Situation: A company has determined that market shifts off-shore have neutralized their strategy for the past two years. They need to find new markets that offer growth potential. How do you find and evaluate new markets?
Advice from the CEOs:
This is a classic competitive strategy challenge any time a company wants to expand within or beyond its core business. Michael Porter of the Harvard Business School is a top expert on competitive strategy. You can find talks that he has given on TED Talks and elsewhere on the Internet that can help guide your efforts.
Do a SWOT analysis. First, figure out your vision and analyze the strengths that you possess that will fulfill that vision. At the same time analyze your weaknesses to provide a counterpoint on what should not attempt to do. Then consider both threats and opportunities. Have these analyses in place before you expend major effort responding to or developing new opportunities. There are more opportunities out there that will end up as dead ends than there are profitable opportunities.
Don’t discount the expertise that you have developed over the years in your specialty. This is the area of your greatest profits both now and historically. It is likely to remain so in the future.
If you need additional resources to meet existing or new client demand – particularly if these involve activities that are less profitable to you – explore partnerships to access this expertise instead of trying to do everything yourself.
Situation: A company wants to add off-shore manufactures to its supply chain. This is a new experience and the CEO seeks guidance on how to negotiate supply agreements. They want win-win agreements with their new suppliers. How do you optimize supply agreements?
Advice from the CEOs:
No supplier relationship is risk-free, especially if you are a small company. Be sure to cover ownership of new IP developed during the relationship. For example, assure that the supplier adds no new developments without communicating these to you in writing. You may want to fund new developments selectively to assure protection of your IP. This is essential if you need to switch or add suppliers rapidly to maintain adequate supply.
A service agreement is not always about cost. It’s about deliverables, and quid pro quo is important.
Manage your key supplier relationships as diligently as you manage your key client relationships. They are equally critical.
In a contract negotiation between supplier and OEM or customer, both sides need to clarify customer needs and supplier capabilities. The greater the transparency on expectations, deliverables, and contingencies, the better the agreement and contract.
In negotiating an agreement with a Chinese company, make the enforcement jurisdiction either Hong Kong or Macao. Why? So that courts can enforce terms of the agreement on the Chinese party in the case of a dispute.
Post-termination obligations are a key to any negotiation – you want this clarified in advance.
Contracts serve two purposes: a legal tool, and a way to drive behavior. They provide an opportunity to assure that both parties are on the same page and, under the best circumstances, serve as process documents.
Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.
Situation: A company has an offshore operation with 10 engineers and a good General Manager. They will hire five more engineers in the next month. Their target billing rate is projected to be profitable when they reach 15 engineers. Their challenge is that they need to bear the investment loss to have an offshore capability, but are not sure that they’ll see a pay-off. How can you accelerate the offshore learning curve?
Advice from the CEOs:
Given the current situation, give yourself a window of 60 to 90 days. Create a go/no go decision point and let the General Manager know this. It will provide motivation for the off-shore operation to come up to speed faster.
Another company projected a 2 year break-even based on others’ experience in the geographic location.
They are nearing the 2-year point with the office up and running, on target with schedule, under a General Manager with proven experience.
They see payback on their initial investment at the 2.5 to 3 year point, and thereafter duplicating their payback every 6-12 months or better.
It is important not to undercharge for off-shore work.
One company charges $125 for work done in India that they would have charged at $180 if done in the US – a 29% discount. This is for high billing rates, with spreads even better for lower billing rate work.
If a client pushes for offshore rates, bargain for a lower initial discount for off-shore work compared with US-based work, but combine this with an offer to generously share additional discounts as the offshore location improves productivity.
Bottom Line: Stay the course. Long-term this investment will pay off.
Situation: A company is investigating off-shoring to lower costs. Trends are confusing with some companies returning operations to local production and others continuing to offshore. In addition, options include partnering with an existing company with expertise, or developing off-shore resources themselves. Does it still make sense to off-shore?
Advice from the CEOs:
Instead of looking at broad trends, narrow your focus to what other companies in your industry or closely related industries are doing. You can get this from industry publications and trade associations, as well as from other companies with whom you have personal relationships. This will help to clarify trends that potentially impact you.
Consider whether there are complimentary objectives that will influence your decision. For example, do you want to expand your market presence abroad and would off-shoring operations help you accomplish this?
Look at other US locations – for example the Midwest. Midwestern moms working from home provide high quality customer service for Southwest Airlines. Part- or flex-timers may be less expensive than full-timers.
Make this move in steps. Consider breaking up your needs into distinct components and outsourcing each component from a different provider or vendor. This will help to preserve your “secret sauce” and corporate IP resources from those who might want to steal it if they saw the whole picture.
Good off-shore functions utilize as little management as possible. Distinct tasks are easier to off-shore than complex processes.
Look at scalability issues – based on your own past experience.
Tie the resources that you need to what is readily available in different geographies.
Situation: A company is rapidly expanding and is considering the pros and cons of domestic versus off-shore expansion. One of the appeals of off-shore expansion is the availability of good talent at lower costs overseas. However there are appealing counterarguments for domestic expansion. What is your experience, and how would you advise this CEO?
Advice from the CEOs:
This is a challenging question. Based on others’ experience, success off-shoring depends on your ability to be disciplined and rigid in your design specs. If this is the case, then off-shoring can work. However, if either you or the partner changes the spec then delays and difficulties result. You have to make sure that the off-shore labor force possesses the skills that you require to successfully complete your projects and that your specs are sufficiently detailed to overcome challenges of language and understanding of usability.
Tightly specify each job that you want to have done off-shore, and develop performance metrics so that shortfalls will become obvious quickly.
Some large technology companies operate off-shore centers not to save costs, but because they actually find better talent overseas. India and China are producing excellent engineers, and given the size of the populations, the top percentile of talent can product a large number of talented people.
Some companies contract through off-shore entities, and tightly integrate the work of off-shore and domestic engineers. This is a perk for the off-shore engineers and helps to produce value.
One large company sends US Indian employees to India for 2-years stints to oversee their Indian operations.
Maintain strict hiring policies for your off-shore operations. Some companies have encountered difficulties when the managers of off-shore entities hired relatives because of family ties as opposed to talent or qualifications.
Over the past five years, the differential in pay for off-shore and domestic talent has shrunk. A large number of companies have found that domestic talent is easier to manage and in many cases is more productive. Further, there are no language challenges and time zone differences make working with domestic talent easier.
Key Words: Expansion, Domestic, Off-shore, Talent, Cost, Design, Spec, Skills, Integration, Hiring, Policy, Language, Time Zone