When the world’s financial markets collapsed a few years ago, a giant wave of outsourcing swept through corporate America and moved knowledge-based jobs offshore. Years before, electronics manufacturing moved to Asia and less sophisticated manufacturing moved to low cost locations around the world. We've been working in a world of offshoring long enough to know that it just doesn't make sense anymore to build electronics and certain other goods in America any more. Once you've moved these things offshore, they can never come back again. Or can they?
A few years ago, analyst would have said it was impossible for high-technology products like Google’s tablet computer or industrial equipment from Caterpillar to return to America. Yet, both firms have committed to doing just that. At the same time, General Electric has made a billion-dollar commitment to bringing jobs back to America. Service jobs are also returning to America. Rather than being surprised, we should be expecting this, and much more, to be part of the wave of returning jobs.
When you outsource, whether it is on or offshore, you decide based on the conditions of the day. Your needs, and those economic conditions, change over time. A typical outsourcing contract is three to five years. Add to that the 1-3 years that it took to think about outsourcing, develop an RFP, select a vendor and sign a contract. When your outsourcing contract is over, the world is three to eight years later. Consider how different 2012 is from 2004. And you will have learned new facts from your outsourcing experience. Some things will have gone just as you expected, and some will not.
In the one and only vice-presidential debate of 2012, there was a stand-off between Biden and Ryan on alternative energy investments. Ryan said that four alternative energy programs failed, and that this was unacceptable. Biden countered that this was only 4 out of many investments, and that investment banks have a success rate of just 60%. Everyone can debate what is the right level of success for any portfolio of investments, but Biden did make a very good point. No one, no government or private firm, has ever run a large portfolio of projects where every project succeeds. There can be huge differences in how well two different portfolios operate, depending on how they are managed. However, every portfolio has failures. The same is true about America’s “portfolio” of offshoring. Each of these investments by corporate America had different motivations, and different level of outsourcing knowledge. Just as an investment professional can look through a financial portfolio and identify risks and make recommendations for improvements, the same can be done with your outsourcing portfolio. Consider the following factors for your portfolio:
GOALS: What were you trying to accomplish by outsourcing? You may have outsourced just a portion of business functions, and now you have comparative information between on and offshore. And your environment may have change significantly, requiring a different set of goals and a different operation to be successful.
METHODOLOGY: In the last few years, a lot of outsourcing was based on a need for rapid cost reduction, using total outsourcing to send entire business functions to a vendor. Not surprisingly, a lot of these projects didn't work as expected. McKinsey Consulting, the largest consulting firm in the world, tells us that only about 50% of outsourcing projects work. Total outsourcing in the IT world may have a success rate as low as 10%. Your choice of methods, not just locations, matter.
TIME-FRAME: What sort of a time-frame are you working with? Are you just concerned with your operation next year? Or is the plan for the next 3 years, or even 10 years? An outsourcing plan that is heavily weighted towards offshore may make sense for one or two years, but by year three or later this same plan may not deliver the same value to your operation. That value will rise or fall, depending on the time-frame you choose.
PROGRAM DATA: When you compare locations, what is the source of your data? We always need to start with historical data, but the data has changed dramatically in recent years, especially cost data. Make sure that your data is recent, and from a reliable source, and be ready to update it as your project progresses.
TRENDS: Don’t stop at current or historical data. You need to be able to project where you will be at the end of the contract, or sooner (especially if your contract has inflation or foreign exchange clauses). If your time-frame is more than that of the current contract, you also need to know if the project will continue to make sense when it’s time to renew the contract.
RISKS: With years of outsourcing experience, we now know the sort of risks to look for. Financial risks can come out of inflation, which is much higher offshore than in the US or Europe. The cost of space in typical US outsourcing location is far less than in most India, China, and other offshore locations. Now that locations in India and China have been outsourcing for years, the expectations of the labor markets have risen faster than wages. That doesn't merely raise costs, it makes production uncertain. For physical goods, you need to consider more than just the conditions in your work location, you need to understand the risks of the entire supply line back to your home market. Unfortunately, for some outsourcing firms that means dealing with warlord and pirates. Most of these risks are unknown to firms that are just becoming familiar with global outsourcing.
RATINGS: Once you have all of this information, how are you using it to use it to choose your location? Presented with the same information, different firms make different decisions. You need to dispassionately determine the factors that matter most to you (cost, control, time to start the program, level of risk, ability to scale, sustainability, etc.) Be realistic about how you value each factor. Some firms made the ability of the location or the vendor to service the firm globally a minimum requirement, but in the end only used that location to service one office for the firm. Don’t rate based on theories, rate based on your real needs.
When you objectively look at the value of each location, there are still plenty of reasons to offshore, but there are also a growing number of projects that can be outsourced closer to home. Moving work back onshore is one of the biggest, and fastest growing, trends in outsourcing. If you give a little thought to what your goals are and have access to up-to-date data, you too may become part of the wave of outsourcing to America!