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Auditing Offshoring Projects

Save, Make, or Lose Money?

by John Berry, author of
"Offshoring Opportunities: Strategies and Tactics for Global Competitiveness"

Part 1 of 2

A business case establishes the roadmap for success from the offshoring initiative. An offshoring value audit represents the opposite end of the offshoring value life cycle — it is here where the organization discovers how much value, if any, the offshoring project actually created.

All offshoring projects involve investment of some sort, whether it takes the form of time investment by employees who would otherwise work on other productive projects or money expenditures to retain the services of an offshoring service provider. Real capital and other resources are at risk when organizations embark on an offshoring project. If companies go to the trouble of building a business case and forecast for the offshoring initiative, why not audit the results?

Most organizations assume that the value created will be obvious for everyone to see. While the value created may be obvious, say structural cost reductions through offshoring application development or call center operations, verifying through an audit that value from these initiatives has actually been created can help companies determine the how and why value emerged — insights that help managers better understand the costs and resources involved in executing those business processes in-house versus with an offshoring service provider.

That most organizations do not audit offshoring value, just as they do not audit the value from IT investment, can be attributed to many phenomena: a culture of indifference to the measurement of value, an indifference to the importance of value creation for shareholders, poor IT management practices (and poor returns from those investments). Many companies cannot be bothered with the effort it takes to audit the value created from offshoring. This is surprising given many company’s willingness to forklift out of the organization as fast as possible business processes viewed as operationally costly. Companies cannot wait to offshore business process cost centers. They are less enthused with the idea of learning about why the offshoring initiative succeeded or failed.

There are ways to conduct a consistent, repeatable offshoring investment audit and no one need fear being shot at dawn. One of the most powerful management practices employees can embrace is the capacity to learn and turn the learning process into improvements in how the company operates. Audits are an effective component of this corporate learning process. The benefits do not emerge from simply confirming that the offshoring returns match forecast but from taking remedial steps to fix the offshoring management operation should it turn out that the returns are less than planned. The act of investigating why some elements of the offshoring initiative are not returning the projected cost savings or increased revenue is the first step of the remediation process by which the organization figures out why the offshoring project is not delivering total value and, through this process of discovery, goes about fixing the problems so that maximum value is ultimately achieved.

So if organizations are going to invest the resources and effort in offshoring, they should be encouraged to operationalize a consistent, repeatable post-offshoring investment value audit capability. A value audit is useful because it answers such questions as: what costs emerged that were unanticipated? Why were the expenditures required? Did any additional unforeseen benefits emerge? What management process changes are likely to improve areas of sub-optimal performance? Was poor worker training the reason why the offshoring initiative did not return the benefits we had expected? What better decisions may have improved the offshoring initiative's payback period? You might obtain the answers to these questions without an audit but how many organizations would have bothered asking these questions in the first place?

The good news is that unlike IT value audits, offshoring value audits are probably easier to conduct. Some of the benefits of enterprise software are diffuse, usually indirect and hard to measure. An offshoring value audit provides a clearer measurement path because much of the cost/benefit impact is rolled up in what the service provider delivers versus the monthly cost of that service provider. Understanding the points of value in software might require identifying numerous systems from which data can be pulled for metrics calculation purposes. The service provider assumes the responsibility for resource allocation decisions which bear on whether some metric was achieved or not. In this way, the benefits from an offshoring initiative are more contained — either the service provider cut our costs or brought in revenue or it did not. For this reason, some organizations might argue there is little need for a value audit because the value is clear to the organization.

But again, this misses the point of the value audit function. While in IT the purpose of a value audit might be the discovery and validation of value, the purpose of an offshoring audit are these, in addition to, a deeper understanding of the management decisions which bear on value creation. How effective is the organization’s service level management? If the offshoring is captive, how effective is recruitment and retention at our in-country location?

What if companies don’t audit offshoring initiatives? Well, most companies don’t audit the value results from IT and there doesn’t seem to be any harm done. The salient question then becomes, is there possibly any causation between the lack of auditing IT investments and the lack of value created from those IT investments? Maybe, maybe not. Many managers will resist the argument that a connection exists. But can managers afford not to understand the drivers of value of any project — particularly offshoring — given its potential impact as well as risk?

Look for Part 2 in the next edition of Cincom Expert Access.

John Berry is a management consultant with extensive experience in helping organizations execute information technology strategies designed to deliver measurable value. He is the inventor of three distinct process-driven and structured methodologies that guide companies to reach optimal decisions in several areas of enterprise management. EV+2™ directs organizations to invest wisely in information technology through a combination of financial analysis, project prioritization techniques and post-investment auditing, which serves as a feedback loop for future investment decisions. EV+3™ is a set of tools to assist information technology vendors better articulate the value proposition of their products by using the language and techniques of financial analysis, an approach that has been described as “ROI Selling.” EVO™ is a comprehensive methodology that guides the organization through the complexities of offshoring from strategy development through vendor selection, transitioning and long-term service provider management. EVO is based upon Berry’s Offshoring Value Delivery Framework™, a roadmap for successful offshoring explained in detail in his upcoming book, "Offshoring Opportunities: Strategies and Tactics for Global Competitiveness," to be published by Wiley. Please visit his product website for further information on these innovative strategy and decision-making tools, http://www.nostrategies.com.

Berry has shared his ideas widely as an analyst with the Cutter Consortium and Gartner, as a columnist for InternetWeek and Computerworld and as a speaker at industry functions. In addition to the upcoming book on offshoring, he is the author of "Tangible Strategies for Intangible Assets" published by McGraw-Hill. He can be reached by e-mail or at 541.549.8964.

Copyright John Berry