Timing and cost: Directors, accustomed to handling strategic issues, should make sure that management has considered all of the financial ramifications of moving operations offshore, not simply the projected cost savings. Such savings usually don't materialize for at least three quarters, and companies with shortterm liquidity problems must take care. Gary Wendt, the acclaimed ex-CEO of Conseco who earlier headed GE Capital, was hired to turn the ailing insurance and lending company around, and he aggressively bought an offshore vendor. However, Conseco failed to foresee the magnitude of its mounting problems from bad loans and heavy debts. Rather than buy a vendor, Conseco could have outsourced services, avoided investment costs, and frontloaded the benefits in a creatively structured deal with a vendor. The delay in realizing tangible savings from offshoring quickly contributed to the company's fate as the third largest bankruptcy in US history.

Assessing offshore operational issues

Using offshore services requires sophisticated, countryspecific risk analysis and mitigation along with a thorough understanding of vendor capabilities. Key offshore issues include:

Operational stability: Are you willing to relocate call centers halfway across the world in countries that historically lacked adequate telecom infrastructures? Although many such countries have significantly improved their telecommunications, you must also be sure that the vendor to whom you are outsourcing has the requisite knowledge of the technological issues and the ability to handle them. Can the vendor, for example, easily handle a sudden upsurge in calls from the US? In addition, other infrastructure, language and social and cultural issues may have risk implications.

Political stability and currency risk: Determining whether an offshore location has the kind of politically stable, business-friendly society that is essential for longterm success requires careful judgment. China, for example, has been a highly stable offshore location and is likely to remain so for many years to come. India and the Philippines, with their frequent changes of government, their frustrated resort to coalitions and their highly fractious political cultures, may appear somewhat more risky. In fact, despite the revolving-door governments, there has been no change in the direction of their economic policy: Both are open for business. By contrast, the risks in Malaysia during this time of anti-Western and anti-American terrorism are real and likely to increase. Contracts should also be carefully structured to mitigate currency risks-contracts can be hedged or denominated in dollars, which puts the currency risk on the vendor.

Sustainability of economic advantage: Offshore migration only makes sense when the relevant labor pool is widely available offshore at an appropriate price. Unless the labor pool remains large, the wage gap between the US and the offshore location could close. In Ireland, for example, per-capita income, once among the lowest in Europe, has doubled over the last decade. Coupled with the country's small labor pool, the rise in incomes has virtually wiped out the advantages of locating there. By contrast, the supply of labor in such countries as China, India and the Philippines is likely to remain plentiful for years to come.

A buy versus build decision

Offshore operations can include a wide range of organizational structures, depending on the level of ownership and control the company wants to retain. It is a structural decision that requires director oversight. Options include:

• Outsourcing to vendors: Simple outsourcing offers numerous advantages-no capital outlay, quick implementation and little government red tape.
• Vendors as strategic partners: In this arrangement, your company maintains equity options in the vendor's operations. The pros include minimal upfront cash commitment, but the potential upside benefit of the equity is partially offset by the difficulty in exiting the relationship.
• Joint venture: This familiar arrangement, in which your company and a partner create a separate operation and new legal entity, permits better control and provides more cost transparency and potentially lower costs. However, it may require some investment, and it runs the risk of conflict with the partner.
• Wholly owned dedicated facility: A wholly owned facility gives your company complete operational control and the entire benefit of the wage differential. But it is offset by a cost structure that is likely to be higher than a vendor’s.
• Wholly owned facility that insources third-party volume: The aim here is to create a new profit center. Such a facility can generate new revenues for your company, provide economies of scale, and create the potential for a windfall from an IPO or sale of the venture. However, this requires far more management time.