As the Canadian dollar rose last year, Oakville, Ont.-based data management firm Digital Connexxions Corp. saw its revenue decline. The problem: most of the firm’s clients are American publishers who pay in U.S. dollars. The loonie’s rise resulted in a foreign exchange hit of $800,000. With no control over topsy-turvy currency markets, says president and CEO Paul Westhorpe, “We needed to find a way to cut costs.”
Westhorpe’s way led him across the ocean with offshoring. In Mumbai, India, he found competent help to monitor his company’s 300 U.S.-based servers for $8,000 to $10,000 per employee per year — a savings of up to $40,000 per employee. “I can hire 11 people in India for the salary of two people in Toronto,” says Westhorpe.
Once the domain of large multinationals, offshoring has been moving down the business chain in recent years, largely because of declining prices for the technology used to manage distance relationships. “If you can afford a plane ticket a couple of times a year,” says Peter Thompson, president of Resource Information Systems (RIS), a Calgary-based firm that monitors and tunes software applications for other companies and has 12 employees in Romania, “you can afford to have an offshore location.”
What’s more, while manufacturers and IT firms once dominated offshoring, now everything from call-centre work, transcription services, accounting to high-level business analysis is being performed offshore.
Yet for all its promise, offshoring can be perilous — and not only for Canadian workers who may be displaced by foreign labor.
The reasons for looking further afield for workers are compelling, says Thompson, who started his Romanian operation nine months ago. Setting up an offshore office is not much different than setting up an office in Regina. Yet salaries for the programmers he hires in Romania are about a fifth of what he would pay in Canada. What’s more, to make the country more attractive to foreign companies, the Romanian government has declared IT salaries tax-free.
Cost savings is not the only reason for using offshore providers. As Thompson points out, his Romanian employees are hard-working and eager to get ahead: “Their English is good, and they’re one of the top countries in the world when it comes to computing science. We tell clients they can expect about a 50% savings all in.” That said, setting up an offshore office is not a venture to be undertaken lightly. When Dell Computers returned its business help desk from India to North America last year, it pointed out very graphically what can happen if you don’t get it right. Customers had been complaining that Dell’s Indian employees relied too heavily on scripted answers and didn’t have the expertise that business users required for complex computer problems. Offshoring, notes Frank Koelsch, president of outsourcing consultancy Everest Group Canada, “has a strong upside, but also very real risks and costs.” So how do you decide whether the benefits outweigh the costs for your company?
The first thing you should do is look closely at your whole operation, says Dmitri Buterin, president of Web design firm BonaSource, which has offices in Toronto and Russia. (Buterin was also keynote speaker at an offshoring seminar held by the Canada-Russia Business Forum last fall.) “For this to work, your internal processes and procedures have to be on a certain level,” he says. You need to describe your goals and the work you want performed clearly, know how much you’re willing to pay and be able to integrate your offshore and local operations. “If you are not organized internally,” says Buterin, “the offshore resources will not help you. You’ll have misunderstandings regarding the requirements and miscommunications about the plan.”
Simple transaction jobs such as data and forms processing, basic application development and even outbound telemarketing are easy to offshore, says Koelsch. Still, even complex functions such as engineering, testing and analysis can be successfully offshored — if you plan carefully.
Consider closely where to locate your offshore operations, suggests Thompson. RSI looked at Romania and India, he says, but opted for the former. Apart from the pool of cyber-whizzes, the time zone meshed better with Canada, and travel to Romania isn’t arduous.
Other factors to consider are the geopolitical stability of the country, its laws governing intellectual property rights and privacy, and the English-language skills of potential employees. Good sources of information may include other businesspeople, the consulates of the countries under consideration and the Canadian Trade Commission, which may be able to provide connections with businesspeople and professionals such as accountants and lawyers abroad.
Once you’ve settled on a location, you have to decide on whether you will outsource to an offshore provider or open your own branch office. A rule of thumb, according to Buterin: “If you set up an office, you can dictate the rules, but this is also a much bigger risk.” Test the waters first by setting up a partnership. If that works well, he says, an office might be the next step. Koelsch agrees: “The greater your inexperience, the greater the risk.”
Westhorpe can certainly attest to that. He thought he had a deal made in heaven when he signed up with Indian outsourcer Techintegral to monitor his company’s 300 U.S.-based servers, which manage databases and handle marketing and subscriptions for many large Canadian and U.S. magazines and newspapers. While the experience hasn’t been a total disappointment, he is reconsidering the relationship. “One of the frustrations we’ve found with [the Indian employees] is that if halfway through their day they run into a critical problem with the software, they’ll just stop,” he explains. “They’ll say, ‘We encountered this problem. We’re not sure what to do next, so let us know’.” Employees in the same time zone can just pick up the phone and ask for assistance, he says. But at 3 a.m., it’s difficult to reach a live person.
Neither do his Indian employees understand “how mission-critical the work they’re doing is.” That, in turn, generates frustration among Canadian employees, who feel their Indian counterparts can’t be trusted to do the job.
Indeed, says Koelsch, there’s so much hype about the benefits of offshoring “that most people don’t adequately assess the risks, their costs and the downside.” Cultural differences will come into play, points out Buterin. “Let’s say you are processing mortgage applications in Russia,” he says. “You might assume that everyone knows what a mortgage is. What you have to keep in mind is that nobody there ever did a mortgage application in their life.”
You also have to factor in transition costs, plane fares, office costs and duplication of work and technology because someone has to do the job at home while others are being trained overseas.
Both entrepreneurs and advisors agree that it helps to have a representative of your own overseas. Thompson’s first Romanian employee started the operation, filling out the necessary paperwork, making contact with competent professionals such as accountants and lawyers, and hiring the staff.
Westhorpe blames part of his discontent on the fact that his company has no local representative in India. “We really feel that they need to appoint somebody on their side to manage the relationship — a senior person who is directly responsible to us for the services.”
In the absence of such a rep, Digital Connexxions is considering alternatives. Will the work be coming home soon? Not likely, says Westhorpe. “We’re still committed to outsourcing. But we’re looking at China or the Philippines.”
© 2004 Camilla Cornell