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For companies under increasing pressure to deliver short-term cost savings, the so-called ‘promise’ of cost reduction by offshoring is very seductive.

Such a narrow view can lead to operational problems and in many cases threaten the long-term viability of a company.

Global talent pool 

Organisations that view offshoring simply as a cost cutting exercise are missing the real potential of the sourcing model. 

With access to a global talent pool, companies can use sourcing strategies to bring intellect to their business, improve quality of service and increase productivity. 

In the last few years, the trend towards offshoring has continued to gather pace.  

Most companies miss out on some of the most powerful benefits of offshoring, however, because they view it as an opportunity to cut costs in the short term rather than as a long-term strategic move to improve productivity and deliver innovation. 

Labour arbitrage, the process of profiting by buying labour in one market at a low price and being able to sell in another market at a higher price, has been the principal driver for offshoring a business process or capability.

While this cost rationale is very appealing, many companies who have chosen offshoring as a sourcing strategy have experienced significant productivity challenges. 

It is worth remembering that no matter how big the cost savings are it never makes sense to move to an offshore location unless the operational performance levels are at least equal to the existing facilities.

This is where intellectual arbitrage really comes into play as it focuses on how to achieve a far superior outcome, a lot faster, for a price the company can afford to pay.

It is all about using offshoring to gain access to distinctive skills and higher quality servicing with the opportunity to reduce operation costs, or at least keep them the same.

Why the right approach to sourcing is vital

We are in the middle of a process of fundamental social and economic reform, in which services are being industrialised in the same way as the manufacturing industry has been revolutionised in the past.

The transformation process is closely intertwined with technological innovation, which has initiated changes in attitude about how business can be conducted, and is producing a consumer base that is confident to shop around.

The impact of globalisation is being felt across every market sector and UK companies had better be prepared. 

Between 1940 and 1980 the basis of competition was determined largely by the assets a company owned, whether factories, infrastructures, raw materials or bank branches.

During the last two decades successful companies moved their focus from owning assets to owning capabilities – think of Tesco’s supply-chain management skills of recent years.

Now we are entering a third phase of competition in which companies will compete based on how skilfully they can exploit capabilities owned not just by themselves but also by suppliers.

Service delivery 

This approach focuses on the customer-centric service value chain; successful companies will be those able to draw upon the best global intellect and talent to support components of the chain and innovate service delivery.

Take this telemedicine scenario as an example. In the past, when a patient needed an X-ray, his GP would refer him to a hospital where a radiographer would perform the scan.

The film image would then be passed to a medical transcriber who would turn it into a printed report, while the X-ray film was sent to a medical records store somewhere in the hospital.

The report would be faxed or mailed to both the patient’s GP and the hospital doctor overseeing the patient’s care in the hospital.

Using today’s technology, the entire process can be redesigned.  The patient can be scanned at a location convenient for him: a mobile unit or a ‘cottage hospital’. 

The image then can be sent electronically to the radiologist who may be in a specialist centre thousands of miles away, as well as to the hospital and GP.