Make Outsourcing a Core Competency

Abstract

A revolution in communications is allowing capital and information to flow with the speed of light anywhere in the world, by-passing age-old regulatory, language and cultural barriers. Instantaneous access to remotely-located, low-cost manufacturing and service skills has become widely available, and is rapidly eroding the economic and financial sovereignty of the nation-state system. The result is that a global village without borders is rapidly emerging. This phenomenon will be disruptive for those many organizations that fail to adapt, but enormously productive for others that do. At the current rate of U.S. outsourcing, some 28 emerging countries could account for about half of U.S. manufacturing and a growing percentage of U.S. skilled services within the next decade. Through 2005, some 1.5 million jobs had been outsourced, and this number will likely exceed 4 million by 2008 (1). It may not be long before 10 percent of U.S. service jobs are outsourced, limited mainly by a lack of competence in English, a lack of local business knowledge, and an inability to be intimately involved in complex interactions between customers and employees. In addition, a growing war for talent will likely gradually push up wage rates in the developing countries, also limiting to some degree the rate of outsourcing. The advantage of outsourcing is significantly diminished when foreign wages rise above about 30 percent of U.S. wages. The critical delivery bridge for accessing low-labor-cost manufacturing and service skill jobs will increasingly be provided by new virtual companies, which have no need for expensive inventories, large sales forces, or heavy overhead expenses, and can have a physical presence in any given country. Existing U.S. and other organizations in the developed world can benefit from this phenomenon, but will have to restructure to do so. The current internally-integrated manufacturing, marketing and distribution form of management, a derivative of the Industrial Revolution era, may no longer suffice. Good models for this restructuring process have been demonstrated, but unfortunately have not yet been widely adopted. Skills Outsourcing Government regulations are a major driver of outsourced jobs. Temporary employment is an option that avoids some of the costs associated with these regulations, but outsourcing to a developing country provides additional savings. Government-mandated health care insurance and pension costs average $5,000 per employee, for companies with more than 500 employees. This amounts to a 25-percent surcharge on top of the average wage of $22,500 (1). Both temporary employment and outsourcing eliminate these costs, but outsourcing can also provide access to skilled services, often at about 25 percent of U.S. costs. Small business owners spend an average of 25 percent of their time on employment-related paperwork, involving some 60 reporting regulations, and on employee lawsuits (like sex harassment), which have doubled over the last decade (2). For some companies, people seem to have become our greatest liability. Currently, 28 developing low-wage countries have about 33 million young university-trained graduates with up to seven years of industrial experience. However, it is estimated that only about 13 percent of these (4.3 million), are considered by human resource managers to be qualified for service, because of deficiencies in language skills, interpersonal relations, work ethic, and a working knowledge of complex U.S. corporate operations (3). The percentage of qualified skills varies from sector to sector and country to country. About 50 percent of the engineers in Hungary and Poland might work effectively for a multinational company, but only about 10 percent in China and 25 percent in India may be qualified at the present time. Generalist and support staff skills account for about 26 million U. …