To Offshore or Not to Offshore?

Let's start with the universal answer to all yes/no questions: It depends.  After going through several articles, hearing others’ opinions, and basing on personal experience, that is what I have inferred.  The good news is that there is a more concise answer to the question you’re probably thinking of now –what does it depend on? Before getting into further details, I must establish the difference between two terms that is mistakenly used interchangeably, outsourcing and offshoring.  Outsourcing refers to having certain time-consuming, mundane, or routine processes done by a third party or external agency so that the company can focus on core business strategies.  Offshoring occurs when these processes are outsourced outside the country [1].

How to know?

This seemingly small detail is what, in my opinion, makes all the difference.  Cultural (and sometimes language) barriers are just the tip of the iceberg.  There are factors that include, but do not limit to, costs, geographic location (time difference, natural disasters, etc.), scope definition, turnover rate, and labor expertise to consider when making this type of decision.   I was part of an offshoring team for a couple of years before coming here and was able to witness the impact that these factors have on the company’s business.  We were delivering services, as opposed to a tangible product, but I can still draw similarities between us and a factory that fabricates LCD screens for a phone.  Three of the most notable are:

1.        Costs: This is the first reason why a company decides to offshore part of the supply chain; they are looking to lower costs.  For us, HP decided to move their operations center to Panama because they wanted to please their customers with lower fees, but they couldn’t afford lower fees on the salaries they were paying Canadian operators.  The fact that we have the same currency was another plus. 
2.         Expertise: Another major influencing element is the local workforce’s expertise.  “How quickly can they be trained?” is one of the critical questions to ask.  Technical knowledge and language proficiency (when applicable) are also assessed and can ultimately change a company’s decision if their previous studies (assuming they did one first) do not show favorable results.
3.        Geographic location: The last decisive factor is location.  Companies are looking to lower costs, so traveling distances and shipping costs are also considered before making a decision.  In our case there were no goods to be transported, but the country is close enough for them to send trainers in and/or have operators fly out for training purposes.  How prone a country is to go through natural disasters that can impact operations is also assessed, and disaster recovery plans are designed in advance as prevision.

What’s happening now?

U.S. companies and manufacturers are rethinking this strategy now because they didn’t get the expected results, or because external factors changed the rules of the game.  There’s already a new buzzword for this behavior: reshoring. General Electric started moving their IT back to America because they were losing too much technical expertise from their offshored business, and the response/delivery time did not comply with their requirements [2].  This happened with one of the accounts supported by HP Panama; the supported technology (previously handled by operators with 20+ years of experience) was taught from scratch and started operating in less than 1 year.  It was no surprise that the number of incidents under our watch increased, which caused frustration among operators and resulted in higher attrition.  This in turn resulted in higher costs for HP as they had to constantly invest in training new hires while the “senior” operators struggled to adjust to the new system.  Support for that account was ultimately taken back to the original team in Canada. 

It is also worth mentioning that external factors are affecting companies’ decision to “reshore.” Labor wages increased, shipping costs (when applicable) increased, goods spend too much time in transit, and even factors like wars and natural disasters that heavily interrupt the supply chain are making companies retract from offshoring. 

Why does it depend?

The decision whether to offshore should not be taken lightly or without careful consideration.  Despite the negative arguments and published counter effects, it is not my intention to dissuade anyone from offshoring.  I believe this can be a valuable decision when thought strategically.  Think about the what, where, why, and how to offshore.  If the process to offshore has always been done by the main company, they cannot expect to move this effort overnight and have it run as smooth as before.  There needs to be clear definition of scope and instructions for the receiving part, accompanied with an understanding of why and how their contribution affects the company and the supply chain; plus constant quality checks (at least in the initial stages) to ensure a transparent process.  If the process to offshore is completely new, then there is even a greater opportunity to have the chain supplied without interruptions, because both parts (company and offshore site) can learn and grow together.

Offshoring can work, and it works both ways.  Take the Chinese company Lenovo for example.  The term offshoring carries a stereotype with it that implies that American companies offshore to other countries.  Well, Lenovo is challenging that notion by moving part of its production to America with the goal to customize computers for American consumers [2].  The turning point for them was realizing that their products spent at least 6 weeks on a ship, which slowed their consumer response.

The numbers [from the above figure] show that multinationals continue to reshore; however, this does not mean that they will somehow become “less global”. What they are trying to achieve a more even distribution of activities.  Is offshoring going away? Is reshoring the right move right now? What do you think?

References:

[1] http://www.flatworldsolutions.com/articles/top-ten-reasons-to-outsource.php

[2] http://www.economist.com/news/special-report/21569572-after-decades-sending-work-across-world-companies-are-rethinking-their-offshoring


By Elisa Taymes