To senior managers at a U.S. investment-management company, the decision at first seemed easy. Back-office financial operations such as payroll had become a costly distraction; why not simply outsource? But as company executives looked closely, they realized that offshoring to countries like India or the Philippines alone was not the answer: The processes themselves needed a significant overhaul.

The company — we’ll call it InvestCo — put a temporary hold on its outsourcing plans. Instead, it decided to benchmark its operations and ferret out potential savings, function-by-function. Topping the list of possibilities: Reducing the number of providers it used and improving co-ordination to strip out days of work.

Management ultimately identified 14 process redesign initiatives and nine structural changes that consolidated and standardized procedures, automated inefficient manual steps, and introduced new incentives to reward productivity.

The exercise revealed which functions to outsource and which to keep in-house. Moreover, it helped the company lay the foundation for a flexible, efficient global network ofcapabilities.
In the end, InvestCo transformed its back office from subpar to best-
in-class.

Resisting Instant Gratification
It’s understandable that managers reach for offshoring as a cure for their operational headaches, rather than probe into their organization to diagnose and correct shortcomings.

When Bain & Company examined outsourcing initiatives across manufacturing and services, we found up to 40 percent of a program’s benefits (as measured by ROI) came from changing attitudes and behaviors within the company. Firms that invest first in boosting the performance of current operations are in a better position to make smart, strategic decisions about what to outsource and how. Three steps can expose underlying issues that impede performance and help resolve them.

1. Revamp Business Processes 
Stripping out complexity and eliminating waste can result in significant cost reductions. However, to overcome deeper operational deficiencies, companies need to break down barriers that hold back information.

That’s precisely what Brother International, the Japanese industrial, home- and office-equipment manufacturer, did when it re-examined its frontline call-centers’ operations. Seven years ago, the U.S. unit of Brother International found itself buried in customer service requests. Most of the nearly 1.8 million calls its service centers received annually took too long to process and representatives couldn’t find customer profiles in online databases. But instead of misdiagnosing the trouble as simply a customer service problem and looking to offshore, executives dug deeper. They discovered that the insights gained from customer contacts could be shared more broadly in  order to improve marketing and product design. Brother International began by enhancing call-center procedures.

The division consolidated outdated paper manuals into an online directory and integrated its records into a robust customer relationship management (CRM) database. Within a year, product returns had fallen by a third.

What’s more, the time needed to resolve customer problems dropped by 43 seconds on an average, and the time required to train new service reps fell dramatically, resulting in substantial savings.

2. Reinforce Credibility and Trust
Companies often turn to specialized contractors to help them achieve challenging technical goals within tight budgets. But often reliance on outside suppliers masks dysfunctional relationships between departments and business units.At U.S. brokerage firm Charles Schwab, executives have viewed IT as a source of competitive advantage that enabled Schwab to deliver customized services to small investors at costs that the traditional full-service brokers couldn’t match. But while Schwab’s overall IT spending remained strong, pressure to deliver new applications meant less money to refresh infrastructure. By 2003, the firm’s IT efforts had drifted off the course. And when a major two-year initiative to develop a new portfolio-management system stalled, trust in the IT plunged.

Schwab launched a business-led IT project in 2004, putting the Individual Investor business unit — the group with the most to gain from the project’s successful completion — in charge. The new initiative attacked head-on the IT infrastructure clutter that had caused operating costs to rise and response time to slow. Schwab earmarked $50 million to migrate the processing of trades from the firm’s mainframe IT environment to a more flexible platform.

3. Find the Scale-economy Sweet Spot
Managers trying to improve operations in today’s customer-focused environment can find themselves squeezed between two goals: Pushing autonomy down to frontline teams and controlling costs. Companies can realize big economies of scale by consolidating local activities and handling them at the regional or global level. However, no re-jiggering warrants holding on to non-core operations when a third-party supplier can do the job more efficiently.

Knowing which way to go requires careful analysis across regions and product lines, before taking a decision.

Smart, Strategic Offshoring
If, after analyzing, you conclude that offshoring will provide additional benefits, the challenge will be to integrate the new operations seamlessly to maintain its consistency.

That’s the strategy a global computer-hardware and business-services firm we’ll call TechCo pursued when it decided to shift operations from its high-cost base in Germany to Poland. TechCo will use lower-cost workers in Poland to provide back-office HR and credit card processing services for customers in Western Europe. But it also plans to use its new low-cost location as a launch pad for growth in the new European Union member states of Central and Eastern Europe. To accomplish both the goals, TechCo will invest $50 million in over five years to hire and train 1,000 employees in the company’s distinctive corporate and brand identity.

Successful organizations thus keep it as a part of the change-management mix, continually re-evaluating how functions, processes, and site-selection and sourcing decisions fit together to create strategic advantages.

Rudy is a partner based in Bain & Company’s Chicago office, where he co-leads the firm’s Capability Sourcing Practice. Amit is a senior manager based in Bain’s New Delhi office and a member of the firm’s Technology Practice.