Modifying Outsourcing Expectations

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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.