Global Services Sourcing: Issues of Cost and Quality

In: https://doi.org/10.7916/D8H1319M

Abstract

Global Services Sourcing (GSS) is not an original concept. What is original about it is the media attention it seems to be getting. We have adopted the "then and now" philosophy in developing this report. We start by talking to the pioneers of global services sourcing, companies like General Electric, Nortel Networks and Citibank. The key learning from talking to these companies who have been sourcing their processes for more than a decade is that the long held view - "went for cost, stayed for quality" about moving processes outside the company (in some cases outside the country) is too simplistic. Rather we found that "went for cost and quality, stayed for continued quality at competitive costs" is more in line with the strategy that that these companies employed. Next, our in depth questionnaire tries to capture the "now" of the global services sourcing industry. Since the pioneers had shone the arc light on quality we developed specific quality related questions. The results validated the pioneers' views: 67% of the respondents said that actual cost savings from services sourcing have been anywhere from 5% - 50% (onshore and/or offshored). 82% of the respondents said that going into the global services sourcing arrangement they look for quality of processes to increase by 2 – 10% (onshore and/or offshored). 70% of the respondents said that the quality of outsourced business processes has increased (quality increase of 5% -10%) or increased significantly (quality increase of 10% - 25%). The top three drivers of outsourcing were: cost savings, increasing capacity, ability to take advantage of offshore labor (through captive centers). The most difficult phase of outsourcing was transition or handoff of business processes from the company to its outsourcing partner. The top risk factors in outsourcing were: loss of institutional knowledge, poor communication with vendor, mismatch of firm cultures. Of the companies that are engaged in services sourcing, 79% of respondents were using an offshore based provider. Perhaps in a sign of maturing of global services sourcing 62% chose to offshore their services to at least one country in addition to India, the current offshoring destination of choice. As far as country risk factors, legal risks (laws comparable to international standards - data security, intellectual property rights) followed by political risks were identified as the top areas of concern. The lesson for countries competing for offshored business and FDI inflows in services is that the robustness and fairness of the legal system is a major factor for companies especially in the face of concerns about loss of institutional knowledge. The overall satisfaction level with outsourcing was high at 68% but a sizeable chunk of respondents – 26% were either unsatisfied or very unsatisfied with their outsourcing arrangements. Almost all of these unsatisfied firms have been outsourcing for 12 months or less, reinforcing the literature about thinking of outsourcing being a long term investment rather than a short term win.