Neil McEwen of PA Consulting, an offshoring expert experienced in setting up service centres in Eastern Europe and India looks at the ‘shall I’ – ‘shan’t I’ arguments.

The terms ‘Offshoring’ and ‘Outsourcing’ have tended to be bundled together and viewed rather negatively of late, the rhetoric used in the recent US presidential election is a prime example. However, they are quite different, as many companies have chosen not to outsource their transactional HR activities but take advantage of cheap labour costs by moving HR work to ‘offshore locations.

The ‘why’ is fairly obvious. ‘All in’ labour costs in India and China are currently more than five times cheaper than in the USA and UK. Labour costs in the Czech Republic, Poland and Hungary are less than half the equivalent cost in Germany or France where employment costs are particularly high.

From a labour arbitrage perspective the case is compelling. While cost is the main driver for offshoring (PA Consulting Group 2004 Offshoring Survey of HR Director opinions), labour quality in Eastern Europe and India is also high, as a recent visit to a shared service centre in Budapest proved – 90% of the service centre staff had graduate qualifications and 95% spoke at least three languages!

China has also recently embarked on a huge English teaching programme to equip its people to work in and manage service centre operations and will in my opinion emerge as the country of ‘choice’ in some ten years time. The market is expanding and the implications of a global service economy, enabled by technology and communications cannot be ignored.

While we take it for granted that low-cost manufacturing is here to stay and accept that 90% of all toys are manufactured in China, we do not yet have the same acceptance that service activities can be delivered globally.

There is still a great deal of scepticism and ignorance of where to go for expert, impartial advice and support and a wealth of anecdotal evidence for poor service, lack of local knowledge, technical problems and data issues which are ‘trotted’ out to denigrate the offshoring model. There is also the very real problem, that of dealing with the inevitable job losses which offshoring creates, either in local employment ‘black spots’ or in some European economies where overall unemployment rates are relatively high.

So, if an HR Director wishes to contemplate ‘offshoring’ HR activities, then what are the actions which will need to be taken in order to deliver a successful offshoring model and avoid the pitfalls which await the unwary. Here are seven areas where the correct decisions and clear focus will help deliver success, in other words, a smooth transition and efficient operation which both delivers the initial business case and continuing customer satisfaction with the quality and accuracy of the service.

1. Manage stakeholders and expectations – offshoring can mean job losses and a view that the organisation is interested only in its shareholders, not its people. Therefore the expectations of the business and its people need to be managed effectively. Affected staff need to be dealt with sensitively and there must be a constant flow of communication around why the decision has been taken, what it means for people, how the company is going to support them through redundancy and what service levels customers will get in the future. The rule of thumb is to work out the intensity of communication required, triple it and you will be half way to getting the right level of communication and stakeholder engagement.

2. Achieve clarity of goals – it goes without saying that clarity of goals and outputs is essential. Points of accountability have to be crystal clear and there is a lot of work to be done in establishing internal service levels to deliver accuracy and timeliness as well as to manage hand-offs between the home and offshore locations and between service tiers in the HR operating model.

Service levels have to be monitored closely, initially on a daily basis to ensure common understanding of process definitions, and then through a common reporting format. Many service centres, for example, use a form of balanced score card to measure service levels, customer satisfaction, internal centre performance and cost.

3. Choose the delivery mechanism – you have two choices, set up your own ‘captive’ centre or find a third party provider to do it for you. The former is preferable as you have control over the centre, how it works and delivery of the correct service levels. Integration is also improved meaning that the culture in the centre matches the overall culture and values of your own organisation. However there are issues in doing this, most notably the need to incorporate yourself in the country of choice. Before you can begin to set up a centre, employ people and buy infrastructure in India you need to set up a legal entity and this can take a considerable amount of time, effort and energy for example.

4. Choose the ‘right’ activities – there is a risk associated with migrating HR processes offshore and generally the most effective offshored processes are the simple transactional and administrative ‘manufacturing’ processes associated with employee data management, payroll, benefits administration, training and compensation administration. Exploiting time zone differences to speed up response times in these areas can be a fruitful source of service level uplift. Contact centre operations are more difficult as they place the centre in direct customer contact and expose flaws in training and knowledge. Some organisations have chosen to keep contact centre operations in the home country to avoid this issue.

5. Managing technical issues – there are a variety of technical issues which have to be overcome. Infrastructure, bandwidth and good connectivity are essential in the chosen location. Eastern Europe has excellent bandwidth and connectivity and telephone costs in India have reduced substantially since the system was privatised but it is essential to have effective change control and disaster recovery procedures in place to manage local connection failures and potential service interruptions.

A key technical issue is to ensure data protection regulations are followed. There are generally no problems in taking employee data across national boundaries, provided that it is duplicate data ( the original data is kept on servers in the home country) and that effective firewalls are in place to protect data channels. In some European countries the Works Councils have to approve data transfer but this is an issue for effective stakeholder management and communication rather than a legal limitation.

6. Manage knowledge transfer – transferring knowledge and intellectual property to the offshore centre is an issue of careful planning and engagement. Respondents in the 2004 PA offshoring survey identified knowledge transfer as a major deterrent to offshoring.

It demands knowledge of the culture of the offshore country location to ensure that the right learning styles are adopted, considerable handholding in the early stages to build the correct level of understanding and a need to drive simplicity. In short all processes and procedures must be translated into simple, unambiguous language that a non-native speaker can manage and manipulate. This is time-consuming but has to be right. “HR speak” has no place in an offshore service centre.

7. Build a ‘one company’ model – the offshore organisation must be treated as an integral part of the total organisation with the same company culture and values as the ‘home’ organisation. In the set up period this means that offshore service centre management will need to be:

• assimilated into the company culture




• work in the same overall structure




• spend time in the home organisation




• work with their counterparts in the home organisation to build the working relationship




• agree how service levels will be delivered




• agree how disputes and issues will be managed

The local service centre staff will require substantial training in what is expected of them and what they should do to what standard. Team building is critical. One key point to remember is that you should try to build and manage the offshore service centre with as many local managers and staff as possible. The business case for offshoring will not stand the wholesale transfer of expatriate managers on expatriate packages.

In conclusion, sticking to the ‘seven step’ programme for successful offshoring will not guarantee you success. The devil is in the detail and how you manage the unforeseen as well as a rational programme of planning and transition. However the prize of more effective and efficient HR transactional service delivery for less cost is one worth exploring and one which more companies are now realising with highly satisfactory results.