Modifying Outsourcing Expectations

Ann All

Rarely a week goes by without the release of a study attempting to assess the value -- or lack thereof -- of outsourcing.


The back-and-forth nature of these reports has always fascinated us. For every study that finds executives happy with outsourcing efforts and intending to expand them, there is another that says many companies prematurely cancel their outsourcing contracts.


Which studies are right? Our usual conclusion: To some degree, they all are. With a topic as charged as outsourcing, it's not surprising to get different answers. And with the constantly changing market, companies frequently rethink their outsourcing opinions and strategies.


A just-released report from the U.S. Conference Board, an outfit better known for producing the consumer confidence index and index of leading economic indicators, is especially interesting because it attempts to account for differences in productivity between U.S. workers and their counterparts in outsourcing hot spots like China and India.


The findings: While outsourcing offers definite economic advantages, they may not be as compelling as they first appear. Offshore workers tend to be less productive than U.S. workers. As their wages rise, as they inevitably do, what looked like a huge economic win suddenly becomes a smaller victory.


While Chinese and Indian manufacturing companies pay their workers just 2 percent to 3 percent of U.S. salaries, on average, their lower productivity levels mean the actual difference in labor costs is only about 20 percent.


China and India are the most competitive manufacturing labor markets, the Conference Board finds. Other locales didn't fare as well; it costs almost as much to employ a worker in Mexico as it does in the U.S., when productivity levels are considered.


So while it may certainly still be worthwhile to outsource, American companies may have to adjust their economic expectations.

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Add Comment      Leave a comment on this blog post
Oct 12, 2006 11:08 AM Ian Frith Ian Frith  says:
Outsourcing is and always will be an emotive subject.  However, having worked in this field, I feel that the real benefits and issues are very much clouded in mist and it depends upon your own position and experiences as to how you feel about it.Many of the mistakes I've seen are related to the outsourcer not fully understanding the outsourcee and vice versa.  This was even the case in a large, established and international company.The need for cultural awareness is paramount on both sides and time should be taken to fully understand the differences throughout the organisation, before any outsourcing is undertaken.  A lack of this understanding is a breeding ground for negativity within the ranks and uncertainty between the operational areas.Obviously this takes time and therefore companies are relectant to do this.  They also push delivery timescales, as they can see the attractive bottom line figures on the carefully prepared Buisness Cases and want to relaise these quickly, therefore training is scrimped upon.It is forgotten that the outsourcing company may have had many years to build experience in the product and tasks they are outsourcing and yet expect persons in another company to learn understand and deliver without an adequate support network.Also of a low priority appears to be the consideration that moving a task out of it's current environment may require a restructure to the business operation.  This can lead to a poorly intergrated service and/or increased cycle times.All of this leads to the ever increasin gap between the Business Heads reporting large profitable benefits against the background of poorly executed outsourcing leading to inefficient process and poor communication lines. Reply

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