The danger of offshore outsourcing
- 50% of all outsourcing arrangements are terminated or end in failure. Only 4% of 150 executives surveyed were "very satisfied" with their offshore relationships after the first year, 9% within the first 5 years and 23% after 5 years or more. Offshoring is a long term investment.
- Hidden costs of training and management are not clearly understood.
- Rapid turnover of employees as they pursue higher paying jobs using their newly acquired skills. This can be as high as 15-20 % each year. Engineers trained by US firms become targets of offshore companies looking to hire talent.
- US companies risk quality, efficiency and responsiveness as overseas vendors put aside their work when a more important client comes along. Also, offshore companies may "cut corners" to meet the price expectations of foreign customers. Engaging with such partners risks a negative customer reaction.
- Base skills may be in abundance but management skills is lacking especially in understanding US customer requirements. The time and energy to manage offshore activities are usually underestimated as well.
- Infrastructure limitations such as communication and electrical "blackouts" and a lack of a public transportation system to bring employees to the workplace. Communication breakdowns contribute significantly to failure of outsourcing projects.
- Large investment cost in real estate to house overseas operations because the cost of upgrading the infrastructure and because the labor pool tends to be found in large cities which in general have higher costs.
- Offshore engineering centers expose companies to certain risks such as intellectual property theft. Theft of intellectual property is due to a non-existent or lax legal system to enforce national and international laws. Therefore, recovering the cost of IP theft is also problematic.
- Arcane legals systems and different tax and regulatory requirements may drive up costs. It can be very difficult to lay off workers in overseas markets.
- Significant corruption in the public sector may prove to be too expensive to overcome.
- Salaries rising at 15-20%/year. Cost may no longer be the advantage it once was. Labor rates in some regions, e.g., Romania, went up 70% in one year.
- Frequent travel to offshore sites is required to inspect and correct offshore processes to assure that work is being performed to quality standards. This adds to cost.
- Most service jobs cannot be outsourced due to the loss of personal contact with customers. No Internet or video conference can replace personal interaction.
- Uncertainty due to political/social unrest such as the recent escalation of tensions between India and Pakistan can cause increased costs as companies develop and implement contingency plans.
- Barriers to collaboration such as language, culture and timezone reduce efficiency and negate some of the cost savings due to lower salaries. Therefore, significant effort must be spent to avoid problems that can arise due to differences in language and culture.
- Logistics cost are 3% of revenue in the US but according to studies by the Aberdeen Group Inc. of Boston they range from 6-12% of revenue due to the numerous "hands" through which all goods must pass.
- Lead times tend to be much longer than US based suppliers by almost 6 times on average. Long lead times (due to extended supply chains) lead to slow response to schedule changes.
- Loss of US wealth in the form of (i) know-how and skill sets as high skilled jobs move abroad as well as the cost incurred for re-training the domestic workforce, (ii) industrial infrastructure as US factories are closed and the exported capital to build new factories overseas.
- Requires significant infusion of know-how to assure quality.
- Customer perceptions of the"evil" of offshoring may drive a segment of the customer base away.
- US worker productivity often offset the cost savings of overseas operations.
- Offshoring can lead to the loss of technical competence and ultimately your ability to innovate. It can also lead to the loss of control of the design, production and logistics.
- Customers want to optimize the cost of ownership of a product and not just the purchase price. Offshoring may lower labor costs which effects the purchase price but service, logistics and other factors enter into the cost of ownership which may or may not be optimal using the offshore business model.
- US laws and policies which encourage offshoring may be coming to an end. For example, congressional representatives are concerned with and are therefore considering to end the practice of offsets, i.e. the industrial benefits that US firms provide to foreign governments as inducements for them to buy US military hardware. Thus the financial incentive to transfer engineering and manufacturing to overseas locations may vanish. In addition, congress is considering to limit the time the US military can lease foreign owned assets such as non-combat ships. This essentially ends a government subsidy of offshored engineering and manufacturing.
- It is advised not to offshore where your technology is clearly unique and strategic.
- It is advised not to offshore confidential methodologies to an outsourcing vendor which may become a future competitor.
- Companies should think twice of outsourcing IP to vendors where there is limited ability to police IP infringements.
- Even if an outsourcing contract states it is governed by US law, local laws can impact the costs of a deal. Contract enforcement in the courts of the offshore country may not be practical. Costs associated with setting up offshore agreements can be costly as they must specify in great detail service descriptions and levels as well as the costs associated with contract governance.
- Local laws in offshore countries may have requirements incompatible with US law especially in the area of personal and technical data.
- Many failures of outsourcing projects are related to the lack of formal plans for managing the relationship.
- The results from a recent survey of 100 of the largest employers in New York City shows that offshore outsourcing is not what it's "cracked up to be" especially when it comes to saving money on labor. This is because they fail to consider other costs such as planning, transition, startup, technology and communication, remote management and oversight.
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