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Articles - Publication Date 10.1.2004
Smart Outsourcing
It's more than just contracting with lower-labor cost offshore suppliers. Pay attention to hidden costs. And after optimizing your production processes, ask whether offshoring still makes sense.
By Traci Purdum and John Teresko
Wishing the advice he was getting were simpler and more decisive, Harry S. Truman expressed the desire to hear from a "one-handed" economist. The 33rd president of the United States would be dismayed and frustrated by outsourcing, a decidedly two-handed proposition -- especially when it comes to the matter of manufacturers shifting of jobs from the U.S. to such lower-wage countries as China
India and half a dozen places in Eastern and Central Europe, a practice that's become known as offshoring.
On the one hand, "there are genuine concerns that [U.S.] jobs are being lost to India and China," relates Sunder Kekre, a professor at Carnegie Mellon University's Tepper School of Business in Pittsburgh. "But on the other hand . . . companies are becoming global, and they will go to the best place where they can get the resources," he says. "The question is what is the net in terms of what we lose and what we gain [from] selling our products and services all over the world." A better question for competition-driven U.S. manufacturers is: "What constitutes smart outsourcing?"
There seems little doubt that manufacturing job shifting will continue from U.S. shores and borders to the rest of the world. "Industrial goods will travel the path consumer goods did over the past two decades," says the Boston Consulting Group. "Already in the United States, some 70% of footwear, 60% of audio and video equipment, and 45% of apparel come from low-cost countries." And the Boston-based management-consulting firm figures that industrial goods sourced beyond U.S. borders account for more than 10% of U.S. industrial consumption, and even in a flat economy would be growing at the rate of 30% per year. A recent survey of 500 senior finance and HR leaders in manufacturing and other companies by Lincolnshire, Ill.-based Hewitt Associates, shows the percentage of jobs being shifted will roughly double during the next three years, with an average of 13% of jobs already relocated and an additional 12% at each company being considered for relocation. "With more than three-fourths of companies indicating that their global sourcing arrangements are permanent, it's clear that global sourcing is a fundamental and permanent change in the way business is conducted," states Mark Arian, corporate restructuring and change practice leader for Hewitt.
But how strategically smart are they really being? "Outsourcing is said to be the answer, if only we knew what the question was," quips Paul Davies in his book, "What's This India Business?" (2004, Nicholas Brealey International).
Among the senior executives responding to the Hewitt survey, cost reduction is cited as the primary reason for shifting jobs from the U.S. However, "companies reap less savings from offshoring than expected due to hidden costs," states Hewitt's Arian. Among the people-related costs not sufficiently considered: training, taxes and the impact of plant shutdowns. "In the early rush to lower costs, companies have been grabbing people to fill seats where the supply of workers greatly exceeds demand. But demand will quickly catch up," says Arian. "As their operations mature, companies that have invested heavily in offshore markets will see projected profits disappear if they haven't fully examined issues around scaling, as well as future opportunities for labor arbitrage, developing leaders and retaining workers."
To minimize hidden costs and maximize return, Arian recommends companies give their HR professionals a seat at the global sourcing table to address such issues as skills and language requirements, labor costs in specific markets, alternative talent pools, and "workforce training, retention and change management at both ends of the global sourcing spectrum -- those being displaced and those receiving the work."
Consultant Tom Devane of Tom Devane & Associates, Downingtown, Pa., is not anti-offshoring. There will always be situations in which offshoring "is the most econom
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"Work hard to improve the efficiency of the process and to instill motivation in your people, and you may find that offshoring is not only unnecessary, but also undesirable."
-- Tom Devane, consultant
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