Offshoring – it's a talent thing

Nov 02 2006 by Brian Amble Print This Article

It is no longer just call centre jobs and software development that is being moved to places such as China and India. Companies are increasingly offshoring sophisticated, mission-critical functions such as product design and research and development – largely because they can't find the skilled workers to do the job at home.

So it isn't cost–cutting that is driving the offshoring boom, a new study by Duke University and management consulting firm Booz Allen Hamilton argues, but shortages of highly skilled scientific and engineering workers.

What's more, says the report, "The Globalization of White-Collar Work," the assumption that offshoring is costing jobs in the U.S. and Europe is also flawed.

"No longer is offshoring all about moving jobs elsewhere," said the study, which examined 530 companies in the U.S. and Europe. "Increasingly, it's about sourcing talent everywhere."

In other words, the days of companies simply saving money by sending low-skill work to cheaper locations abroad are ending as the need to gain access to qualified personnel becomes the decisive factor in companies' offshoring strategy.

Nearly three-quarters of the companies that establish or expand product development offshore report that access to talent is the most important driver of their offshoring strategy, and almost seven out of 10 said that they now choose an offshoring location based on the availability of 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," said Duke University Professor Arie Y. Lewin, co-author of the report.

"They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.

Companies offshore because they can't get it at home; they are reacting to the steady decline in the supply of graduates
"Companies offshore because they can't get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1b quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates."

Half the companies questioned also identified increased speed to market as a significant driver in their offshoring decisions, an increase of almost 70 per cent in just one year and a clear sign that offshoring is not being used as merely a cost-reduction tool, but is now being used to achieve strategic business objectives.

Furthermore, the report argues, offshoring high-value tasks does not lead to major job losses at home, but instead creates more new jobs globally.

In the U.S, offshoring projects that involved "high-skilled" functions such as research and development, sales and marketing, product design and engineering resulted in an average of one job created in the U.S. per project.

In contrast, domestic job losses for office and administrative functions averages 23 jobs per project offshored.

And significantly, as organisations increase the offshoring of high-end functions, the number of overall jobs they are replacing at home is falling dramatically. For example, the average number of U.S. jobs lost per offshore project this years has dropped by 71 per cent on 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006).

At the same time, the average number of offshore employees per project grew by 62 percent from between 2005 and 2006.

"Clearly a new logic is driving decision-making as offshoring entails more highly skilled work," noted Vinay Couto, Vice President of Booz Allen. "It's less and less about low-skilled labor and more and more about accessing new pools of high-skilled talent."

In terms of locations, India remains the most preferred destination, with China emerging as an important location for engineering, product development and procurement and the Philippines becoming increasingly attractive for office administrative work and contact centres.

Nevertheless, this new offshoring dynamic has brought with it new problems, foremost of which is concern about the loss of managerial control that accompanies outsourcing functions close to the core business.

Loss of managerial control was seen as a major risk by half of the companies surveyed. In contrast, political backlash and political instability have steadily declined in importance as noteworthy risks, with less than a quarter viewing them as important.

"Many companies are struggling as they redesign their organisations and implement processes to support the rapid rise of offshoring," Couto said. "The obstacle to offshoring is more often inside a company than outside it."