I have been talking about the ongoing structural transformation of the US economy and how despite an across-the-board improvement in most macro-economic indicators, the jobs have not come back. It seems that we have done everything we could possibly do (I still find it amusing that some politicians and economists actually tried to sell tax cuts as a way to create jobs in the US) and offshoring continues to grow faster than ever. While offshoring is painful for my fellow Americans, I also believe that market forces are working at full speed and they are creating tremendous new business opportunities for enterprising people. (Related article: How to deal with structural changes in the American job market?)
Offshoring or outsourcing to offshore companies works
According to a Duke University/Archstone Consulting study that examined the results and offshoring initiatives of 90 large companies with average revenues of $21 billion, 72% of offshore implementations met or exceeded their expected savings, with 31% achieving their service level goals within the first five months. The results also indicated that more than 55% of the companies surveyed had cost savings expectations greater than 30% per year. What this says is that some projects have not gone well and some companies have brought back some of the offshore operations back home, but the cases are still few. Majority of offshore outsourcing operations have gone well, according to the study.
The study also revealed that offshore implementations are planned to grow by more than 50% over the next 18 to 36 months citing significant cost benefits as the No. 1 driver (93%) followed by demand for improved service levels (56 %). Now read the number carefully: 50% growth rate. It is no longer possible to say that we are starting off a small base. So, in other words, this is an amazing growth rate and clearly tells us how the job market in the US is transforming itself. (Related article: How to create jobs in America?)
Another major trend is the offshoring of higher value services. As everyone now knows, offshoring has gained a lot more attention this time because mostly white collar jobs have been offshored (there is hardly any opportunities left to offshore blue-collar jobs since we have already exhausted those by offshoring them for over three decades now). According to the study, while IT is the function most often offshored (66%), high value services like finance and
accounting (60%) engineering services (44%) and research (32%) are more often offshored than transaction-process services like human resources and procurement (24%).
And when it comes to the destination for offshore operations, while India is still the leader (80%) of offshore operations, only 52% of expansion plans with a specified location are being targeted for India, according to the study. Other countries that are growing in importance include: China, other Asian countries, the Philippines, Latin America and Canada/Mexico.
There is another aspect that I still have difficulty grasping and that is that companies are moving offshore to improve their service levels. Or in other words, companies are realizing that when they set up operations offshore, the service level actually goes up, which is contrary to anecdotal evidence that was presented by the media that service was poor, employees had difficulty with the language, etc., and what I would have expected. More than anything else, this is a very important finding and something to think about.
Finally, the study had another finding that should concern many Americans who are currently looking for a job. 75% of participants reported reaching targeted service levels within 12 months. From my work as a management consultant, this is among the fastest ROI metrics for any project that I am aware of.
So it is obvious that offshoring/outsourcing to offshore companies is unstoppable. The study showed that political backlash had little-to-no impact. Less than 5% postponed offshoring plans due to political backlash. In fact, 72% said it had no impact on their decision to offshore.
What does it mean for you?
- If you are unemployed or about to be unemployed, it is a good time to appreciate the power of market forces and develop an action plan for your future.
- If you are a business leader and have not yet offshored or outsourced to an offshore business, you might want to conduct a business analysis and benchmarking
exercise to assess if you are competitive in your space. Then you must make changes in your strategy accordingly. - As I have been saying all along, offshoring is something that we can do little about. Market forces are always more powerful than politicians and regulations. So it is best to embrace market forces and find out how to exploit them. Anne Fisher of Fortune actually argues that offshoring could actually boost the careers of Americans. Indeed, she is talking about the typical reader of Fortune, but she still has a point. Not all Americans may be able to find a job in China or India that makes sense for them, but there are new business opportunities that can be found if you go look. And while it helps to know Chinese, you don't need to do know an Indian language to serve the rapidly growing middle class in India, which actually enjoys English and American products. As an Indian friend of mine recently told me, "If American online shops could provide free shipping to India, their orders from India will explode!"
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