8 February 2015

Soaring Offshore Costs & Diminishing Returns

HR Success Guide
Author: Gaurav Bahadur

More than 90% of Offshore Costs account for Compensation and Benefits

Having a profitable offshore development center is a dream come true of every entrepreneur. With cost arbitrage going away with high offshore costs, it is a tough arrangement for those who fail to manage it the right way.

At the time we start the offshore arrangement, it does look to be affordable to offer high salaries to attract and retain talent. What transpires during the journey is salaries blown out of proportion and downsizing. The outcome loud and clear (1) Low Return on Investment (ROI) because the benefits actually planned for a bigger team is now spent on handful of resources (2) Low Attrition because a large count of talent is over price and fails to get better remuneration elsewhere (3) Acceptable delay in deliverable because of the limited team strength at offshore.

Danger and Delight grow on one Stalk

Things do go unnoticed when we lead offshore from a distance but what’s important is to understand the cultural difference and get it right. After all the objective of offshore is to be a low cost center with high deliverables. The following are some of the ways to offset high offshore costs:

1)    Self-Sustain: Largely the offshore model is looked at an arrangement to be financially supported by its parent entity. There are little or no thoughts put in to make it self-reliant largely because the leadership layer is not stationed locally. A sales team catering to EMEA and APAC region could be a way out. Alternatively offshore consultants on client payrolls could be a revenue model to consider. Profitability from offshore arrangement is higher and goes a long way when you develop it on a self-sustainable model.

Create a Sustainable Business Model

2)    Market Data: Identify if your resources are overpriced. Hire a trusted recruitment partner and provide them with the job roles, experience level and location of your current team. Allow them to validate the local market and check the salaries for these positions. Ask for an unbiased evaluation and get the median of salaries instead of the average because different companies price same quality of resource in different salary bands.

Your Offshore Costs would double in four years maybe sooner. Plan it wisely.

3)    Normalization: Conduct normalization at workplace. This means overpriced resources take a salary cut while underpriced resources get a salary hike. Worried if people would leave? Tell them this is the way forward to a sustainable offshore model. Compensate them with performance bonus so that good performers get the benefit that they deserve.

Let More People Enjoy Some Benefits than Some People Enjoying More Benefits

4)    Hire Fresh Graduates: Smart Companies plan in advance. Hire a talented bunch of fresh graduates from a reputed school or conduct an off campus drive. Don’t get taken away by limited space or your inability to sustain the expense until the resources are productive. Train them well and reap the benefits of averaging out your soaring costs.

Failing to Plan is planning to fail

5)    Downsizing: Hate it but be ready to live it. One of the painful phase for the organization because it takes so much efforts to hire and retain talent and so little to let go. The master stroke to cut costs when you have little or no time to set the dynamics right. Adopt some sound methods for downsizing to ensure you neither hurt your people nor your brand. Parting is painful but there are ways to let go people with a smile.

Everything Revolves around People

6)    Reevaluate Service Arrangements: While this has low impact on the overall costs, it can certainly help to bring down recurring costs of the offshore development center. Invite proposals from quality service providers and know their engagement cost. Do a Cost Benefit Analysis (CBA) and choose to work with the best. Negotiate for a ‘No Change’ pricing model to escape annual hikes.

Vendor Management is an Investment. Maximize your Returns

Offshoring is a profitable business when dealt with in the right way. It requires the ‘Right Planning’ at the leadership layer at the parent location and the ‘Right Execution’ by the management layer at the offshore. The pitfall is a low quality high cost arrangement that fails to meet the purpose.

Your Company is only as extraordinary as your People

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HR Success Guide

rajsaini said...

very informative

Roman Smolgovsky (VP of Engineering and Operations at ShowEvidence, Inc.) said...

Great article, thanks!
I would also add that there is a great need to organize (or adjust if not reorganize) the operations of the home office. A lot of $$$ are wasted due to lack of clear requirements, proper procedures, inefficient communications. As the result offshore teams are often redo the same work over and over, not delivering on schedule and/or not producing the expected results.
With that said - lots needs to be done about selecting the right offshore partner. I, personally, do not believe too much in so-called 'cultural differences', but I witnessed a lot of poorly organized offshore and, especially, outsource teams with the lack of well-organized on-site day-to-day management. Such teams might be pretty good technically, but may lack discipline or suitable for US companies work-ethics.

Joerg Stimmer (MD at pliXos GmbH) said...

Offshoring started with the cost benefits which are changing, correct. When managed properly there is by far more to get. Flexibility in ramping up and down, rare skills, 24 ×7, access to new markets etc. My believe is that a high level of automation and best practice (getting standards) is key to success. This is what we focus on: http://www.plixos.com

Anonymous said...

I'm not so good in financing in general and in offshore accounts too, but are they okay? I mean, in law sense. I've always thought they are kinda banned? No? I'm looking for this information because now I'm busy on how to write a college reflection paper on my finance class

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