Which Business Processes Should Move Offshore?
BY J. BONASIA
INVESTOR'S BUSINESS DAILY
As head of consulting firm OffshoreView.com, Jonathan Guerster has a unique background that shapes his views on the offshore outsourcing of business processes.
OffshoreView of Charlestown, Mass., helps startups and midsize companies determine how, when and where to apply offshore approaches to their corporate operations. That is, when it makes sense to outsource work overseas.
Guerster is a trained computer scientist and former manager at software maker Open Market. So he clearly sympathizes with the plight of programmers who have lost their jobs to lower paid workers in India, China and elsewhere.
Yet as a former venture capitalist with Charles River Ventures, Guerster also knows that companies of all sizes can benefit by outsourcing basic software and service functions, and thereby focus on their bread-and-butter business issues.
Guerster says outsourcing is evolving. Over time, he expects more companies to send core tasks, such as research and development, to offshore sites.
"It's naive to assume R&D can't be outsourced," he said. "Product makers can outsource their design research, and pharmaceutical firms can outsource clinical trials."
Guerster recently spoke with Investor's Business Daily.
IBD: How would you describe the evolution of offshore outsourcing?
Guerster: The value of going offshore involves 24-by-7 operations and lower costs. Manufacturing first evolved to an outsourced, and then an offshore, operation. With the service economy of the last 10 years, we saw the principal areas of offshore outsourcing develop around call centers and information technology.
Call centers became a natural operation for outsourcing because that was a separate business process. Then information technology was penetrated through a fair amount of repeat work that could be done from remote offshore locations, such as the maintenance of . . . software.
So we went from manufacturing to call centers to IT, and now business process outsourcing. One of the first processes to be outsourced was human resources. It was a necessary part of the business, but management of the data around those processes was not viewed as core. That's why people made early experiments with HR.
Next we saw accounting go offshore. Now we're at the stage of real business process outsourcing, where every business process inside a company can potentially be optimized on a cost-savings basis to do more with less.
IBD: What comes next?
Guerster: So far, it's been presumed that offshore outsourcing would be done around commodity operations that involve high-volume, low-value tasks. But it's not clear that's true any longer. For instance, companies with cost structures that can take advantage of offshoring faster can beat competitors. So when people can launch a new idea or product from offshore, they can both innovate and use capital more effectively.
IBD: What types of business processes should smaller companies consider outsourcing, and which ones don't make sense?
Guerster: What business are you in? If you're in a business that has labor-intensive activities, obviously you'll look to use offshore labor, both in processes and development. These include the insurance, health care and financial service fields — any service that involves processing lots of data.
Any venture-backed tech startup of the last few years is almost required to leverage offshore labor for development of software, hardware and in some cases even chips. The percentage of VC portfolios that use offshore labor as part of project development is very high today.
IBD: How should U.S. companies assess whether to build offshore operations, seek foreign partners or make overseas acquisitions?
Guerster: With large companies, it can make sense to build their own offshore operation. Another option is to outsource to a third party, to get someone to do it for you. Or you can go with what we call a build-operate transfer. In such a case, a company deals with an outsourcer by giving them the rights to develop a product or service. But the company has the right to buy the operation back and pull it in-house if things go the right way. Those are three ways a company can establish an offshore operation.
The answer also depends on your growth rates and how many people you need. If you don't have plans to hire at least 100 to 200 people for an operation, it's usually better to get started with a third party due to the costs of utilities and office space and such.
IBD: How do you address concerns about job losses for skilled U.S. workers due to offshore outsourcing?
Guerster: This gets back to my point about offshore R&D. If possible, I tell my clients — especially midsize companies that want to do more with less, that want to offer more services at a lower price point — they should try to grow their new business offshore without disrupting their existing business at home. That way, they can keep all their existing employees and still offer new products and services.
IBD: OffshoreView is mostly focused on India, but isn't China building a huge outsourcing base as well?
Guerster: I haven't spent as much time in China due to having a larger contact base in India. But China is clearly a big force in every aspect of offshore development, both for manufacturing and business processes.
India is ahead of China in the IT and call center market. India is the low-risk choice when it comes to offshore strategies. Pretty much all the global companies have operations based in India because there's a proven track record there. Plus the language is mostly English.
So China and India are the two behemoths. But Russian engineers are very strong in some areas such as voice processing and security. Israel is also an early market for high-tech and security work. And other places such as the Philippines have lots of English-speaking people, so they do well in call centers.
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