Offshoring is on the minds of many, but concerns about quality of service remain a stumbling block. Here are ways to cash in on labor arbitrage while protecting your vital functions.

by Bill Frech

Throughout economic history, countries have always traded with each other for competitive and comparative advantage. When producing something in our home country becomes more expensive than producing it elsewhere, we often ship that product to a country where it is less expensive to manufacture. In the U.S., this has happened in the past with certain manufactured goods, for example, and more recently with many business functions including information technology.  

With increased growth in offshoring, the U.S. economy netted 90,000 jobs over the 300,000 jobs that went overseas, according to a 2004 Forrester Research study. Even with a loss of 1.5 percent in 2005, there is a net job gain of 30 percent in our national workforce. According to recent research by the U.S. Chamber of Commerce, direct foreign investment now exceeds $487 billion dollars and supports 6.4 million jobs here. The McKinsey Global Institute asserts that for every dollar of costs moved offshore, the U.S. gains a net benefit of $1.12 to $1.14.  

However, it is important to note that outsourcing does not entail shipping 100 percent of the work offshore. Multi-shore outsourcing strategies frequently have offshore components with operations located thousands of miles from their home office. Such strategies regularly enhance a company’s overall competitive position in the marketplace.

WHY GO OFFSHORE?
Competitive advantage is a primary motivator driving executive decisions to outsource in both near and far offshore locations. FAO has increasingly witnessed a growth in global service delivery (GSD) location options during the past two years. Contracts signed at the end of 2003 had few offshore components. By contrast, in 2005, we saw a dramatic rise in service delivery locations.

All of TPI’s F&A clients have some portion of their outsourced finance services served from an overseas location. Up to 50 percent of all TPI-led transactions, including ITO and BPO, now include offshore components. We are seeing many outsourcing deals metamorphose into complex strategic endeavors that play an integral role in a company’s business strategy. These support growing global operations and leverage the deep skill sets, domain expertise, and proliferation of offshore service delivery centers now offered by a wide range of service providers around the world.

FAO clients are interested in exploring and implementing outsourcing initiatives that leverage a variety of geographic alternatives to meet the different business needs across their organizations. FAO these days represents a much more complex environment than it did, say, even five years ago. It now includes a diverse combination of retained work within the company, onshore work performed in the home country, and a combination of near- and offshore solutions to take advantage of  labor arbitrage, language requirements, service provider centers of expertise (COE), increased control and quality, and a host of other advantages.

Besides labor arbitrage other factors also help make offshoing worthwhile, such as access to a well-educated, highly skilled foreign staff and the phenomenon of “centers of excellence” offered by the providers.

There is still a greater dimension to going offshore than mere cost savings or gaining operational efficiencies. For many North American companies, future business growth is moving rapidly to countries such as India and China, which have the largest global populations at more than two billion collectively. Many Asian economies are growing at twice the rate of developed countries’ average GDPs.

Global expansion can create geographic operational gaps for numerous companies. Some CFOs decide to build regional centers to support new international growth; others outsource or buy service delivery from a provider with multiple global locations to ramp-up more rapidly. Leveraging a well-established service provider’s operational experience and brand recognition in a foreign country is often a great way to mitigate some of the risks.

OTHER CONSIDERATIONS
Increased competition, market complexity, and differences in language, national customs, and regulations can make it challenging for any global company to streamline operations across borders. In Europe, these and other mitigating circumstances tend to keep firms’ operational costs especially high. Increasingly, European organizations are outsourcing certain non-core processes, including finance and accounting, to reduce costs, standardize procedures, optimize performance, and gain greater value.

If your firm is considering offshoring but is not comfortable with India or China, certain Eastern European and even Latin countries offer a workable solution. Brazil has one of the largest Japanese-speaking populations in the Western hemisphere and can be a good option for firms with a Japanese-speaking client base. Some Caribbean countries such as Jamaica and Costa Rica are also emerging as offshore destinations.

Competitive advantage applies across all industries. If you have qualms about the direction today’s business is heading—overseas—consider the path taken by television sets, radios, clothing, microchips, and others. When production and service become more efficient overseas, the market naturally takes advantage, bringing net benefits to consumers around the world. Outsourcing and offshoring for competitive advantage is a natural progression in our world economy and a phenomenon that has truly occurred for centuries.