Offshoring: Obstruction or Opporunity?
There has been much controversy over offshoring. What is offshoring? Offshoring is “the outsourcing of manufacturing and services from domestic businesses to primarily low-wage markets” according to Nickels et al (2008, p. 81). The reason many companies engage in offshore outsourcing is to simply save money. Obviously a worker from China working at $56 a month is preferable to an American worker being paid twice as much for a day's work. Yet, offshoring is seen by trade protectionists as “disruptive to the US job market” and even “unethical” and “anti-American” to a few (Nickels, 2008, p. 81; Democratic Underground, 2005). Ultimately, for business leaders of today and tomorrow, offshoring is going be discussed inevitably and whether it to be an obstruction or an opportunity will depend on how it is implemented.
The primary reasons for offshoring is labor arbitrage, improved service and globalization. Labor arbitrage is a term for “taking advantage of wages that are cheaper elsewhere”(Ashley, 2008, p. 31). In India today, IT (information technology) professionals can easily be found and for a cheaper rate than those located in the United States. An A.T. Kearney Global Services report shows that in 2007, India ranked number one of “most attractive offshore service locations” (Harris, 2008). On a scale of one to ten, India ranked 7 for business environment, 5.5 for people and skills and most importantly 3 for costs, making it a close competitor to China's rating of 2.8 (Harris, 2008). Based on these statistics, Chris Harris, the author of the article “Offshore outsourcing statistics for services in 2007” concluded that “the smart money seems to be on the countries with abundant talent supply” (Harris, 2008). Both India and China are affordable alternatives and contain an adequate supply of educated people.
The second reason of offshore outsourcing is improved service. This can happen in two ways. The first way is that offshoring delegates less important functions to an offshore company which allows domestic employees to focus on customer service. According to callcentres.net, St. George Bank found that “outsourcing some of its IT functions to India allows more staff to focus on customer service” (Callcentres, 2008). Increased customer service results in more satisfied customers and thus, a greater retention of market share and profit. The second way is related to the first reason to offshore: cost savings. Manufacturing jobs can be done in China and India for a fraction of the cost in America. By saving money, companies can focus on providing the best quality service and reduce costs for consumers. Such tactics give companies a competitive advantage over those that do not realize the benefits of offshore outsourcing and is related the last but more important reason for offshoring.
As the world becomes increasingly interconnected by new information technology and greater production offshoring may become inevitable in the globalized economy. Global competition is stiff because the world is essentially a “6 billion customers” market (Nickels et al., 2008, p. 80). As barriers to entry continue to be broken down through agreements such as NAFTA, the North American Free Trade Agreement, companies will need to find a competitive advantage by all means possible. One of such means includes lowering costs and is achievable by offshoring to countries where wages are considerably lower than those in the United States. Companies that fail to respond to those who seek offshoring will eventually seek bankruptcy such as Levi Strauss & Co in 2004. Levi's had “produced more than 3.5 billion pairs of jeans in the more than one hundred and fifty years of existence” yet was forced into bankruptcy by “2.3 billion in debt” (Versluis, 2004). This amount of debt was only achievable because of it continued to let Walmart's outsourced but cheap products take over Levi's traditional market share. If companies intend to compete in the new global market, they must be prepared to differentiate and justify high costs or resort to offshoring to prevent being displaced by other more willing competitors.
Still, despite these benefits, many opponents of offshoring argue that offshored services lack cultural fit, end up costly due to public backlash or that cost reduction is actually not enough. At one time, Dell's call centers exemplified the first argument. Call centers were focused in India and many operators had heavy stereotypical Indian accents. Of course, customers became irritated at this especially when they expected clear advice and Dell lost the faith of many customers. Its actions gave Dell bad publicity and continued to add to the debate about offshoring. However, Dell is now starting to train its operators to “speak like Americans” and hopefully avoid alienating any more customers, present or future (Nickels et al, 2008, p. 82).
Dell's problems are part of larger issue that includes communication. International companies deal with many different cultures and languages. Communication may be hindered by the lack of adequate translation services and can serve to prevent efficiency. Culture is another a concern. What is acceptable in one culture may be illegal in another. Take for example the fact that “in Saudi Arabia, the consumption of alcohol is viewed as a violation of social norms and is punishable by imprisonment” (Jones, 2008, p. 236). Also, for Saudi Arabians, “Friday is the Islamic Sabbath. Thus, it would be impolite and inappropriate for a US manager to schedule a busy day of activities on a Friday.” (Jones et al, 2008, p. 240). Global companies should realize these potential hurdles and address them early.
An important consideration is the public backlash. Some people are opposed to offshoring because the idea of shifting jobs to America is unsavory. Furthermore, they do not appreciate the fact that “jobs are lost permanently and wages fall due to low-cost competition offshore” especially when “services make up more than half of American economy” (Nickels et al, 2008, p. 81 & 21). Sometimes in manufacturing situations, product quality may fall due to offshoring. One of the first words people think of when they see “Made in China” may be “cheap” and possibly “crappy” depending on the experiences with Chinese goods.
If incorrectly implemented, offshoring may not be appropriate for a company and could potentially end up costing rather than saving. Communication is a major concern in the global market and if it is not addressed early, it will make the entire system inefficient. At the same time, the customers should be considered. Companies must decide whether risking a public backlash is worth it. Further, they must also develop methods to maintain quality in their products and services to keep customer satisfaction up. Without much planning and too much speculation about assumed “cost savings” of offshoring, global companies will fail. Still, they must also not follow the fate of Levi-Strauss which got straddled with over $2 billion in debt for failing to adapt to competitors who were investing in offshoring. In an increasingly global environment, offshoring may help to keep a competitive edge. Though the decision to offshore or not should not be taken lightly, one should always remember that “There is no security on this earth. Only opportunity.” - Douglas MacArthur
References
Ashley, Ed. Outsourcing for Dummies. New York, New York: Wiley Publishing, 2008.
“Asian Contact Centre Industry Benchmarking Report Launch Events.” Contact News. 21 Dec. 2006. etalk. 13 July 2009 <http://www.callcentres.net
Harris, Chris. “Offshore outsourcing statistics for services in 2007.” Inventure Global. 22 Feb. 2008. 12 July 2009 <http://www.inventureglobal
Jones, Gareth R, and Jennifer M. George. Contemporary Management Fifth Edition. Boston, MA: McGraw Hill , 2008.
Nickels, William G., James M. McHugh, and Susan M. McHugh. Understanding Business . Singapore: McGraw Hill, 2008.
“Offshoring. Why it is not just immoral and unethical. But utterly illegal.” Democratic Underground. 13 July 2009 <http://www.democraticunder
Versluis, Arthur. “What Happened to Levi Strauss & Co.? .” Traditional Conservative. 13 July 2009 <http://www.traditionalcons
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