Outsourcing Guidelines For Success
Many business executives believe “offshoring” to be the destiny of any company that wants to remain competitive. Labor costs can be reduced by 25-30% or more, and companies across the country are doing it. How can responsible corporate officers not consider the offshoring option for their companies? But what are the real benefits and the pitfalls of offshoring? When does it make sense to pursue outsourcing, and how can you safely take advantage of lower cost resources in other countries without risk or loss of quality?
Background:
Moving jobs to cheaper work forces is nothing new. Even as recently as a few decades ago, significant segments of the manufacturing sector were transferred to locations such as Mexico, where labor was cheaper. Although the transfer caused some social turmoil, it was regarded as a growing pain on the way to a more sophisticated economy. Workers were retrained in new skills and assimilated into the “new” economy, based largely upon free trade and emerging technologies. It was reluctantly acknowledged that those jobs were gone forever, and that in the end both the workers and the economy would be better off.
A new variation on this familiar story occurred in the late 1990’s. As the technology boom reached its peak, demand for skilled IT workers was far exceeding supply, driving labor costs to unsustainable levels and leaving companies without personnel for new projects. With the Y2K crisis putting additional pressure on technology, companies began to look to other locations to fill some of the excess demand for IT workers.
India and other countries had a wealth of highly skilled workers willing to work for dramatically less than was demanded by comparably skilled American workers.
With the Y2K crisis, the current wave of IT and other white collar job sector offshoring was initiated.
“The new telecommunications technologies are now making possible this pitting of domestic workforces against foreign workforces just as for centuries before domestic products have been pitted against foreign products.”
Current State:
It is estimated by Goldman Sachs that since 2000 U.S. companies have sent 400,000 service jobs overseas, and the Information Technology Association of America (ITAA) believes that during the same period 104,000 technology jobs have moved overseas. Everyone agrees that this number will grow dramatically over the next five years. Some have estimated that as many as one million jobs may be sent to India alone by the end of the year, and that a million jobs a year may be lost to overseas locations for the next several years. But who is offshoring, what kinds of jobs are being transferred, and how is it working?
Forty percent of the Fortune 1000 firms have begun to offshore, according to Forrester Research, Inc., though 25 to 30 percent of these are offshoring on a limited basis, for small projects, spending no more than 5 percent of their IT budgets on offshore work. Only 5 to 10 percent are using offshoring for complex projects and mission-critical operations. However, this is likely to change.
Sixty-four percent of finance executives polled recently responded that they planned to do more offshoring in the next two years. A great portion of recently offshored jobs paid $50,000 or more before being transferred overseas. Although much of the offshoring has been in the information technology area, call centers, finance functions, data entry, and human resource operations have also been outsourced.
Benefits:
There is no doubt that the primary benefit of offshoring is the cost savings. The ITAA estimates that outsourcing currently saves U.S. companies about $7 billion and that by 2008 the number will climb to $20 billion. The savings from offshoring varies. In the same survey cited above, over forty percent surveyed said they were saving as much as twenty percent or more. Nearly the same number are saving from ten to twenty percent.
Hazards:
The savings do not tell the whole story, however. Offshoring does have hazards which companies considering the option must weigh.
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