Global Outsourcing: Trick or Treat?

Does offshoring benefit or harm a business? It depends.

The spectre at the door of IT departments everywhere this Halloween is global outsourcing (or offshoring, as it's typically referred to in the United States). Although the topic hasn't been front-page news for a couple of years, it remains a polarizing issue. But is global outsourcing a trick or a treat? The short answer is that it can be both. Let's strip away the hype and take a look at the ways global outsourcing can affect your company.

Ground Rules

Before we look at the pros and cons of global outsourcing, we need to recognize three axioms. These axioms are fundamental to having a rational conversation about global outsourcing.

Outsourcing has always been a key component of IT. IT, with its roots in data processing and finance, has always relied heavily on external consultants and software and hardware companies. You're outsourcing IT when you purchase an off-the-shelf application such as Microsoft Office, hire a consulting firm, or use the services of a few local administrators. Outsourcing to far-flung destinations such as India, China, and Malaysia isn't substantially different.

Free markets strive for efficiency. A business that's in the market for a good or service that's considered a commodity (i.e., a product or service that's widely available with little differentiation in features or quality) will look for the cheapest source. Free markets strive for efficiency, and producing a good or service that's more expensive than necessary is inefficient. An organization that chooses an inefficient method of producing a product or service—be it a shoe or an answer to a Help desk call—when an efficient alternative is available will succumb to more-farsighted competitors.

Ethnocentricism and racially driven views have no role in free markets or successful businesses. In an increasingly global economy, you can't have a rational discussion about whether to outsource IT if you base your argument on nationalism, ethnocentrism, or blatant racism.

Why Global Outsourcing Is a Treat

There are three big treats in the global outsourcing bag. Global outsourcing is a treat when it enables organizations to save on labor costs for IT functions, build a local presence in a developing economy, or create business services they otherwise couldn't.

Paying less for skilled work. Say that your company can pay Person A $30 per hour or Person B $10 per hour for the same work. Which person will it hire? Most companies will typically choose the less expensive of the two if the quality of the work is the same. If you add the amount saved in wages to the amount saved in other types of compensation such as health insurance and retirement benefits, the gap is even wider.

Executives look at this basic math and see a nice treat in global outsourcing. Few things please business executives more than reduced labor costs. Your organization can roll the savings into its profit margin, use the extra funds for strategic projects, or reinvest them in the company.

Investing in developing markets. India and China together make up more than one-third of the world's population. Because both economies are developing rapidly and both countries' trade, travel, and political boundaries are relaxing, India and China represent a tremendous opportunity for market expansion.

Playing a role in developing these markets and establishing a local presence as an employer in these countries are long-term strategic maneuvers. Although establishing a presence overseas is critical for large companies, it can often be just as important for small or midsized companies that don't plan to expand globally.

Knowing how to conduct business in other cultures, legal systems, and geographies is valuable and will become more so as developing economies mature. Expanding business services. Because of time differences, expanding operations such as telephone services and Internet chat to other parts of the world might enable your organization to offer extended hours of technical support and customer service. Augmenting operations might in turn convince customers to choose your organization over its competitors.

Why Global Outsourcing Is a Trick

Global outsourcing can also be a trick—a wolf in sheep's clothing. Here are three ways that global outsourcing might look good on paper but be a horror for your organization to implement.

TANSTAAFL. Every economist's favorite nine-letter abbreviation, which stands for "There ain't no such thing as a free lunch," applies to global outsourcing. Money for bandwidth, telecom, and travel doesn't grow on trees, and when you add expensive offshoring consultants, specialized lawyers, and salary premiums for managers to relocate overseas, all the perceived savings—or more—might disappear. Reduced labor costs might look like a treat on the surface, but a plethora of hidden charges can make for an unpleasant surprise if you don't look closely.

Communication difficulties. Communication is difficult enough when people are in the same room and speak the same language, so you can imagine how hard it is when people don't always speak the same language, are separated by several time zones, and have different cultures and worldviews. From a communications standpoint, sending work overseas isn't as easy as outsourcing it to a consulting firm across town. Organizations that aren't prepared for the cultural gap will feel that they've been tricked.

Not all IT tasks are commodities. Remember our axioms—when a good or service is a commodity, business efficiency depends directly on price. However, not all IT functions are commodities. Technical support, order-taking, and customer service can be done almost anywhere, whereas software development, content creation, and research and development can be more difficult to accomplish through offshoring. Thinking that every IT job can be sent offshore or outsourced is a trick.

Trick, or Treat?

There are enough benefits to make global outsourcing a treat as long as it's managed with attention and skill. Neither outsourcing nor offshoring should be an excuse for poor management or abdication of responsibility. If your job is a candidate for being outsourced or sent overseas, there's little that I or anyone else can say to convince you that global outsourcing isn't always a trick.

As President George W. Bush remarked in 2004 about sending jobs overseas from the United States: "The numbers are good, but I don't worry about numbers. I worry about people." The best way to avoid being caught in the undertow of jobs being outsourced or sent offshore is to give your employer a level of quality and efficiency that can't be matched by anyone in another country.

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