Companies continue to pursue offshoring aggressively, moving operations to locations in the world where they can be conducted at lower cost, either by third parties or by their own efforts.
Between 2005 and 2008, the number of U.S. companies with an offshore-outsourcing strategy more than doubled, according to Duke Offshoring Research Network’s fifth annual report on offshoring trends. And very few U.S. companies plan to relocate activities back to the United States, the report claims.
In fact, 60 percent of companies currently offshoring say they have aggressive plans to expand existing activities, Duke Offshoring Research Network, in collaboration with The Conference Board, recently found.
Global management consulting firm A.T. Kearney reported similar findings in the latest edition of its Global Services Location Index (GSLI), which ranks 50 offshoring locations according to a composite of 43 measures of financial attractiveness, skills availability and business environment.
“While the global financial crisis has slowed recent offshoring moves, the percentage of companies’ staff offshore may very well increase as a result of the crisis,” A.T. Kearney said in mid May. “Layoffs at home are not translating to layoffs among offshore workers as companies seek to maintain service but reduce costs.”
According to A.T. Kearney, offshore facilities “tend to be more efficient because they are newer and lack years of inefficiencies often built up in onshore facilities.”
However, while many businesses today — in virtually every industry across the globe — see offshore outsourcing as an “if you don’t do it, you won’t survive” issue, the geography of offshoring is shifting.
In the past few years, even as their people-skills and business-environment scores have risen, the relative cost advantage of the leading offshore destinations has been deteriorating.
These key changes are “driving a dramatic shift in the geography of offshoring,” according to the GSLI.
“While cost remains a major factor in decisions about where to outsource, the quality of the labor pool is gaining importance,” the A.T. Kearney report, The Shifting Geography of Outsourcing, said. It is in this context that companies are viewing the labor market “through a global lens driven by talent shortages at home, particularly in higher, value-added functions,” Norbert Jorek, a partner with A.T. Kearney and managing director of the firm’s Global Business Policy Council, said in a statement. “In response, governments all over the world are investing in the human capital demanded by the offshoring industry.”
While India, China and Malaysia retain the top three spots they’ve occupied since the inaugural GSLI in 2004, the A.T. Kearney index underscored “a fundamental shift” that has taken place in the index, as “once strong Central European countries have yielded ground to countries in Asia, the Middle East and North Africa.”
A.T. Kearney also reports that the U.S. is the leader in the “people skills” category, and the combination of high unemployment and political pressure to create jobs is increasing interest in “onshoring” possibilities among smaller “tier II” cities such as San Antonio, Texas. Similar onshoring trends are evident in the United Kingdom, France and Germany, all of which rose in the GSLI.
As the dynamics of global offshoring shift, transformational changes can be harsh and deep as companies re-evaluate the political risks, labor arbitrage and skill requirements. This is particularly true in the context of the global economic downturn.
“Simply offshoring more functions isn’t the solution,” said Arie Lewin, professor of strategy and international business at Duke and director of the Center for International Business Education and Research. “To achieve real savings, companies need to get the process right.
“Successful companies direct their attention to risk management, establish corporate-wide resource centers, and avoid ‘reinventing the wheel’ for each new offshoring initiative,” Lewin continued.
Paul A. Laudicina, A.T. Kearney chairman and managing officer, agrees that there is a heightened awareness of risk.
In a statement in May, Laudicina said, “Risk management will take on new importance to protect global service delivery from interruption and ensure capabilities are strategically dispersed rather than concentrated in a few cost-effective locations.”
“Despite the complexities involved in offshoring, success follows from a simple if unacknowledged rule: How a company goes into offshoring determines what it will get out of it. Execution trumps all other factors — function, location and business model — in determining why some companies fail while others succeed,” A.T. Kearney stated in a separate report, titled In Offshoring, Execution is Everything (2007).
Based on survey responses, The Conference Board and the Duke Offshoring Research Network provide the following best practices gleaned from companies with successful strategies:
- Have a senior-level champion for offshoring efforts;
- Use a service provider selection model;
- Conduct onsite visits to providers;
- Use a master service agreement;
- Have internal stakeholder buy-in for offshoring; and
- Establish a global corporate offshoring resource center.
“Companies that have implemented a corporate-wide offshoring strategy often report significantly better performance in cost savings, meeting target service levels, improving relations with providers and overcoming internal resistance,” according to Ton Heijmen, senior advisor of outsourcing/offshoring at The Conference Board.
More than half the companies surveyed for the Duke University Center for International Business Education and Research and The Conference Board had a corporate offshoring strategy in place last year. This is up from 22 percent in 2005.
Offshoring Evolving at a Rapid Pace, Report Duke University and The Conference Board
The Conference Board and Duke Offshoring Research Network (Duke University Center for International Business Education and Research), Aug. 3, 2009
Offshoring Evolving at Rapid Pace
Duke Offshoring Research Network and The Conference Board, Aug. 3, 2009
The Shifting Geography of Offshoring: 2009 Global Services Location Index
A.T. Kearney, May 18, 2009
Geography of Offshoring is Shifting
A.T. Kearney, May 18, 2009
Executive Agenda: In Offshoring, Execution is Everything
A.T. Kearney, 2007 (Vol. X, No. 1)