How Goes It With Off-shoring?

07/26/2007

Paul Munnis


Yesterday I attended an Information Week Seminar on off-shoring of jobs in order to see how it is going. The news is mostly bad for companies who choose this route.

Basically two types of off-shoring have been tried. One is called Captive off-shoring and the other is Third Party off-shoring. In captive off-shoring the originating American Company goes to a nation like India, obtains facilities, hires workers and managers, and installs needed infrastructure. They them move work to the offshore location and seek to operate as though it were a foreign owned plant reporting to Corporate Headquarters. In Third Party off-shoring they enter into contractual arrangements with a foreign owned supplier who then performs for profit.

There were several original motivations for off-shoring. The first was lower cost of operations. The second was to solve a talent problem in America caused by retiring Baby-Boomers and the small workforce behind them. Not only is there a lack of talent in America but the skills base is poor and the educational attainment is non-competitive. These are the two main reasons given for off-shoring today.

We all know there was a third reason too, CEO’s were operating under performance contracts and got bonuses for shipping work off-shore. Often they dumped the work, grabbed the bonus, and retired, leaving a new generation of workers to clean up the mess that these CEO’s created by their gold paved exit.

The nations were not only India, Pakistan, Bangladesh, China, Vietnam, Thailand, but also included the former Soviet Bloc nations like Poland, Hungary, Romania, Russia, Ukraine, and other such nations all seeking work to replace the collapse of the former Soviet Union. This has added a challenge to off-shore vending which is that political stability must be assured. As we are all a witness to – political stability is just not happening. The GOP has failed miserably at fostering world peace and world stability. American companies are paying for the failure.

Most companies are not realizing the vaunted cost savings that were promised. By the time they obtain buildings, pay permits, move management people and their families to run the captive facilities, hire local people, train them, set up the infrastructure, and begin operations they find themselves suffering quality problems and problems with stolen intellectual property, and poor productivity is the result. Some U.S. wives want out and hate their foreign assignments causing management attrition. So far they are finding that the cost of operations abroad is about the same as the cost of operations in America and in some cases it’s higher.

When it comes to talent and a trained labor pool, one executive said he pays his people on Friday, the job recruiters are outside his building at 5PM, they stop his workers and determine how much they were paid, they then offer them a better job if they show up at a rival’s place on Monday, plus they provide a 20% wage increase. So wage inflation is setting in. Also Mr. Bush has been devaluing the dollar and so the cost of operations is is rising because the dollar is simply worth less.

I have written other editorials dealing with off-shore quality problems and will not go into the subject except to point out that when quality suffers so do profits. That adds to the cost of foreign operations.

Computer Programming has not worked out that well in an off-shoring scenario and neither has IT support services. Call Centers are suffering from a backlash coming from Americans who first don’t want to be called, then object to the intrusion, then object to the sing-song voice, and then often there are culture clashes. Some people on “Do Not Call Lists” want to know why they are being called and the answer is that these Do Not Call Lists do not apply to India. I would also mention that Banks, especially those who moved data entry off-shore, have not been very happy with the results. Payment is often made on a piece-work basis, about $0.12 per customer entry, the result is that workers wanting to earn more do not care about accuracy, just volume.

Politics is a key factor as I mentioned earlier. Business can only be conducted successfully in a safe and tranquil environment. As Pakistan tests a missile that can reach their enemy in New Delhi and both India and Pakistan obtain nuclear weapons, and Bush’s foreign diplomacy is a failure across Asia, Europe, and with Russia, there is much concern about the future of out-sourcing. Indeed the whole argument for globalization is getting rocky.

Companies are caught in a dilemma. Outsourcing isn’t panning out and there is no turning back. Now what? Some mentioned a need for America to change its Immigration Policy while others shook their heads at the emotional aspects. Safer havens like Canada are being used while more and more the nations of Brazil, Venezuala, and other South American nations are being examined closely.