Managing outsourcing projects for success

The offshore shift of work poses challenges for many companies, but it remains a crucial process for corporate success. This paper examines the growing trend of outsourcing and provides guidance to the audience on avoiding common pitfalls. Based on the author’s extensive experience in managing projects in Asia and Latin America, a proven formula for project success is outlined. The paper highlights the complexities faced by project managers in outsourcing projects, which involve remote management, less developed organizations, and diverse cultures.

Outsourcing projects typically involve remote management, engagement with less developed organizations, and interaction with diverse cultures. These factors increase complexity and present greater challenges for project managers compared to purely domestic projects. This paper addresses the common challenges and pitfalls that arise in outsourcing projects and offers a time-tested outsourcing approach that has proven effective in low-cost locations such as China, India, Southeast Asia, and Latin America.

Overseas companies enjoy lower operational costs in addition to low direct labor costs. The factors driving outsourcing include lower overhead expenses, reduced front office personnel, less comprehensive and enforceable regulatory frameworks related to safety, labor, and environment, longer working hours of foreign workers in Asian countries (with a common 70+ hour work week), government incentives and financial assistance provided to local businesses in developing countries, lower material, rental, and real estate costs, the absence of capital investment in automation due to low labor rates, favorable currency exchange rates, the opportunity to sell products/services in the local market, and the need for North American companies to follow their customers overseas in order to provide local goods and services, as failure to do so may result in the loss of key customers.

During the outsourcing transition, organizations face numerous obstacles and hidden costs. Major challenges include a significant decrease in productivity, often by a factor of 2.4 in low-cost regions, with productivity levels taking over a year to reach 90% of pre-outsourcing levels. Most organizations underestimate this impact. Poor material control systems in overseas organizations lead to frequent product shortages and delayed deliveries. Time zone differences, such as the 12-13 hour gap between East Asia and North American Eastern Time, hinder critical communication for most of the workday, requiring early morning and night work and reducing free time. Most overseas businesses have inadequate accounting systems, making it difficult to obtain accurate financial data and assess the financial health of potential partners. Quality assurance and control systems are generally insufficient, resulting in noncompliant and defective product and service deliveries, requiring more costly incoming inspection and process monitoring by the receiver. Retaining skilled labor is challenging, with high turnover rates reaching as high as 80% in countries like India. Cultural and communication issues, particularly in diverse Asian cultures, can lead to difficulties and setbacks if cultural sensitivity is lacking. Late deliveries are common, especially during project startups, often necessitating costly air shipments and increasing freight costs by 5-9%. Unforeseen problems may require unexpected travel, driving up costs. Placing personnel overseas under expatriate packages can cost up to $500K/year. Inadequate resources to support both overseas and domestic operations simultaneously, along with a lack of necessary skills, pose additional challenges for some organizations, requiring the involvement of outside help or consultants, thereby adding to the overall cost.

The paper presents time-tested approaches that ensure outsourcing project success, with a strong emphasis on due diligence. Extensive research is essential to identify the optimal region and suitable business partner. Many organizations make the mistake of being infatuated with the lowest price alternative without considering the total cost, resulting in negative consequences. It is recommended to involve experts early in the project to avoid major problems and ensure success.