Outsourcing Sneaks Up The Corporate Ladder

Benefit of outsourcing.

Outsourcing has long moved beyond professional and technical jobs and is moving up the corporate ladder to all but the most senior executives. Moreover, pressures to move outsourced functions to cheaper locations are escalating. The most obvious benefit of outsourcing relates to the cost savings; the downside is the trauma of change.


Companies are outsourcing more and more professional and technical jobs to locations far from home.


Two distinct trends mark the growing move to outsource noncore functions to U.S.-based companies. First, companies that once outsourced only low-level positions are increasingly pushing outsourcing up the organization to all but the very top levels of management. Second, although most businesses are moving these jobs to lower-cost locations with close geographic proximity to the corporate base, pressures to move farther afield are mounting. As costs equalize across regions and nearby labor markets peter out, more organizations will be forced to join those that are already outsourcing offshore. Companies that retain all of their professional, managerial and technical jobs in-house will face huge competitive challenges from companies that are willing to ship large chunks of high-level work to India, the Philippines and other distant lands.


Peter Bendor-Samuel, CEO of the Outsourcing Center, a Dallas-based company that specializes in thought leadership, best practices and innovation in outsourcing, says that the biggest trend is toward outsourcing all but the highest executive positions in a number of corporate divisions. “Multinationals are moving quickly to outsourcing in real estate, human resources and finance,” Bendor-Samuel says. “Some companies have outsourced their entire finance function on a Pan-European or Pan-Latin American scale. Multinational firms are also outsourcing their legal function to international law firms.” These outsourcing arrangements reach up to the top levels of management, Bendor-Samuel notes. For example, a company may still have a vice president of HR or finance, but outsourced work might replace the people who once reported to that position.


Location, Location

“With outsourcing, we are at an interesting juncture or horizon beyond which there are many unknowns,” says Claude Hartridge, partner in charge of global business development in the business process outsourcing group at PricewaterhouseCoopers in London. “There are different horses for different courses; different multinationals have different approaches. We see the full spectrum, from companies that are focused on the greatest cost savings possible to companies that are far more conservative in the risks they are willing to bear. There will be a continuing focus on cost control, but each company takes a different approach to the issue.”


With the euro in place, both European companies and U.S. companies operating in Europe see a decreasing need to maintain separate back-office operations for business units in different European nations, Hartridge says. There is a growing willingness to centralize these functions in one lower-cost location. “But many of these companies still want an offshore location that is within fairly close proximity to their business operations,” he reports. “There is some reluctance, based on unnecessary fears, about moving to a more remote location for greater cost savings. Locations such as Portugal and Poland, which are more familiar environments, are considered safer. Finance executives have varying opinions and varying willingness to send jobs farther offshore.” With one large client, Hartridge notes, “we proposed a number of different locations for their shared services center. They chose Rotterdam over some lower-cost locations because they knew they would be more comfortable there. Now they are more willing to look into locations such as Krakòw and Lisbon. There is a broadening willingness to go farther.”


Confidence Factor

An underlying lack of confidence in offshore suppliers is a major deterrent in outsourcing professional and technical work. “We are doing pilots in India to demonstrate that work can be moved there with efficiency and accuracy,” Hartridge reports. “Over the next 18 to 48 months, we will see more work moving to these locations, but the higher-level jobs will always remain in Europe for interfacing with clients.”


Some companies may choose to outsource a single function in more than one location, Hartridge says. “For a large multinational company, even the finance function needs to operate on a 24×7 basis, and this may not be possible or cost-effective if it is based in one location. A company may need to base its finance function in a number of centers around the world to tap different industry-specific expertise in each location.”


According to Hartridge, companies already face labor shortages in some locations, such as Rotterdam, so it may not make sense to expand outsourcing arrangements in those areas. “For several years,” he says, “we’ve seen the need to move jobs to other locations. Companies that moved work to Dublin are now experiencing high turnover because of the increasingly tight labor market. There may be scenarios where professional-level jobs are moved to Rotterdam, with transaction-processing jobs moved farther afield, to India or the Philippines. Some positions, such as controller, may be moved to both Rotterdam and India. Or companies may co-locate professional jobs, with significant movement of professionals among different locations.”


Hartridge notes that the business process outsourcing (BPO) environment offers tremendous opportunities for professional growth. “We see people rotated between various locations. We have taken divisional CFOs and moved them into BPO, and we’ll always want to move these people around to make sure we get the best practices at each location. Companies will maintain the very senior levels of finance in-house.”

Types of Outsourcing:


Onshore, Offshore, Onshore

Some suppliers have been able to bridge the confidence gap with an onshore/offshore/onshore outsourcing model that allows clients to retain the comfort of using a supplier with U.S. offices while still reaping the cost savings of offshore outsourcing. Politec Inc., for example, is an offshore IT outsourcer of systems integration and software development that operated in Brazil for 30 years before it opened an office in Reston, Va., two years ago. The company has 3,200 employees, mostly based in Brazil. Its largest clients in the United States include U.S. government agencies and large health-care corporations. About half of the work that originates in the United States is executed at three tech centers in Brazil.


Dalton Luz, Politec’s CEO, believes that “it’s natural to find some resistance when you talk about offshore work. An educational process is required. We have tools that provide a level of comfort for clients, including Web monitoring that allows them to follow the progress on their projects so they don’t feel that their work is going into a black hole.” Politec president Robert Nichels says that the company works hard to dissipate client fears. “We leverage our U.S.-based work force in the initial phases of the project. Our methodology includes nine phases, with the first three completed in the U.S.,” he says. According to Nichels, Politec can offer cost savings of up to 50 percent or more, depending on the project. Beyond the attractive cost savings, Luz believes that offshore work is the only viable alternative given the huge labor shortage in the United States. “Apart from the economics of outsourcing,” Luz says, “organizations here simply cannot find the resources to complete projects.”


Offshore IT

“Finance executives must reconcile themselves to the fact that their companies will lose competitive advantage if they do not outsource offshore,” says Nandu Thondavadi, Ph.D., CEO and chairman of Schaumburg, Ill.-based Mascon Information Technologies Inc., an IT services and solutions provider. Mascon IT and its parent company, Mascon Global, based in Chennai, India, each employ 600 people. “U.S. executives cannot replicate here the technology talent that is available overseas in countries such as India,” says Thondavadi.


Mascon IT takes a multisite development approach to give its clients more confidence in the offshore segment of the work. U.S. companies outsource to Mascon IT, which provides an on-site U.S. project manager with whom the client can deal directly. Then Mascon IT divides the project into segments and ships certain segments to Mascon Global. As the client develops confidence, more of the project is moved offshore. “There is a hand-holding process, with lots of dialogue,” Thondavadi notes. Mascon Global’s 600 Indian employees train in India on Indian projects, then advance to working on U.S. projects executed in India. At some point, all of Mascon Global’s Indian employees complete a rotation in the United States, working directly with Mascon IT’s U.S. clients.


Thondavadi believes that “U.S. companies can basically be segmented into those which are not comfortable with outsourcing offshore and those which deliberately pursue offshore outsourcing, such as General Electric, which now mandates that a certain percentage of all work must be outsourced and a certain percentage of that must be done offshore. Finance executives know their business and marketing strategies — their core competencies — and must outsource the supporting technology. Because of the talent shortage and high costs in the U.S., they must create relationships with companies such as Mascon that lead the life of a dual culture.”


Some suppliers have not been able to convince their clients to use offshore outsourcing for high-level professional and technical work. Joe Koscik is co-CEO of MDI, an IT services company based in Atlanta with 400 consultants working for Fortune 1000 clients. “Beginning in late 1999,” he recalls, “our clients asked us to look at new development projects at lower costs. We located a partner in India that could perform all types of development projects.” MDI proposed an onshore/offshore/onshore paradigm and offered a blended rate to reflect the work done offshore at a lower cost.


“We pitched the plan to our clients but discovered that most were uncomfortable with development offshore, despite proposed cost savings,” Koscik says. “The companies that decided not to outsource offshore walked away from proposed cost savings of about 30 percent. It should have been an easy sale, but it wasn’t.” In some cases, the MDI clients who rejected offshore outsourcing decided to outsource to U.S. companies, “but in most cases,” Koscik reports, “they decided to manage it themselves but augmented their staffs with infusions of temporary talent.” Koscik believes it will be difficult for companies to continue to take this approach because of the critical talent shortage here.


Outsourcing vs. Technology

“In the 1990s,” says PricewaterhouseCoopers’ Hartridge, “it was relatively easy to select a technology and move ahead. Now it’s clear that there will be a shakeout among the e-enabling suppliers, and it is unclear who will win out. What follows from this uncertainty is a series of difficult decisions about whether to outsource back-office functions or wait to see if those functions will vaporize as new technology becomes available.”


Hartridge advises finance executives to perform a detailed cost-benefit analysis of keeping technology projects in-house vs. outsourcing. “The executive needs to be dispassionate about the choice and must base it on a careful cost-benefit analysis of the risks involved in moving work offshore. If the executive decides to move the work offshore, then he or she should do so without looking back. After 12 to 24 months, the executive should reevaluate the decision against Web enablement. The outsourcing arrangement should be flexible so that the company can modify it if change is needed.”


Most importantly, Hartridge says, the finance executive needs to have a clear strategy to determine which functions are core functions for the company and then prepare to migrate the rest to an alternative arrangement, whether that is outsourcing or a technology solution. “With outsourcing,” he says, “it comes down to whether the company is willing to embrace the trauma of change for the cost savings that are possible.”


A New Practice Makes Perfect

Toledo, Ohio-based Pilkington North America Inc., formerly Libbey-Owens-Ford Co., once handled the great bulk of its legal work in-house. The $1 billion-a-year subsidiary of Pilkington PLC, a U.K. company, manufactures glass and glazing products for building, automotive and technical markets. A year ago, Pilkington North America outsourced all its legal work to Pepper Hamilton LLP, which has 400 lawyers practicing in 10 U.S. offices and relations with cooperating law firms scattered around the world. Pepper Hamilton now handles all of Pilkington North America’s legal work in the United States, Canada, Jamaica and Mexico and some of its work in China and South America under an outsourcing agreement launched by Alan Graham, Pilkington North America’s general counsel, vice president for legal and corporate affairs, and secretary.


At the end of the first year of the outsourcing relationship, Pilkington had cut its legal costs by 40 percent. Beyond the significant cost savings, Graham says, the agreement provides three major advantages. “First, we are outsourcing under a fixed-fee arrangement, so we know what our costs are for each year and can plan accordingly. Secondly, we gained access to practitioners with breadth and experience, and we gained a scope of coverage that we could never have duplicated in-house. Finally, and perhaps most importantly, we built into the agreement a legal education program.”


Pepper Hamilton is now responsible for educating Pilkington employees on a number of legal issues, including antitrust, employment and immigration. “This allows our employees to make more intelligent business decisions. Through this program, our employees come to understand not only the relevant legal constraints, but also the reasoning behind these constraints. Our legal costs will decline further as this program matures.”


With the decision to outsource, Graham surrendered a significant portion of his span of control and drastically cut the number of employees reporting to him. “Spans of control should not be an issue in the outsourcing decision,” he says. “Optimizing shareholder value is the goal. With outsourcing, we’ve been able to meet our performance goals at a lower cost.” Graham reviews cases with the Pepper Hamilton lawyers biweekly.


Pilkington was careful in choosing its legal provider. “We put together requests for proposals (RFPs) and asked half a dozen law firms to participate,” Graham recalls. “We interviewed three or four. The interview process was pretty interesting because legal issues are really business problems, no matter how you dress them up, and we wanted a firm with the right perspective and business leadership.”


Pepper Hamilton handles Pilkington’s North American legal work with its own lawyers and with local law firms working under Pepper Hamilton. Some of the firm’s own lawyers with work experience in Mexico recently completed an acquisition there for Pilkington. Pilkington North America has responsibility for its parent company’s automotive divisions in South America and China, and Pepper Hamilton is on call for legal work arising in those areas.


The key to the success of the relationship, Graham says, “is that we get the firm’s top lawyers.” Although there is no formal agreement stating that Pepper Hamilton will always devote its top lawyers to Pilkington, Graham feels confident that the firm will continue to provide high-quality work. “The legal profession is so competitive that other law firms still call me for interviews,” Graham says. “Pepper Hamilton knows that it must continue to provide its top people or lose out to another law firm that will.”