Average achieved cost savings from offshore operations on the decline

Most US companies move their job functions overseas due to a shortage of skilled domestic talent – not cost cutting – as it is widely believed. Similarly, manufacturers and high-tech/telecommunication companies are less likely to establish offshore operations and are moving increasingly toward the use of third-party providers of offshore labour.

These are among the findings of the sixth annual study on corporations’ offshoring trends by Duke University’s Fuqua School of Business and The Conference Board, an independent research association. The study is part of ongoing research into the effects of offshoring trends on competitiveness and reflects the sentiments of business managers.

“Over half of the participants in our survey say offshoring has resulted in no change in the number of domestic jobs in most functions,” said Arie Lewin, Fuqua professor of strategy and international business. “In the US alone, the software sector has the highest ratio of offshore to domestic employees – almost 13 offshored jobs per 100 domestic jobs – may be a reflection of a scarcity of domestic science and engineering graduates in the US.”

The UAE is fast emerging as one of the key global destinations for offshoring ranking second only to Egypt in the Middle East, and 15 globally according Global Services Location Index (GSLI). India, China and Malaysia remain the top offshoring hot spots in the world.

According to survey respondents, the range of factors that influence their selection of an offshore site has been broadened to include the location of the best service provider and the quality of infrastructure. In spite of placing a high priority on cost savings and labour arbitrage, the survey finds average achieved cost savings offshore have declined at many companies.

The researchers said that survey participants have lower expectations than previous respondents for average cost savings in several offshoring functions. Contact Centres, IT and software development have seen the largest declines among all offshoring functions as companies new to offshoring discover a number of hidden costs involved, including expenses for training, staff recruitment and retention, as well as government and vendor relations. Conversely, average achieved savings have increased for administrative and innovative functions such as research and development and sales/marketing.

“The potential for cost reduction alone is no longer enough to justify moving operations,” said Ton Heijmen, senior advisor to The Conference Board. “One survey respondent noted it has taken his company several years to discover the impact of labour arbitrage disappears in fewer than three years. Companies are now shifting from cost-driven offshoring to a multidimensional value proposition in creating a global footprint.”

As companies expand offshoring activities by increasing scale or by offshoring more diverse and complex functions, most firms see a decline in the overall efficiency. This may be partially attributed to a loss of managerial control as offshoring operations are expanded, requiring companies to improve coordination and management of their global sourcing.
The ORN database includes cumulative responses collected through an annual survey conducted since 2004. As of November 2010, the database encompassed 2,000 companies (22 percent large, 35 percent mid-size and 43 percent small) and more than 4,300 different offshoring projects.

A published report on the research results is available for purchase. Contact jrussell@duke.edu for details.

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