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When It Comes To Offshoring, Employees Are More Important Than Dollar Signs

Once seen as a way to reduce expenses, offshoring is now driven by new factors.

Once upon a time, offshoring was a way for companies to lower cost, thus increasing profit. Those days are fading.

Today’s manufacturing executive looks overseas not to reduce cost but to have access to a new, talented workforce. They are more concerned with building a global network than cutting expenses.

According to the Booz Allen Hamilton study, “Globalization of Engineering Services,” in 2005,  96 percent of respondents said that low cost was the driving force behind offshoring. That number is expected to decrease to 70 percent for 2010-2015. Other factors, such as time to market and quality of supply are expected to increase.
Offshoring drivers.
For larger chart, click here.

“In the old days, the primary role of outsourcing was to simply reduce cost in back – office functions like IT and commodity processes like payroll and call centers. Increasingly, however, companies are realizing that they need to tap into outsourcing – and especially offshoring- to not just reduce cost but also enhance their top line, i.e. trigger growth by getting more and better products to market faster,” said Ashok Divakaran, a principal in Booz Allen’s Chicago office.

Divakaran continued: “The outsourcing of R&D is particularly important in industries such as automotive, aerospace, consumer electronics, and pharmaceuticals. Companies are selectively outsourcing/offshoring key elements of their engineering and R&D to enable better-designed products to reach their target markets faster. This could be everything from car components to avionics to the clinical trials of a new drug.”

Even if some manufacturers are still clinging to the hope of low cost operations, pay raises for skilled overseas employees can balance that out. The Booz Allen Hamilton study adds, “As maturing offshoring locations move toward offering premium services, labor cost advantages are likely to diminish.”
R&D site drivers. For larger chart, click here.

That is not to say that lower cost is not a factor in the decision to outsource. Companies will always look to maximize profits. In developing areas, depending on the industry, cutting expenses is still a top reason. However, countries that are more fully developed, such as India and China, have the ability to offer premium services, or those that are more knowledge-based than the back-office processes that have historically comprised the bulk of what got outsourced. Language capabilities, cultural fit, and increasingly specialized skill-set requirements also need to be taken into account.

Take India, for instance. India was once under British control and benefited from the British education system. Over time, and combined with a growing technology sector in the 1980s, this has translated into the emergence of a highly-skilled group of employees well suited to supporting the needs of companies globally. This was accelerated by Western companies' use of the Indian tech industry to help solve the Y2K problem, and subsequently, by the emergence of the BPO (Business Process Outsourcing) industry and the establishment of captive centers by companies like GE and British Airways.

As Divakaran said, “India has a sweet spot of a large pool of educated people, functional skills, and very importantly, language skills that other countries may in the short term be hard-pressed to compete against.”

According to Romi Malhotra, managing director of Dell’s Indian operations, the company can "leverage a pool of extremely gifted workers and managers" in India.

In an interview with McKinsey on IT from McKinsey Global Institute, a research group that studies economic issues facing businesses and governments around the world, Dell Computer said that it is so impressed by the employees in India that it plans to double its workforce there during the next four years, increasing to more than 20,000 people by 2009.

Nine months ago, DuPont opened an R&D Center in Shanghai, where many DuPont businesses are located, with more than 100 scientists and technicians. It is the company’s third major research facility outside North America.

The facility was designed to provide support for research, applications development, training, technology transfer and licensing of DuPont technologies for China, Asia Pacific and global markets. The center will also provide an enhanced platform to enable technological exchanges and research collaborations between DuPont and leading Chinese and Asian universities and research institutes. The facility is part of an investment to date of more than $20 million.

“We see unique growth opportunities in Asia Pacific and particularly China. Our investment in the Shanghai R&D center is a commitment to the regional market. It enables us to better meet customers’ rapidly changing needs in the region and also globally,” said Douglas Muzyka, President of DuPont Greater China.

“The single largest driver is always talent: can we find enough talented people to set up a center?” said Malhotra. “Then you get down to other issues, such as incentives, infrastructure and other cost and quality issues.”

He added: “And at the end of the day, frankly, it doesn’t make a difference what the cost was. We used to say ‘Come for cost, stay for quality.’ But now, just as much it’s ‘Come for quality and stay for innovation.’”

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