Offshore Location Strategy

Offshore Location Strategy

A low-cost offshore location strategy is a proven method to reduce expenses. However, it requires an upfront investment in staff, training, real estate and other infrastructure as well as one time severance cost. We generally utilize a benchmark of an 18–24 month payback period.

We group location strategies into two buckets: a “clean” drop and a “dirty” drop. A dirty drop moves a process as it currently exists and is effectively a salary arbitrage. A clean drop is moving a process AFTER it has been re-engineered. With a clean drop, an organization gets two levels of cost benefits; a more efficient process with reduced risk and salary arbitrage.

While a relocation strategy gives an organization immediate benefits through reduced cost, there are a number of risks including:

• Relative inflation rates — Public companies are required by the Securities and Exchange Commission to publish three years of financial data which is then used by investors and analysts. When a company moves functions from a country with a lower inflation rate to a country with a higher inflation rate (for example the US inflation rate is currently 2.54% and the inflation rate in India is currently 4.44% and highly volatile) expenses grow at a higher rate than they would have if kept in the home country effectively negating the positive comparative benefit past the three-year mark. Costs are also subject to fluctuating currency rates.
• Attrition Rates — are hidden costs in a low-cost location strategy. Attrition rates in financial services in the United States were 14.46% in 2017 (although we would argue attrition rates are lower in Corporate Banking functions) while attrition rates in 2016–2017 in India were 17.4% according to a Mercer study. High attrition rates translate to a loss in productivity due to lost production as well as recruiting and training costs.
• Managing Remote Staff — Many mid-level managers are ill prepared to manage remote staff and must adapt to a new management style. Similar to out-sourcing, one must learn to manage “outcomes” versus managing “people” and allow local management to manage people.
• Fractured Processes — Often times, an organization moves part of a process. Commonly the initial move is a part of the process requiring a lower skill level. If this is done tactically without a strategic roadmap, functions of a process may be scattered throughout the world resulting in a tremendous loss of institutional knowledge and a loss of an end to end view of the process.

In summary, a low-cost location strategy can be an excellent tactic to free up investment dollars to fund a true corporate transformation. The strategy requires a high degree of research, planning and project management with crisp execution to assure benefits are maximized while risk is mitigated. A low cost location strategy should not be a stand alone cost reduction initiative but one that is aligned and part of a firm’s overall strategic direction and aligned with the target operating model.