It is not about low cost labor any more but about a high skilled workforce
Duke/Booz Allen Study Finds Companies Moving High-End Functions Offshore to Access Talent Needed to Drive Growth
Concerns Rise Over Loss of Management Control as Innovation, Product Development and Other Core Business Processes Expand Offshore
NEW YORK & DURHAM, N.C.--(BUSINESS WIRE)--Companies are increasingly moving sophisticated, mission-critical functions such as product design and research and development to China, India and other offshore locations primarily because these countries can provide highly skilled scientific and engineering workers who are in short supply in the U.S. and Europe, according to a new study by Duke University and management consulting firm Booz Allen Hamilton.
And even though companies continue to offshore more high-skilled work, they are increasingly concerned about the loss of managerial control that accompanies outsourcing functions close to their core business.
The 2006 Duke CIBER/Booz Allen offshoring study is the third in an annual series originated by the Offshoring Research Network (ORN) led by Professor Arie Y. Lewin at Duke’s Fuqua School of Business. It takes a comprehensive look at strategic factors driving decisions to offshore. It also examines offshore operating delivery models and performance outcomes of various companies’ offshoring efforts. The 2006 study examined 530 companies from both the U.S. and Europe, through partnerships with universities in the United Kingdom, Germany, Spain, Netherlands, Belgium and Scandinavia. Key findings of the study include:
The need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies’ offshoring strategy. Nearly three-quarters of the companies that establish or expand product development offshore report that “access to qualified personnel” is the most important driver of their offshoring strategy, and almost 70 percent of survey respondents select an offshoring location based on the availability of needed expertise. “Access to qualified personnel” has increased substantially (by 70 percent in the last two years) as a major reason for establishing or expanding innovation, product development and product extensions offshore.
Lewin, director of Duke/CIBER (Center for International Business Education and Research) and lead principal investigator of the ORN project, said, “Companies in the advanced economies of the U.S. and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies. The leading-edge companies are developing new ways to source and manage talent globally. They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.
“Companies offshore because they can’t get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1b quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates."
Contrary to popular belief, offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally. In the U.S., offshoring projects that involved “high-skilled” functions such as research and development, sales and marketing, product design and engineering resulted in an average of one job created in the U.S. per project. In contrast, domestic job loss for office and administrative functions averages 23 jobs per project offshored.
Significantly, survey respondents indicated that as they increased the offshoring of high-end functions, the number of overall jobs they are replacing in the U.S. has dropped dramatically. In the 2006 survey the average number of U.S. jobs lost per offshore project dropped by 71 percent from 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006). At the same time, the average number of offshore employees per project grew by 62 percent from between 2005 and 2006.
“Clearly a new logic is driving decision-making as offshoring entails more highly skilled work,” noted Vinay Couto, Vice President of Booz Allen. “It’s less and less about low-skilled labor and more and more about accessing new pools of high-skilled talent.”
Concerns about offshoring are shifting from external factors, such as political backlash, to internal factors, such as loss of managerial control and the impact on operating efficiency. “Loss of managerial control” was cited by 48 percent of companies as a major risk of offshoring, an increase of 30 percent over 2005’s result. In contrast, “political backlash” and “political instability” have steadily declined in importance as noteworthy risks, with only 22 percent of respondents citing either as “important” or “very important.” In all, companies cited greater concerns about their ability to manage their offshoring activities, while concerns about cultural differences, which ranked very high in the 2004 and 2005 surveys, dropped by 50 percent.
“Many companies are struggling as they redesign their organizations and implement processes to support the rapid rise of offshoring,” Couto said. “The obstacle to offshoring is more often inside a company than outside it.”
India remains the preferred destination for offshoring. While much of the recent literature on offshoring highlights China as a favored destination alongside India, the research confirms that India is still the most preferred location across the board. China, however, is emerging as an important location for engineering, product development and procurement as more companies co-locate engineering groups alongside manufacturing operations. Similarly, the Philippines is increasingly attractive for office administrative work and contact centers.
While India remains the top offshoring destination for U.S. companies, German companies prefer Eastern Europe. Forty-two percent of U.S. companies chose India for offshoring implementations, as compared to only 15 percent of German companies. Meanwhile, 24 percent of German companies chose Eastern Europe to offshore operations, compared to only 7 percent of U.S. companies.
European firms perceive cultural differences as an offshoring risk, while U.S. firms are primarily concerned about service quality. Thirty-eight percent of European respondents considered cultural differences a significant risk, as compared to 28 percent of U.S. companies. In contrast, 68 percent of U.S. respondents identified service quality as a serious concern, as compared to 39 percent of European companies.
Offshoring is used as a tool to enable faster speed to market. Forty-eight percent of the surveyed companies identified “increased speed to market” as a significant driver in their offshoring decisions, an increase of almost 70 percent in just one year. Offshoring is not being used as merely a cost-reduction tool; it is being used to achieve strategic business objectives.
Other findings include:
Small, entrepreneurial companies are more likely than large corporations to initiate offshoring of high-value functions. Forty-eight percent of companies with fewer than 500 employees reported that their first offshoring initiative involved product development, innovation or engineering, as compared to 16 percent for large companies.
U.S. companies are increasingly outsourcing work to third-party providers, rather than setting up their own “captive” offshoring operation. More than 84 percent of the surveyed U.S. companies that are considering offshoring are planning to use third-party providers, compared to 7 percent that are working on joint ventures and 9 percent that are planning the “captive” model. Only two years ago, 42 percent of U.S. firms surveyed were planning to follow start their own captive offshore operation. In contrast, German and Spanish companies are particularly apt to choose a “captive” service delivery model (78 percent and 76 percent, respectively). This model fits the much higher emphasis that German and Spanish companies place on language and cultural fit in their offshoring criteria.
About the Study
The survey methodology involves a snowballing technique for identifying companies that are offshoring and individuals within the companies directly involved with offshoring. Many organizations such as the Conference Board invited their members to participate in the survey. The survey uses an online survey methodology developed at Duke’s Fuqua School of Business. The data is collected for specific functional projects that have been offshored. The sample also includes companies that are considering or have decided not to offshore.
About Booz Allen Hamilton
Booz Allen Hamilton has been at the forefront of management consulting for businesses and governments for more than 90 years. Providing consulting services in strategy, operations, organization and change, and information technology, Booz Allen is the one firm that helps clients solve their toughest problems, working by their side to help them achieve their missions. Booz Allen is committed to delivering results that endure.
With 18,000 employees on six continents, the firm generates annual sales that exceed $3.7 billion. Booz Allen has been recognized as a consultant and an employer of choice. In 2005 and in 2006, Fortune magazine named Booz Allen one of “The 100 Best Companies to Work For,” and for the past eight years, Working Mother has ranked the firm among its “100 Best Companies for Working Mothers.”
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