residual capac-

ity so tha t they can b ring processes back

into the company if they have to . In the

case of relatively vital processes, firms

must retain enough in-house expertiseto train new p roviders. Otherwise, busi-

nesses will have to ask incumbent pro-

viders to train potential rivals, which,

in our experience, never works well.

Finally, companies face the risk that

rivals may steal their intellectual prop-

erty and proprietary processes if they

transfer processes offshore, especially

to emerging markets. There's no sure-

fire way organizations can protect them-

selves against this risk unless they set

up dedicated facilities offshore. Com-panies should decide they want to do

that only after evaluating al! their or-

ganizational options, and in the next

section of this article, we will explore

that process of evaluation.

Choose the Right

Organizational Form

Most companies believe tha t they m ust

either perform processes in-house or

outsource them. That was true in the

1990s; today, however, companies canenter into joint ventures with other

companies in the same industry or in

other industries to generate services or,

like GE, use the huild-operate-transfer

mechanism to create ventures that evolve

from being part ofthe company into in-

dependent service providers.

Companies should match organiza-

tional structures to needs by considering

both th e structural and operational risks

ofoffshoring processes. In general, they

can use location-onshore, nearshore,

or offshore-to combat operational risk,

and organizational structures - such as

captive centers and joint ventures-to

respond to structural risk (see the ex-

hibit "Choosing the Right Location and

Organizational Form"). When bo th the

operational and structural risks of off-

shoring processes are low, companies

can outsource them to overseas service

providers. As the operational risk ofoff

shoring processes rises, locating them

offshore becomes more dangerous.Companies should transfer processes

that possess high levels ofoperationai

risk to nearby countries rather than to

distant overseas locations. When the

operational risk is very high, setting up

captive centers locally is often the best

solution. Outsourcing is less attractive

in the case of processes with moderate

or high structural risk; here, other forms

of governance, such as joint ventures

and captive centers, become b etter op-

tions. In the case of processes that havevery high levels of structural risk, out-

sourcing isn't feasible. Companies m ust

set up captive centers to execute those

processes. Finally, when both opera-

tional and structural risks are very high.

Cho osing the Right Location and Organizational Form

Once a com pany has dete rmi ne d the ope ration al and structu ral risks of outsou rcing its processes, it can usethis g rid to choose the best locations and org aniz ation al fo rms for those tasks. The n ine cells in this tabie show

the optimal offshoring responses to different levels of risk.

4J

a.

O

r

HIG

LU

5UJ

Q

U

0

Outsource to service provider

located nearby

(nearshore)

Lit igation support

Offshore and outsource to

service provider over t ime

Insurance claims processing,

customer support

Offshore and outsource

to service provider

Data entry,

transaction processing

Set up captive center

nearby or onshore

R&D, desig n

Use extended organizat ion

offshore, but monitor closely

in real t ime

Supply chain coo rdination.

bioinformatics


offshore

Teiecol lection.

technical support

Execute process in house

and onshore

Pricing,

corporate planning

Set up captive

center offshore

Equity research


offshore, but condu ct f reque nt

process au dits

Customer data analysis.

market research analysis

LOW MODERATE HIGH



Structural risk

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offshoring and outsourcing are out of

the question. Companies must execute

those processes onshore and in-house.

When choosing organizational forms,

companies have to trade off the con-

trol and quality they bring to the table

with the scale economies and gainsfrom the specialization that providers

offer. Interestingly, offshoring has led

to a hybrid form of organiza tion th at al-

lows companies to , in a sense, have their

cake and eat it, too. We call this structure

th e extended organization, in this hybrid

organizational form, companies specify

the quality of services they want and

work closely alongside providers to get

that quality. They manage providers

carefully and monitor the agents' work

to ensure th at things are done properly.Technology enables buyers and sellers

of services to exchange information in

real time and to embed themselves

deeply in each other's companies. Firms

can thus move away from command-

and-control structures to sense-and-

respond forms of collaboration.

Consider, by way of illustration,

Chennai-based Office Tiger, which of-

fers research support and real-time sce-

nario analysis, and builds investment

and to alte r project priorities. Cruc

Office Tiger's agents and th e investm

bankers they support work in tan

Both can see, in real time, the mo

and scenarios their counterparts

creating. They work off the same

the same spreadsheets and data fand, when necessary, they work i

tively. Buyer and seller are separate

boundaries that are porous and

stantly shifting; it's impossible to

where one boundary ends and the o

begins. Walk thro ugh Office Tiger

fices, and you will see how close

agents work with clients. The pro

has created different premises for

client, and agents working for on

vestment bank cannot enter the of

of agents working for another bSimilarly, Gecis -GE 's erstwhile

tive center and, in 2004, an inde

dent $426 million service provider b

in India - has created a version o

extended organization. Gecis (rec

renamed Genpact) always config

project teams with two leaders, o

whom is an employee of the bu

company. He or she, along with a

manager, sets priorities, tracks prog

helps define quality standards, and

Service providers can, and d o, have incentives

to behave in ways tha t reduce companies' financ

benefits from o utsourcing.

models for some leading investment

banks in the United States and UK.

The banks tolerate very few mistakes,

so Office Tiger's employees can't learn

through trial and error. Moreover,

nearly a third of the company's dead-

lines must be met within an hour. To

make the tie-ups work, the investment

banks' managers and Office Tiger's ex-

ecutives jointly manage both long-term

goals andday-to-day operations. Office

Tiger has developed an information

system,T-Track,to m onitor th e produc-

tivity andquality of groups of employ-

ees and, if required, the performance of

each agent. Its clients use the system toask for changes in agent assignments,

to modify quality control m echanisms.

itors the team. Every year, the two

ers jointly decide team members

bonuses, and prom otions. Gecis en

ages its employees to see themselv

extensions of the ir clients. In fact, i

visit the floor in the Gecis center

executes several processes for a le

U.S. retail chain, you'll think you're

retailer's own offices because ofthe

and the vision statem ents on the w

Our studies suggest that the exte

organization is the most effective w

man age offshoring. In a two-year s

we compared howa captive center,

vider, and an extended organizatio

ecuted several moderately com plexcesses in the financial services s

While the captive center produce



highest quality throughout the period

of our study, the extended organization

showed the greatest improvement and,

over time, produced almost the same

quality as the captive center. Moreover,

the extended organization delivered

that level of quality more cheaply thanthe captive center did. When we studied

processes that w ere more complex, the

same results held: The extended organi-

zation started out relatively poorly but,

after it reached a stable state, was the

most cost-effective way to execute pro-

cesses. Clearly, offshoring isn't just ab ou t

companies moving across geographical

boundaries; it's also about companies

redrawing organizational boundaries to

achieve collaborative supply chains of

information, expertise, and knowledge.

It may sound like a cliche, but compa-

nies must tre at offshoring as a strategic

imperative if they wish to capture all

its benefits, Offshoring initiatives that

have cost savings as their raison d'etre,

our studies shovw, don't allow companies

to capture greater revenues from the

market. That's because such companies

don't comm it themselves to the organi-

zational changes that are necessary foroffshoring to help them , say, customize

products or services, lock in buyers,

compress new product-development

cycles, or enhance profit margins. Be-

sides, when offshoring is only about

cutting costs, businesses are reluctant

to outsource complex processes, even

though doing so wiil have a bigger im-

pact on their bottom lines. However,

when corporations begin w ith the desire

to create strategic advantage through

offshoring, they commit themselves totransferring complex processes rela-

tively early. Companies would do well

to remem ber that the m anner in which

they start their offshoring initiatives

often determ ines how they will end. ^

i ."Atpha Corp."is a pseudonym. For more details on

the offshoring problems faced by this company, seeRavi Aron, Eric K. de m on s, and Sashi Reddi ,"Jus t

Right Outsourc ing: Unders tanding and Managing

Risk,'7oijma/ of Manag etnent Information Systems,

Fall 2005.

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