The crucial challenges of offshoring

Dec 08 2005 by Brian Amble Print This Article

The lure of potentially massive savings in wage and benefit costs may continue to fuel the global offshoring movement, but companies cannot remain blind to the wide range of people management issues this raises both overseas and at home.

According to a new report by The Conference Board, the attraction of hiring employees abroad at wage and salary multiples sharply lower than at home cannot hide the fact that offshoring poses risks as well as opportunities.

With payroll clerks in the U.S. earning $15 an hour but only $2 in India and average programmer in California earning $78,000 as opposed to just $11,000 for the same job in India, the economic argument for offshoring is obvious.

But as labour demand rises in offshoring markets, companies are wondering how long the opportunity will last and whether labour supply will continue to meet the growing demand.

Already, increases in demand for IT skills are driving up pay levels, especially in such centres as Bangalore and New Delhi in India.

Despite the increase in the number of highly-skilled workers in China, India, and other countries, serious educational constraints - high illiteracy rates, the lack of language proficiency, inadequate higher education - could easily dampen growth and reduce the attractiveness of certain offshore locations.

Meanwhile, so stark are wage disparities that critics warn that the mere threat of moving administrative jobs overseas can depress wages and any potential increases in income at home.

The mere threat of moving administrative jobs overseas can depress wages at home

As Ton Heijmen, Senior Advisor to The Conference Board on Offshoring and Outsourcing points out, such disparities risk leading to rising social tensions as a consequence of job losses and longer working hours.

The study, Aligning The Organization: Management and Human Resource Concerns, emphasises that companies need to look beyond wages to consider benefits, training and other costs before they outsource and also consider transportation, cultural and other expenses related to offshoring.

At home, the study argues, companies can quell some of the disruption springing from offshoring by designing plans to aid employees who lose their jobs to offshoring, overcoming resistance from disgruntled workers and maintaining both morale and a positive image among remaining employees.

"All of these groups must be considered if a company wants to protect its image as an employer of choice," Heijmen said.

"Meeting these and other challenges calls for innovative approaches and developing specific leadership qualities."

Organisations need to do their homework before offshoring, Heijmen said. Due diligence should include a basic familiarity with local employment law, particularly the requirements and obligations surrounding termination.

Companies should also know the standard contractual terms that apply, as well as the costs of hiring and firing and the procedures prospective vendors follow to screen potential employees, including background checks and references.

Likewise, project management skills and other management qualifications are essential for leaders of offshoring projects.

Offshoring executives should also be good integrators, a skill that requires expertise in conflict management and inspiring group and individual cooperation.

"One of the most important requirements for executives involved with offshoring is the ability to foster and maintain a spirit of trust," says Jan Koch, the principal author of the report.

Among the actions that companies can take to build this cooperation, Koch recommends that they managers be involved at all levels in important decisions, that companies promote an open culture in which people believe in their colleagues' and leaders' competence and that they be very aware of cross-cultural health, awareness, and cooperation issues.

"While manufacturing has a long history of being managed from afar as a discrete process, business processes and other services that touch many integral parts of a company's operations involve a higher degree of coordination and integration with different parts of the organization," Tom Heijmen said.

"In addition to operational issues, executives should consider the special processes they'll need to institute to manage people and projects, drive behaviour, and resolve conflicts half a world and many time zones away - regardless of the offshoring structure they choose."