March 31, 2016 11:43 am | Updated 9 months ago.
By Arup Gupta
You cannot blame Shakespeare for the fallacies of Othello, and similarly you probably cannot blame the off-shoring model for the failings of the offshore vendor.
- The Fault Line: The wrong selection of off-shore vendor can potentially ambush an off-shoring initiative. One of the biggest banes in the off-shoring landscape has been the casual selection of vendors. Resultantly 30% of all off- shoring deals are not renewed on expiration (Manning et al., 2011).
- Risks involved in Off-shoring: Figure 1 below lists by magnitude the major challenges perceived by off-shoring clients. Among them, loss of service quality stands out as the most important risk. Other major risks include employee turnover offshore, operational efficiency, data security, and loss of managerial control. Most of these risks are related to the principal-agent problem, i.e. the challenge of, and the costs involved in, controlling and monitoring the performance of the off-shore vendor under conditions of asymmetric information (Jensen and Meckling 1976). In the context of offshore outsourcing, these managerial challenges have often been referred to as ‘hidden costs’ which may lessen or even diminish the very cost savings driving many outsourcing decisions (Aron and Singh 2005; Dibbern et al. 2008; Stringfellow et al. 2008). Interestingly, service providers similarly perceive achieving expected service quality as their major managerial challenge and as a major reason for termination of contracts (Couto et al. 2008).
- Proper Vendor Selection Emerges as the Key Variable: Researchers have suggested that correct vendor selection reduces the risk of a failing offshore business relationship (Khan et al., 2011; Manning, Lewin, & Schuerch, 2011; D. D. Wu, Zhang, Wu, & Olson, 2010). In IT-related offshore relationships, vendor development is necessary, which requires a considerable investment on the buyer side, and the cost of switching vendors may become high (Poston, Simon, & Jain, 2010).
- Multi Criteria Vendor Selection Typology: Increasing globalization with concomitantly increased interconnectivity and a resultant larger supply and demand base has changed how off-shore vendors are selected. A multi criteria vendor selection typology suggested by C. Bai and J. Sarkis, 2010has become a gold standard in both academics and practice.
The model comprises of three levels
- LEVEL 1 decision criteria: Organisational and Performance.
- LEVEL 2 decision criteria: Quality, Time, Flexibility, Innovativeness, Cost, Culture, Technology and Relationships.
- LEVEL 3 decision criteria: Further detailing of the Level 2 criteria
Importance (weights) of these factors in decision making differs by industry and process (BPO, KPO, Services etc) off-shored. An extensive number of studies on vendor selection has been done using the Bai and Sarkis typology and has been adopted by large off-shorers. For instance the empirical study ( Musaeus 2014) titled Prioritizing Offshore Vendor Selection Criteria for the North American Geospatial Industry gives the following weightings provided by client respondents in making vendor choice for Geospatial industry:
The top five critical factors which the study found for the geospatial industry include (a) product quality, (b) consistency of quality over time, (c) low initial price, (d) reputation and positive track record, and (e) use of new technologies and future capabilities. The accumulated weight of the top ranking five factors is 54.51%, which means that a buyer would normally prefer the provider scoring highest on all of these factors to all other providers. The study further breaks the evaluation parameters into three groups namely:
- “Must-have” or primary factors, which are the five highest ranking factors determining more than 50% of the evaluation outcome.
- “Help-to-win” or secondary factors with individual weights between 2.5 and 5%, which somehow have an influence on the total score and could collectively substitute one or two of the primary factors.
- “Decorative” or tertiary factors, which practically do not affect the decision.
5.Multi Criteria Decision Making Requires Specialised help
When evaluating proposals from vendors, SMEs often apply a list of evaluation criteria. However, the list is neither complete nor does it contain relative weights among criteria for scoring each vendor objectively. Often the process of selecting a vendor for offshore outsourcing involves an aggregation of the opinions of a number of internal experts, opinions that include their self-interests. Asymmetry of information is another pitfall wherein the decision makers are not aware of the entire vendor universe. An objective and streamlined process could save time and thereby reducing costs. In addition, having a list of prioritized criteria would ensure a degree of consistency and fairness in the application process. Specialist off-shoring consultants can assist potential and ongoing off-shoring clients to use a multi criteria approach in vendor selection thereby considerably minimizing the risk of jeopardizing an off-shoring initiative being implemented by wrong hands.
- The Stability of Offshore Outsourcing Relationships; The Role of Relation Specificity and Client Control, Stephan Manning, Arie Y Lewin, Marc Scheurch, 2011
- Prioritizing Offshore Vendor Selection Criteria for the North American Geospatial Industry , Phd Dissertation, 2014, Walden University
- Getting offshoring Right, Harvard Business Review, Aron and Singh, 2005
- Explaining Variations in Client Extra Costs Between Software Projects Offshored to India, Dibbern et al. 2008
- Offshoring 2.0, Contracting Knowledge and Innovation to Expand Global Capabilities, V Couto et al, 2008