Lift-and-shift or transform-and-shift? In a global strategy, the right answer isn’t always one or the other. A blend of approaches will produce the greatest returns.

by Michel Janssen, Julio Ramirez, and Erik Dorr

The strategic alternatives for business process globalization (BPG) will range from “lifting and shifting” to “transforming and shifting.” Across the G&A functions, the former scenario represents a total cost savings value of $116.2 million for a Fortune 500 company, whereas “transform and shift” delivers $182.2 million. In a “transform and shift” scenario, $110.4 million savings are realized through transformation only, with the remaining $71.8 million through globalization. Consider just the context of the finance functions:
• A substantial amount of the total value for finance is dependent on reducing the labor headcount by executing best practices, thereby reducing the overall net realization of labor arbitrage.
• The value associated with transformation by implementing world-class processes totals $73.3 million, with an additional $11.2 million coming solely from labor arbitrage for the typical Fortune 500 company.

To optimize their globalization opportunities, companies should manage a portfolio of business processes combining elements of “lift and shift” with “transform and shift” strategies. The optimal approach depends on factors such as risk, complexity, and net present value (NPV).

Optimize the Balance
Recognition of performance improvement potential through business process globalization (BPG) has reached the corporate mainstream. Now that more conservative and risk-averse companies are looking to globalize, a more systematic approach for analysis of the opportunity is required. Organizations need better models for quantification, as well as insight into the implications of different globalization scenarios.

One of the questions companies should ask in the context of their BPG strategy is: “What is the optimal amount of process transformation needed before moving work offshore?”

At opposite ends of the globalization spectrum are two scenarios:
• “Lift and shift” (globalize with no transformation at all); and
• “Transform and shift” (transform the process to world-class performance level and then globalize).

These scenarios mark the two extremes on a continuum that contains an assortment of choices. In reality, no company will be able to “lift and shift” all of its G&A processes, nor can individual processes be lifted and shifted offshore exactly as is. As for the “transform and shift” scenario, organizations will always weigh the level of investment in transformation against any achievable short-term benefits they may capture by offshoring.

Fig. 2, calculated for a typical Fortune 500 company with $19 billion in revenue, quantifies the “lift and shift” and “transform and shift” scenarios for all G&A functions and underlying processes combined. Companies represented on the left, or “lift and shift” side, are harvesting the benefits of labor arbitrage. The total value of direct process cost savings for a typical Fortune 500 company in this scenario is $116.2 million.

Data on the right represents a pure “transform and shift” scenario. Here, the company first transforms the particular process to achieve world-class performance levels and then globalizes. Transformation typically involves complexity reduction through process redesign, automation, centralization, and consolidation. Processes that are not initially suitable for globalization because of their risk and complexity profile are first transformed so they can potentially be globalized.

The estimated value of the “transform and shift” scenario is $110.4 million through initial transformation, and another $71.8 million through subsequent globalization. Although the combined value of $182.2 million exceeds the “lift and shift” value, the cost of realizing these savings will be higher. “Transform and shift” does not guarantee higher NPV.

Companies should be aware that in a “transform and shift” scenario, savings take longer to materialize. However, the end result of this strategy is typically a more optimized global process and higher levels of process effectiveness.

In reality, a globalization strategy involves a portfolio of processes that will be transformed to various degrees before globalization, depending on NPV, risk, and complexity. The design and execution of this strategy across all G&A processes is a journey that will take companies between five and 10 years.

A G&A process portfolio for a specific company is characterized by a position on the “lift and shift” to “transform and shift” continuum, as shown as “Company ABC” in Fig. 1. As companies go through the journey, gradually globalizing more complex processes, they move to the right (Fig. 2).

Enterprise-level Scenarios
In one scenario, we compared the BPG profile of various G&A functions to determine the basis for further analysis and, ultimately, translate into a strategy defined at the process and sub-process levels. In our analysis, we have broken down the finance, HR, and procurement functions into “transactional” and “non-transactional.”

Not surprisingly, the “lift and shift” opportunity for the transactional processes exceeds the non-transactional processes in all three G&A functions. But other non-cost performance metrics may be impacted in a “lift and shift” scenario as well. For example, moving a process to India may affect error rates, depending on process complexity and the capability of the offshore service center. In this example, the total value of the opportunity is $116.2 million: IT represents close to 50 percent of that figure.

The second scenario involves transformation only (Fig. 3). For a typical Fortune 500 company, the total value of the transformation opportunity of the functions presented in Fig. 3 is $110.4 million—more than $73 million of that is in finance.

The process cost savings opportunity through transformation exceeds the globalization opportunity for all functions (transactional and non-transactional) except in IT, where the opportunity is really small. The transformation scenario actually presents a big picture view across all processes within a particular function, At this consolidated level, transformation generates more savings than globalization. However, for some underlying processes and sub-processes, globalization may still offer more process cost savings than just transformation. These are typically highly commoditized, transactional processes.

In the third scenario, companies realize the benefits of globalization after transformation. Note that after the transformation, the company will be operating at a higher level of performance than is in a “lift and shift” scenario. In this situation, processes will be more mature, more automated, and better documented. As a result, the company is less likely to run into scalability issues, a benefit that may mandate a “transform and shift” scenario for some processes.

For a Fortune 500 company, the globalization opportunity after transformation is $71.8 million. Fig. 3 shows how this opportunity breaks down by function. The reason why this opportunity is less than the $116.2 million globalization opportunity in a “lift and shift” scenario is because transformation initiatives increase productivity, resulting in fewer FTEs per unit of work left to globalize. Combined with the $110.4 million up front, the total opportunity for “transform and shift” is $182.2 million. Fig. 3 illustrates that the bulk of the globalization opportunity after transformation is still in IT.
What is leading the “lift and shift” vs. “transform and shift” decision? We reiterate that the impetus behind the “lift and shift” versus “transform and shift”
decision is complexity, risk, and NPV. To understand and manage a G&A globalization project portfolio, companies need to assess these factors at the process or sub-process level. Herein lies the challenge: to assess (sub-) processes this way, executives must have a deep understanding of the process. Also, to estimate the NPV of “lift and shift” versus “transform and shift,” leaders also need to understand the benefits and the cost side of the equation. This requires careful modeling and many assumptions about the causes of individual costs. Consequently, organizations will often resort to less sophisticated but more practical rules around BPG (and sourcing) decisions. These include:
• Any process that touches our strategic clients stays onshore and/or in house;
• For any transactional process that is non-differentiating, we will rigorously pursue efficiency optimization/cost minimization and offshore where we can; and
• Business processes slated for globalization will be consolidated in a shared-services organization.

The Hackett Group advocates a detailed analysis approach explicitly identifying drivers of risk, complexity, and NPV at the (sub-) process level. This increased level of sophistication of analysis is part of moving up the BPG maturity curve, and the only way to rationalize BPG strategy, including “lift and shift” versus “transform and shift”.

The implications for services globalization are complex and not easily solvable with one solution. The establishment of an outsourcing relationship or the establishment of an offshore insourcing option is most likely the beginning of the globalization journey for your firm. The key to success is to have the right strategic vision and the ability to step back from the day-to-day operations to understand what is happening in the big picture and how it will impact your organization during the next five to 10 years.

This article is excerpted research published by The Hackett Group. Michel Janssen is chief research officer, Julio Ramirez is senior business advisor, and Erik Dorr is senior research advisor for The Hackett Group.