It's Not Your Parent's Offshoring Anymore

With the offshoring of highly-skilled work comes worries of loss of managerial control.

According to a new study by Duke University and Booz Allen Hamilton, companies are moving sophisticated, mission-critical functions like product design and research and development to offshore locations like China and India, due to the highly skilled scientific and engineering workers that can be found in those areas.

Although companies are increasing the amount of high-skilled offshoring work, they are still concerned about the loss of managerial control that is intertwined with that sort of offshoring, the report adds.

One of the key points of the study is that the need to source talent globally is replacing low-skilled, low-cost labor as the driver in companies’ offshoring strategy. Almost three-quarters of the participating companies that are involved in offshoring said that “access to qualified personnel” was the most important driver of their offshoring strategy, and 70 percent said they select offshoring locations based on the availability of needed expertise.

“Companies in the advanced economies of the U.S. and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies. The leading-edge companies are developing new ways to source and manage talent globally. They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.” said Professor Arie Y. Lewin, director of Duke/CIBER (Center for Internatioal Business Education and Research).

The study also found that offshoring high-value tasks does not cause major job losses at home, but rather more net new jobs globally. Offshoring projects involving functions like research and development, sales and marketing, and product design and engineering resulted in an average of one job created in the U.S. per project, while domestic job loss for office and administrative functions averaged 23 jobs per project, the report said.

Moreover, as the participating companies increased the offshoring of high-end functions, the total number of jobs that they are replacing in the U.S. had dropped.

The report also notes that concerns regarding offshoring have shifted from factors like political backlash to concerns about the loss of managerial control and the impact of operating efficiency. According to the research, 48 percent of companies listed “loss of managerial” control as a major risk of offshoring, up 30 percent for the 2005 study results.

India is still the preferred destination for offshoring, the study found. China is becoming an important location for engineering and product development and procurement as companies are co-locating engineering groups with manufacturing operations, but India is still strongly favored.

The study adds that European firms see cultural differences as an offshoring risk, and U.S. firms are preoccupied with service quality. Thirty-eight percent of European companies saw cultural differences as a significant risk, while only 28 percent of U.S. companies did. In the U.S., 68 percent of companies saw service quality as a serious concern, versus 39 percent for European companies. However, 48 percent of the total respondents agreed that increased speed to market was a major factor in their offshoring decisions, a jump of 70 percent from last year.

In terms of size, small, entrepreneurial companies are more likely to offshore high-value jobs than large companies, and U.S. companies are increasingly turning to third-party providers instead of setting up their own offshoring operations, the study also notes. 

For more information, go to www.boozallen.com.

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