VideoThe big news at this year's International Consumer Electronics Show in Las Vegas was all of the plasma televisions, digital music players, and other crossover gadgets that Dell, Gateway, Hewlett-Packard, and other computer giants are using to challenge consumer electronics stalwarts such as Philips, Samsung, and Sony. Behind the trade show buzz, however, lies a bigger story—one that goes well beyond home entertainment.
That story tells how Dell and its fellow computer manufacturers, along with leading US companies in the financial-services and other industries, are using offshore partnerships to do more than just cut costs. Indeed, they are taking advantage of the distinctive skills and high performance offered by companies in Asia's developing economies to enhance their own operating performance, to outsource vital business activities (such as the design of components), and to accelerate their entry into adjacent product markets. (To a lesser extent, this process is also playing out in other rapidly developing economies, such as those of Eastern Europe (including Russia), but Asia represents the primary focus of offshoring activity for US companies today.)
US computer companies, for example, are relying heavily on original-design manufacturers, primarily based in Taiwan, to storm the consumer electronics market. A leading US financial-services firm has transferred increasingly sophisticated aspects of its interactions with customers to eTelecare, a call-center provider based in the Philippines. The result has been greatly improved performance at lower cost.
While it is possible, and sometimes preferable, just to offshore key business activities, outsourcing them as well provides bigger opportunities for most companies. Offshore providers of outsourced services offer vital and sometimes distinctive skills that are available in developed countries only at much higher cost, if at all.
Lower Costs, Higher Performance
To most executives in the United States and Europe, offshoring means cheaper wage rates for labor-intensive activities. These cost savings are real, but some Asian companies can also offer superior performance.
The Philippines' eTelecare, for example, serves an array of blue-chip US clients, including a leading computer company and a prominent financial-services company, both known for world-class customer service. It takes eTelecare, on average, 25 percent less time to handle incoming calls than it took its clients' own call centers or previous outsourcers, and the company also delivers higher levels of customer satisfaction. In an outbound telephone-marketing campaign for one client, eTelecare exceeded the sales performance of the client's in-house facility after only one week. By the fourth, it was generating three times as much sales revenue per hour and three times as many conversions from telephone calls to sales.
Similarly, in handling technical support for customers of a leading US electronics OEM, eTelecare's cost per resolution was almost 40 and 16 percent lower than that of the OEM in its own US and Indian call-center operations, respectively, and 30 percent lower than that of competing US outsourcing vendors. (Cost per resolution covers the cost of call-center operations, including all calls needed for each problem and the cost of all dispatches and redispatches related to the problem.) At the same time, customer satisfaction levels exceeded expectations: in a survey, 99 percent of the OEM's customers said they were satisfied or very satisfied.
Asia's manufacturing operations also attain high levels of performance. By moving such operations from North America to China, one large US electronics company tripled its manufacturing productivity (measured both in units per line and in the number of surface-mount-technology components placed per unit of placement equipment). Cycle times and defect rates fell.
A New Model
Such outcomes reflect the ability of offshore companies to combine lower labor costs with distinctive skills. Low wages allow offshore companies to hire more middle managers, who can then devote more time to building the skills of their employees and to improving their processes than would be economical for most Western companies.
More for your wage. Discussions of wage rate differentials between Asia, on the one hand, and the United States and Europe, on the other, tend to focus on less skilled jobs, but in the more skilled ones the differentials can be compelling as well. In electronics, the wage rate ratio between the United States and China for product engineers is about 10:1. For software developers, the ratio between the United States and India is about 8:1.
The implications are significant: cost savings continue to accrue the higher up on the skills ladder companies go with their offshore outsourcing. Another way of looking at this offshore advantage is to compare the absolute wage premium required to hire a college rather than a high-school graduate. The premium could run to from $5 to $15 an hour in the United States, compared with $2 to $4 an hour in the Philippines, so it is much more cost-effective to hire a college graduate there, even if the quality of education in the two countries isn't entirely equivalent.
Reader Comments» Post a comment