VideoEven before Ajit Singh made a formal announcement about his company's offshoring plans, employees knew what he would say. "The more I talked," recalls the CEO of Bioimagene, a maker of computer-aided diagnostic tools, "the more I think they could see my rationale."
True, some voiced concern about the restructuring scheme, most of which would play out 8,000 miles and nine time zones away from the company's Silicon Valley headquarters. There, in the city of Pune, India, the company employed dozens of software developers — about twice as many employees as in the United States — and they cost about 75% less than their American counterparts.
Those Indian employees had been with the company from its 2004 start, as a way to help Bioimagene stretch its initial funding as far as possible. Singh, a 20-year Siemens veteran who joined Bioimagene last fall, took immediate note of the Indian operation, making monthly visits there.
By December, with the economy sinking, Singh was ready to act. Five key employees would have to move halfway around the world. Another 65 would be let go. The decision? To close the company's Indian office, in order to become more competitive.
But wait. Wasn't that the same argument that so many companies — one-third of the Fortune 500, in fact — had given for transferring functions abroad in the first place? For about 10 years (earlier, in the case of manufacturers), U.S. businesses had been shipping jobs overseas as eagerly as a prize-hungry kid mails in box tops. From data-entry and customer-service jobs on up the value chain to human resources, engineering, and finance, offshoring became a fundamental tenet of globalization: Let the lower-wage workers overseas handle the labor-intensive stuff, leaving workers (albeit fewer of them) back home to lavish their talents on value-creating analytics.
Pressed for profits, what CFO could resist, especially when it promised quick cost reductions of 40% or more where large quantities of administrative work could be moved to low-cost locations, such as India and the Philippines? Put simply, "CFOs are looking to hold on to market share," says David Poole, head of Americas Business Process Outsourcing at Paris-based consulting firm Capgemini. "Huge shifts in markets are taking shape."
As formulas go, offshoring looked both elegant and simple. "Outsourcing was cost-cutting by a different name," says veteran industry strategist Ram Iyer, founder and president of The Midmarket Institute, an association in Princeton, New Jersey. "Once companies saw the savings they could achieve through labor arbitrage, the decision was made."
As wage inflation has set in — in India, annual raises of 15% have become the norm — some companies have been prompted to broaden their horizons. Fresh supplies of low-cost labor beckon from countries like the Philippines and China, to name but two of an exploding roster of options. Yet even when wages do move up, improving productivity and training keeps offshoring costs attractive. Therefore, "outsourcing isn't about making one decision anymore," says Poole "It's become a portfolio of choices."
And, potentially, a portfolio of headaches. Currency fluctuations, terrorist attacks, and financial fraud are but three complications to arise recently — and that's just in India. Making sense of the options "has become more demanding than ever," says Patrick Dupuis, CFO of Sitel, an outsourcing firm whose customers include many global giants. Below are some of the factors that any executive entering — or re-entering — the outsourcing realm ought to consider:
Put More Context Around Cost-Cutting
As recently as a year ago — or perhaps one should say particularly a year ago — cost-cutting was still the driving force behind offshoring.
But while some companies forged ahead, others focused on internal IT projects designed to lower costs, or moved toward shared-services models. Anupam Govil, chairman of the Global Sourcing Forum + Expo and CEO of Global Equations, an outsourcing advisory firm, believes that some companies are hesitating because they have become "a little more sensitive to the political aspects…. They don't want to be seen as taking jobs out of the U.S."
India's outsourcing industry is expected to grow at just 7% this year, compared with 16% last year and 35% in 2007. That may, in fact, be good news for clients in search of lower costs, because the decline in business may prompt offshore businesses to cut their rates. Consulting firm Gartner predicts that outsourcing prices will drop an average of 10% this year. "We have people coming in and saying, 'What can you do for me?'" says Sitel's Dupuis. "In the rich times, we were saving them enough." Now companies want assurances that prices are as low as they can go.
And yet there is also growing awareness that agreeing to specific cost-cutting goals isn't the hard part; maintaining them is. Whether because of poor project management, a different work ethic, communications difficulties, or for other reasons, low hourly rates may not save much money if the total hours needed to accomplish a given task are higher, and that is often the case. "A lot of people who jumped on offshoring for the cost savings never truly understood the market," says Iyer. "They got some savings, but generally not as much as they thought." There were unexpected outlays — error rates that rose too high, or more-frequent trips to India and elsewhere — that affected underlying cost assumptions. Toss in wage inflation overseas and wage deflation at home and suddenly the calculus shifts again. Phil Fersht, an analyst at AMR Research and author of the outsourcing blog Horses for Sources, says that the wage differential between a call-center worker in Bangalore and one in Nebraska can be as low as 15%.
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