Why Outsource?
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 economically viable solution," he says, naming call centers, with their simple processes, few handoffs and short duration of transactions as a prime example. "But too many manufacturers are offshoring in a 'knee-jerk' fashion," he asserts. "What many of them are discovering the hard way is that for an operation to work smoothly overseas, the business process must be in tip-top shape so it can be executed well by locals. And the irony is this: If a company gets the process into tip-top shape prior to moving it, it may find that it doesn't need to offshore after all!"
Before you commit to moving a segment of your corporation overseas, pour your energy into significantly improving it, says Devane. Specifically, he recommends combining "the best parts" of Lean Enterprise, Six Sigma and High-Performance Organizations to help eliminate waste, reduce process variation and redirect the work culture. You may find that your efforts make the operation so cost-effective and so high-quality that you don't have to send it overseas. And even if you do end up offshoring, you've created a process blueprint that will make the transition as quick, efficient and profitable as possible.
For instance, an optimization project at StorageTek, a maker of data storage systems and one of his clients, demonstrates the work that needs to be done before determining what outsourcing offers, says Devane. In two and a half years, beginning in 1998, the company went from a mean time-to-failure of 200 months to a mean time-to-failure that exceeded 2,000 months. Workmanship errors decreased by 90%, and scrap costs were reduced by 85%. Rework costs were reduced by 73% and process yields improved by 80%. The optimization process reduced manufacturing cost by 60%.
"Offshoring -- and even domestic outsourcing -- ultimately reflects management's commitment to business excellence," he contends. "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. And for manufacturers who've just assumed they must move overseas, knowing that an alternative just might exist for them will come as a huge relief."
