Offshore vs. onshore decision case: what framework to use?

operations strategy
Anonymous A asked on May 25, 2019

What framework should be used to tackle cases requiring to assess whether a client should offshore part of its production, i.e. what factors he should consider to decide whether to offshre part of its production or not, where to offshore and what percent of the product line should be offshored?

Thanks!

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on Jun 01, 2019
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on Jun 01, 2019
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These are the high-level topics you should cover. I can share a great article about this. Please let me know.


Differences in the Operating Model and Capabilities

Differences in the Financial Model

Differences in Risk Profiles

Cheers

Serhat

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Hi Serhat, may I ask you to send me the article you are mentioning?

Decision to offshore and onshore ( make or buy ) is governed by the basic principle of business economics across (a) Transaction/Agency Cost ( what's the cost arbtitrage ) and (b) Asset Specifivity ( how important is the function/asset to the business operations).

Keeping this princinple in mind one can develope a simple framework comprising of :

1. Cost Arbitrage : The cost benefits across offshore and onshore - Salary , Benefits, Taxes, Real Estate, etc. Calculate the cost benefits across offshore and onshore. Also take into account the expenese that would be incurred while closing/reducing operations inhouse or with the vendor.

2. Operations : (a) Activity Type : Core (high Skilled . - High Asset Specificity) / Transactional (Commoditized) - Asset is a commodity can be outsourced. This determines what % of activities can be outsourced.

(b) Governance : How and what will the governance model if operations are offshored. What will be the quality of services and support and how the parent compnay manage it.

3. Risks . : (a) Human Resources - Are required skill resources available in the outsourced geography and vendor

(b) Business Continutiy - You may include a PEST analysis of the destination country or financial and operatioanl competencies of the vendor

(c) Public Relations / Brand - Outsourcing may lead to firing of emplyees. What will be it's impact interms of brand image and public affairs.

(edited)

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Hi,

And what's the objective of the client and how he will measure success? That's the fundamental question and you can't build a structure without answering it

Best

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Hi Vlad, the client would like to assess whether offshoring might be an option to reduce costs and competitive pressure. Increased profitability and qualitative factors like volatility of demand, quality, lead time and cost of capital should be taken into consideration

(edited)