As an owner of a small CPA Firm I have tested the waters over the past year outsourcing (also know as offshoring) certain marketing, sales, and IT functions to companies and individuals in India, Pakistan, Phillipines etc. I’m happy to say that I will never do it again. If you want quality, BUY AMERICAN!
My father always used to say “Buy the Best, You Will Never Regret It”.
I knew he was right before I tried this experiment, but did not know the magnitude. I should have known. I get so frustrated when I call tech support when my cable goes out and I get someone on the line whose first question is “Please check to see if your TV and Cable Box are plugged in”. ARGH! Now I bet the fixes the problem for .001% of all calls, but really gets my blood boiling as well as the other 99.99% of the folks calling. Not to mention I can’t buy anything these days that’s not made in China and falls apart literally the day after you take it out of the box.
There has been a lot of the discussion about Outsourcing vs. Offshoring. The differences between outsourcing locally and offshoring outside your home country are dramatic. The advent of modern electronic communications has allowed companies to efficiently source and manage labor all around the globe. This is one of the megatrends, if not the megatrend, of the current economic period we are living in.
But just because you can use labor halfway around the world doesn’t mean you should. This post is about the pros and cons of offshoring from an accounting and finance perspective. I’ll leave customer satisfaction issues to someone whose an expert in that field.
On the plus side, offshoring often offers considerable cost savings (at face value anyways). Labor costs in emerging markets are often a fraction of the labor costs in the developed world. And you can often tap into highly educated and skilled labor pools. The problem is, these folks follow scripts or repeatable task and are paid to think or comment when something is not working.
Let’s look at this from a numbers point of view. If I offshore a service for $5 an hour that would cost me $15 in the United States, that’s a great deal (financially speaking anyways). The problem I encountered is I often had the same work done three times before they got it right. So $5 x 3 = $15, same as the American cost of labor. Mind you, I’m not factoring it aggravation, customer dissatisfaction, productivity, brand perception, etc. There is an opportunity cost to each of these that I’m sure someone way smarter than me can figure out. But I bet when all is said and done, we’re losing money and more important, status as “World Class” leaders.
On the negative side (as if I have found a positive side yet), there are significant communication and management issues that arise when you have a team working half way around the world for you. Yes, you can Skype, IRC, Twitter, and IM all day long with your remote team. But often they want to be asleep when you want to be awake. Tech teams are well known for their participation in critical product/tech meetings with their US counterparts in the wee hours of the morning. They might be in the meetings, but you have to wonder if they are at their best.
But as problematic as the communications issues are, the management issues are even harder. You can outsource the management issues by hiring a firm to do your work for you. I am not a big fan of that approach, particularly for startups. I believe startups need to directly employ the people doing the most critical tasks. And for a startup, that includes things that are commonly offshored like software engineering and customer support. And even if you outsource the management to an offshore firm, you will have to manage that firm. And managing vendors is often harder than managing employees.
I have observed that hiring a local manager for a remote team is often the hardest thing to do. And you need a strong manager in place in your remote location if you are going to be successful. A weak manager of a remote team is almost always a disaster for your company. It causes delays and management messes that you will have to clean up.
The most reliable technique I have observed is to ask a trusted and experienced team member to go overseas and launch/manage the remote team. That is a big ask and often is not possible. But if you can make that work, it has the highest probability of success.
Speaking of culture, you can’t overemphasize what a big deal it is having multiple cultures in your company. Some cultures take it easy in the summer and work hard in the winter. Some cultures have different approaches to gender in the workplace. Some cultures value respect more than money. Some cultures value money more than respect. Multiple cultures can often create tensions between offices and teams. Managing all of this is hard and I have not seen many do it exceptionally well. But I have also observed that as this kind of organization structure gets more common, entrepreneurs and managers are getting better at handling cultural complexity.
The single most important thing you can do is get everyone, at least all the senior team members of the company, across all geographies, together on a regular basis. And I think it is not a good idea to always have the remote offices come to the home office. The home office needs to travel to the remote offices too.
As I said at the start of this post, being able to source and manage talent all across the globe may be the signature megatrend of the current economic period. It has far reaching consequences for companies of all shapes and sizes. For startups, it offers lower costs and at times access to excellent skills and talent. But it comes with great challenges and you should not undertake an offshoring exercise lightly.
In conclusion, I would need a year, a heavy duty spreadsheet, and a PC made in China to calculate all these teams managing other teams. Loss of productivity based on cultural or language barriers. Cost of flying and or relocating folks all over the globe to insure the entire company is all on the “same page”. I have not run the numbers, but I bet we’re not saving much and most important, losing American jobs.
I think I’ll offshore the financial analysis….
Gustavo A Viera CPA
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