The McKinsey Global Survey of Business Executives : Confidence Index, January 2007

Diversify locations

Many companies still view India as the only location for their offshoring requirements. Although it is perfectly reasonable to start by offshoring jobs to English-speaking countries, that won't suffice when companies truly seek to expand their offshore work. Some of them need offshore providers whose employees can speak languages other than English for activities such as customer service and contacts with suppliers. Others must ensure that business continues in the event of potential disruptions such as natural disasters, wars, or political unrest. Further, in India the number of employees providing offshore finance and accounting services has increased sixfold over the past six years. This dizzying pace of growth has begun to place a strain on the middle- and senior-management layers at many Indian finance-offshoring suppliers. Indeed, our analysis3 suggests that for various business-process-outsourcing segments, including finance and other functions, India will probably face a talent shortfall of up to 500,000 full-time-equivalent employees by 2010. (The analysis is based on the McKinsey Global Institute report, The Emerging Global Labor Market, available free of charge online.)

Genpact, the former GE subsidiary, is a good example of a company that has carefully crafted a multilocation model. It provides GE and other clients with finance and accounting services from five countries: China, Hungary, India, Mexico, and Romania. Similarly, P&G picked Costa Rica for its shared-services center in the Americas but turned to Newcastle and Manila to serve Europe and Asia, respectively.

Making a good match

For control and compliance reasons, some companies believe that they must set up their own company-owned and -operated-that is, captive-offshore centers. For some early movers (such as British Airways and GE), captive offshore finance and accounting operations made sense because in the past there was no capable vendor community.

An analysis of public data sources, however, reveals that of 30 companies4 that have embarked on new finance-offshoring efforts during the past two years, 26 have chosen to work with outsourcing providers. These providers offer faster service, using a more talented group of analysts at a sustainably lower cost than companies could realize by themselves. Indeed, our analysis5 shows that, on average, the total cost of providers is 30 percent lower than that of captive operations. Indeed, only the very best captive centers achieve similar-and sometimes better-levels of performance and cost.

Companies that decide to work with an offshore vendor would be well advised to evaluate their potential partners carefully to make sure they pick one that makes the right fit-strategically, operationally, and culturally. At this point, at least three kinds of providers are investing heavily to build their capabilities: former captives, global service providers, and service providers based in India. Each type of provider brings distinct strengths but also faces unique challenges (Exhibit 2).

Offshoring can give the finance function powerful benefits that go well beyond labor cost arbitrage. The design of offshoring efforts can make all the difference in how quickly and effectively companies can reap those benefits.

Getting started and staying with it

Offshoring can be a cornerstone of a sweeping effort to transform a company's finance function. A successful effort can take years to accomplish and requires significant investments of capital and resources. Executives who attempt such efforts should pay close attention to at least three critical elements of the execution plan.

1. CFO leadership. Offshoring never lies easily on the organizational palate. As with any transformation effort, top managers must continually reinforce their commitment to it. CFOs in particular should personally communicate their vision of offshoring as a commitment of the overall finance function and assume responsibility for staffing offshoring programs with the best internal and external talent available. Anything less is a recipe for failure. In our experience, companies that try a bottom-up approach-sending small projects offshore- never reap the full benefits of offshoring.
2. Risk analysis. A transformation program of the right scale and scope is not without risks: news of offshoring could increase a company's attrition rate and lower employee morale, to the detriment of service levels. Companies should meticulously assess the risks as part of their plans for offshoring- for example, the risks related to operations, political and legal developments, and threats to business continuity. This approach can help set the right expectations with onshore clients and allow the company to develop appropriate risk-mitigation plans. One leading European logistics business conducted a thorough assessment of risk for an offshoring project, for example. The assessment revealed more than 120 potential risks, including the possibility that onshore employees would leave faster than knowledge could be transferred offshore. The company then ranked these risks by their likelihood and severity and incorporated risk-mitigation plans into its overall implementation programs.
3. Governance and change management. In any offshoring effort, it's essential to build on existing governance structures rather than add more bureaucracy. The specific issues related to offshoring, however, are often new to the finance organization. Novel governance processes must be designed, for example, to revisit regularly the scope of the activities being offshored, to assess service levels and take corrective action, to review the financial charges between onshore and offshore units, and to identify opportunities for further performance improvements in the offshore centers (through benchmarking, for instance).

About the Authors

Michael Bloch is a partner in McKinsey's Paris office, Shankar Narayanan is a partner in the New Jersey office, and Ishaan Seth is an associate principal in the New York office.

This article was first published in the Spring 2007 issue of McKinsey on Finance. Visit McKinsey's corporate finance site to view the full issue

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