Are you under pressure to improve margins so you can keep pace with private equity-backed competitors? Are you constantly feeling swamped? Are you finding it harder to recruit and retain good talent? Is client response time lagging? Then you might be a candidate for offshoring.
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Whether you’re a sole practitioner, small firm or larger firm, you can work with a third-party agency (aka outsourcing) or you can set up your own full-time team overseas (aka direct). Either way, offshoring can not only help you improve your margins and sanity. It will also allow you and your onshore team to spend more time with clients, focus on higher-value assignments, and improve overall turnaround time on engagements. Finally, offshoring provides staffing flexibility. Sometimes you need to let “dud” hires go or otherwise reduce your headcount. It’s much easier to terminate offshore workers than it is in the U.S., especially states like California, which have stringent worker protection rules.
But before you jump into the offshoring pool, or if you’ve recently jumped in, I urge you to set up benchmarks to track your progress and look for areas to improve. Hint: There’s a learning curve with all forms of offshoring and it can take a while to get full up to speed.
1. Turnaround time: This is something that needs to be tracked carefully when using offshore workers because cultural differences around “urgency” and response time can vary greatly. For routine tax prep, you should be getting the work back from your best overseas team members within two to three days and within four to five days from your average workers. If it’s taking longer, then offshore staff members need to be upskilled, replaced or you need to reset expectations more clearly
2. Margin: You should track your margin for every engagement. A lot of firms don’t do this. Margins should go up when offshoring because your overall labor costs are lower.
Note: U.S. managers must have the right incentives to send work offshore or else the process could break down. For instance, if your firm still uses the hourly billing model and a U.S. manager’s performance is based on their number of billable hours charged, why would they want to reduce billable hours on an engagement to send them offshore?
3. ROI: You need to allow at least two years for offshoring to pay off. There’s a learning curve on both sides. If you’re working with an agency, you should see savings of about 25% per employee after two years. If you are going direct, you should be saving about 50% per employee after two years. If you’re not coming close to those percentages, you need to revisit your processes or reach out to an outsourcing consultant for guidance.
Direct ownership monthly offshore compensation (USD)
Source: June15 Consulting Annual Offshore Compensation Survey. Estimates only. Offshore compensation includes salary and benefits.
4. Employee raises should come with a productivity boost: It’s great to give high-performing offshore workers a raise. Just make sure their productivity increases accordingly or else wages can spiral out of control. If you’re going to reward someone with a 10% raise, make sure you’re giving higher-value, more complex work to do so that your margins remain intact.
5. Onboarding time: If you’re bringing in very junior people overseas and trying to train them in your firm’s best practices, you should allow three to six months for them to be productive. A better strategy is not hiring entry-level workers fresh out of school. Instead, bring in overseas workers who have at least two years of working with a U.S.-based firm. That way you only have to train them on how you do things, not on how tax prep is done in general.
Hint: Creating a library of how-to training videos can be very helpful for getting offshore workers up to speed on how you do things. We’ve found that overseas workers tend to learn better from interactive videos than they do from static training manuals or from shadowing people. Pre-hire testing can also improve your average onboarding time, because it can spot problem candidates before they’re added to your payroll.
6. Utilization rate: In year one, look for a utilization rate that’s about two-thirds (66%) of what your U.S. team’s utilization rate is. In year two, your offshore team’s utilization rate should be about 80% of what your U.S. team’s utilization rate is. By year three, the offshore team’s utilization rate should be on par with the U.S. team’s utilization rate. For example, if your U.S team’s utilization rate averages 80%, then the offshore team should be at about 55% in year one (0.65 x 80%), 64% by year two (0.8 x 80%) and fully 80% by year three.
7. Recall rate: This measures the percentage of work sent offshore that gets pulled back to the U.S. before the offshore team can complete it. A high recall rate usually signals that something is broken in the process: unclear or uncommunicated deadlines on the U.S. side, offshore teams not starting or finishing work on time, or last-minute changes in client expectations. If your recall rate is above 10% that’s a red flag.
8. Non-delegation rate: This refers to the amount of eligible work you would have wanted to send to your offshore team but didn’t due to reasons like these:
- Lack of confidence that the offshore can get it done on time.
- Admin issues signal that you didn’t have time to confirm that the client signed Form 7216, which allows offshore workers to work on their return.
- Lack of incentive to send work offshore if the onshore team is bonused on billable hours.
Try to keep your non-delegation rate below 15% in year one, below 7% in year two and below 1% by year three.
9. Escalation time: This refers to how long it takes for your offshore team to make the right person in the U.S. aware of an issue — say a missing client document. If they haven’t escalated the issue to the right person within 48 hours, you increase the risk of missed deadlines, last-minute fire drills, and work being recalled back onshore. Shorter escalation times signal a healthier workflow, better communication, and higher trust between U.S. and offshore teams.
10. Employee turnover rate: This varies by country. In the Philippines, turnover may be less than 5%. Turnover is even lower in Argentina due to a struggling economy. Workers just feel lucky to have a job and appreciate being paid in U.S. dollars, which don’t deflate like Argentinian currency. In India, where workers have more opportunities, a good turnover rate is around 10% which includes both voluntary and involuntary turnover. And unlike in the U.S., turnover is not as big an issue in India. You can find someone the next day, because there’s such a big supply. Again, doing pre-hire testing and having a good video training library will speed up the onboarding time.
(For more about offshoring metrics, I’ll be leading a hands-on workshop at the
Offshoring done right can transform your firm’s efficiency and profitability. Track these ten metrics closely, stay patient through the learning curve, and you’ll be well-positioned to compete — and win — in today’s talent-constrained accounting landscape.
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