How to Manage an Offshore Relationship During a Recession

A Discussion with Rafiq Dossani, Senior Research Scholar at the Asia-Pacific Research Center, Stanford University: A Wipro Council for Industry Research Initiative

Last month’s Academic Thought Spot discussed how to manage an offshore relationship to reap the best possible rewards. There are four other managerial concerns during a recession, which significantly impact both the buyer and the service provider, according to Rafiq Dossani, senior research scholar at Stanford University’s Asia-Pacific Research Center.

Dossani says the original reason to outsource included cost savings. But other considerations may have been equally important or even paramount. For example, some buyers may have needed help achieving scale that they couldn’t do on their own. Or they needed assistance improving processes, making them as seamless as possible. Maybe they needed business analytics to get clearer insight into the actual inner workings of their business.

Now all that has changed given the world economy.

Managing the changing offshore relationship

Once a recession arrives, cost-cutting efforts change how managers think and operate. For example, layoffs may have cut the number of people at either the supplier or the governance team at home. Now, how does the manager get the job done as well with fewer people?

Dossani notes that all managers must build working relationships with their employees, whether they sit in a pen outside their offices or are eight time zones away. In good times, managers have the luxury of building these relationships slowly. They get to know their counterparts and learn how they make decisions.

In recessions, “there’s pressure to do this more quickly,” says Dossani.

In recessions “managers are less certain about the process.” He says it becomes more difficult for managers to determine how to divide up the work and choose what to send overseas.

“Managers have to be more careful to ensure they don’t lose control,” says the Stanford researcher. One way to shoulder this added burden is to “be informative about the work.” In good times buyers just share with their outsourcers what they need to know. “Now you have to tell them more to build trust. Building trust with a supplier,” he adds, “is a manager’s strategic duty.”

Offshore suppliers can help their recession-weary buyers by assigning managers “of very high quality,” says Dossani. If the offshore manager is clearly superior to the in-house employee the manager is used to working with, “it becomes easier for the manager to trust his overseas counterpart.” Dossani says this means offshore suppliers have to invest in top talent more than they did during good times.

Having top offshore employees has another benefit to the supplier, according to the Stanford researcher. “Their buyers appreciate the quality because they now don’t have the funds to pay for that kind of talent,” he says.

In good times managers may only send work offshore as employees leave the retained organization. Offshoring through attrition rarely causes a ripple. “In a recession that luxury disappears,” says Dossani. Now offshoring becomes “demotivating for the employees that remain because they constantly worry about losing their jobs.”

Innovation

Dossani points out innovation is a “complex process that requires considerable face-to-face interaction and an understanding of local markets.” During recessions buyers typically ask suppliers to take on more of the pieces that make up innovation.

The Stanford researcher says this change is beneficial for the supplier. “Now the buyer is inviting them to do work they would not have considered appropriate before,” he observes. However, these assignments are challenging because the offshore supplier has no real knowledge of the marketplace and has had no face-to-face interaction with company employees.

He suggests suppliers must be honest with their buyers and acknowledge doing innovative work is difficult for them to do for those two reasons. One of the ways to improve the success rate is to either send an offshore manager to the buyer to learn the market first hand or send an American to the offshore location to educate the supplier’s employees. Plan on staying for months, he says.

Offshore suppliers have one additional challenge on the innovation side. “Innovation is not really required for typical offshore work, but innovation is really moving up the value chain,” says Dossani. Once again, the supplier has to attract employees who are qualified to do this kind of work. His suggestion: replicate the buyer’s innovation team.

Governance

When it comes to the offshore relationship, Dossani says governance “is becoming an important issue” during this recession. He says relationships between buyers and sellers are usually metrics driven in good times, especially when the work involves routine back-office processes. “Buyers define the project and everybody gets to work,” he explains. The buyer typically doesn’t complete an in-depth due diligence of the supplier’s capabilities because it assumes those skills are table stakes.

But in recessionary times “a crisis can arise” because the buyers are forced to send mission-critical work to the supplier, too. Now the question is: can the supplier really do the work? The buyer better find out beforehand. Now more detailed due diligence is a must, notes Dossani.

Finally, the researcher says large buyers have preferred to use as many as four different suppliers, mainly to defer the risk. But in a recession governance becomes more important. Today most buyers don’t have the time to devote to governing a multitude of suppliers. “Companies are cutting the number of offshore suppliers they use in a recession,” he reports.

Engagement duration

Before this recession, managers typically sent work offshore for a two- to three-year period. “They figured they would reevaluate thereafter,” says Dossani. But capital costs become critical in a recession. “The U.S. manager is worried about investing in a new plant and equipment but needs new IT infrastructure or tools. He offshores that so the offshore supplier will share the cost. In the current environment he hopes the supplier will shoulder more of that burden,” he explains.

In return, however, the supplier will now demand a longer timeframe because it now needs more time to recoup its investment.

Lessons from the Outsourcing Journal:

• During a recession, buyers don’t have the luxury of time to build an offshore relationship with their counterparts.
• Offshore suppliers will have to up their game and hire top managers to build trust quickly. This will also enable them to move up the value chain and do innovative work.
• Buyers may reduce the number of offshore suppliers they use when it is too difficult to govern them appropriately. This is especially true during a recession.
• If offshore suppliers share in capital costs, they will likely require more than a three-year engagement.
• Buyers must do more due-diligence work before they send more mission-critical work to their offshore suppliers.

Wipro set up the Council for Industry Research, comprised of domain and technology experts from the organization, to address the needs of customers. It specifically looks at innovative strategies that will help them gain competitive advantage in the market. The Council in collaboration with leading academic institutions and industry bodies studies market trends to equip organizations with insights that facilitate their IT and business strategies. For more information on the Research Council visit www.wipro.com/industryresearch or email industry.research@wipro.com.