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Offshoring is not just for cost savings

Arie Lewin and Nidthida Perm-Ajchariyawong     January 24, 2011
Arie Y. Lewin
Most companies say offshoring jobs has not resulted in higher unemployment domestically and the desire to cut costs is not the primary motivator for companies in moving job functions overseas, according to findings from the sixth annual study on corporations' offshoring trends released by the Center for International Business Education and Research's (CIBER) Offshoring Network (ORN) at Duke University's Fuqua School of Business and The Conference Board.

Over half of the participants in the survey say offshoring has resulted in no change in the number of domestic jobs in most functions. The US software sector has the highest ratio of offshore to domestic employees - almost 13 offshored jobs per 100 domestic jobs. This could be a reflection of a scarcity of domestic science and engineering graduates in the U.S.

Nidthida Perm-Ajchariyawong
Another increasingly popular trend in offshoring is a shift away from company-owned offshore - or "captive" - operations. In response to the global financial crisis, companies have turned away from captives as they come to realize the higher operational costs and risks associated with the captive offshoring model. The recent ORN survey shows manufacturers and high-tech/telecommunication companies are less likely to use captive operations and are moving increasingly toward the use of third-party providers of offshore labor. Several surveyed companies also indicate they use captives to build experience and capabilities as a step toward full offshore outsourcing. The case for a shift in service delivery model preference is supported by a series of major captive spinoffs that have taken place in the market since early 2008.

In addition, the recent ORN study clearly suggests that offshoring at most companies is evolving to the point where the potential cost reduction alone is no longer enough to justify moving operations. One survey respondent noted, "It has taken our company several years to discover the impact of labor arbitrage disappears in fewer than three years. Companies are now shifting from cost-driven offshoring to a multi-dimensional value proposition for offshoring operations." In spite of placing a high priority on cost savings and labor arbitrage, the survey finds average achieved cost savings offshore have declined for functions at many companies. IT services and software development in particular have experienced consistent declines over the past five years while average achieved savings have increased for administrative and innovative functions.

According to the recent survey findings, survey participants have lower expectations than previous respondents for average cost savings in several offshoring functions; contact center, information technology and software development offshoring 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, and government and vendor relations. 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 of their offshoring processes as measured by average cost savings across offshored functions. 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.

Clearly, the next level of offshoring involves a finer and more sophisticated view of collaborating and managing value across both firm and geographical boundaries.

(Arie Y. Lewin is director of CIBER at Duke University.  Nidthida Perm-Ajchariyawong is a research associate at CIBER.The global Offshoring Research Network was established at Duke University's Fuqua School of Business in 2004. ORN is a network of research partner universities, scholars and practitioners and has become the most recognized international research network tracking the globalization of services over time. To learn more about Duke CIBER, visit http://offshoring.fuqua.duke.edu)

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