Offshoring a brief chronology:
Offshoring is the concept of shifting of tasks which are done in-house traditionally to a different place usually to other where cost of performing the tasks is low mainly to achieve cost cutting. Industrialized Nations such as USA, UK, Germany witnessed offshoring of manufacturing getting accelerated since World War II (Carmel et al 2005) in industries like steel, semiconductors, automobile, shipbuilding , textiles, consumer electronics etc. However these activities of offshoring occurred in terms of goods. The concept started initially where manufacturing process typically assembly were moved offshore in 1960s and 1970 because this could be done less expensively (National Research council 1992). The term offshoring and outsourcing became very familiar since 1980 (Carmel et al 2005). Lately other than manufacturing offshoring of services began to increase as the World shrink due to improvement in communication, so globalization of business began to grow at a rapid pace. And companies in industrialized nations moved to developing world to access the pool f talented cheap labor and to access local market and to manufacture their products. Then in late 80's when computers and software's began determining global business the offshoring took a turn towards IT offshoring. In early 90's many big companies in first world countries began to outsource services called service offshoring which led to appraising of IT and BPO industries (McKinsey 2005). Many companies also outsourced back office operations in order to concentrate on core competencies (Ian Hunter n.d.). Then nowadays companies even outsource R&D which are traditionally done in house (Business week 2005). Instead of outsourcing a particular process of service to a third party vendor they began to outsource the entire line of business, which is credited by action of Boeing corporation working with HCL Technologies in producing software ranging from navigation, landing gear to cockpit control for their upcoming 7e7 airliner (Business week 2005). Many companies like Dell, Motorolla, Philips are buying complete designs from Asian manufacturers. Procter & Gamble said it needs half of its new product ideas to be generated outside by 2010 as compared to 20% now (Business week 2005). The offshoring which led to globalizing of business and creating employment of opportunity in every aspects ranging from logistics to communication and what not is surely a boom for both developed and emerging economies.
Offshoring Drive and Destination
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Frims have been offshoring for a long before the recent hype in service offshoring. The reason for outsourcing was mainly driven by factor of cost reduction and access to low cost production sites, new markets and skilled labor. The other factor is the technological improvement including use of broadband communication. Recent advancement in Information Technology and decreased cost of communication over long distance enable companies to place the service activities in other countries (Alan Garner n.d.). other reasons include trade liberalization and to have a global presence to access potential developing markets and to make people aware of their products in offshoring countries (Capgemini 2007). A research by UNCATD states that fortune 500 companies eyes cost reduction as major reason for offshoring, this cost reduction factor constitutes 70% reason for drive of offshoring. As said earlier the factors considered while offshoring and selecting a destination for doing so are cost, which includes wage, infrastructure cost, tax and regulation cost. The other factors are labor force availability, language barrier and business experience, in addition to this factors include countries infrastructure, business environment, cultural adaptability and intellectual property protection. The table below pictures' the preference given to each factor while selecting an offshore destination. The offshore destination must be a favorable in terms of political and economical environment and considering the geographic location. The destination should have a labor market which is well educated as well as cheap considering the fact of language barrier (Carmel et al 2005).
The major offshoring destination favored by many companies in the developed companies are BRIC nations. In that too China stands first in terms of foreign direct investment mainly due to the attraction of manufacturing companies to set up a base in China. Next comes India standing in the second position in terms of FDI beating USA. The position of India is due to the fact that it attracts lots of technology oriented offshoring. Brazil is in 7th and Russia is in 6th position in terms of FDI (AT .Kearney 2005). In the BRIC nations too 45% of global investors show enthusiasm for China and India and then comes Brazil, Poland and Russia (AT .Kearney 2005). In a survey by AT .Kearney the rankings of offshoring destinations were published in a scale of 1 to 5 the rankings were given for favorite destination in terms of factors considered for selecting the destination. In that India and China stands at number 1 and 2 with points 3.4 and 3.1 respectively. In the survey it is stated India is leading China in terms of cost of labor a 2.9 compared to China standing at 2.6 (AT .Kearney 2005). Same survey sates that in relation to the factor of environment which comprises of political, economical factor and countries infrastructure, culture and geographic location and most importantly the intellectual property protection India stands ahead of China and Russia with rating of 1.6 but on the heels of Brazil which stands at 1.8 (AT .Kearney 2005).
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Inspite of India standing ahead of China in factors considered for offshoring the Foreign Direct Investment received by India is $7bn compared to China FDI input of $70bn (AT .Kearney 2005). This FDI input is mainly due to China's attraction of manufacturing and logistics functions. And also favored by the growing market of China which many companies want to access. In manufacturing sector especially in electronic, food and textile the first 7 positions are taken by China, India, Brazil, Russia, Poland, Mexico and Hungary. However by considering the factors of offshoring like cost, business environment and availability of people India stands first from 2005 to 2009 beating China which is at no.2. when India and China alone are compared respecting the fact that China received more FDI than India, the reason for this has to be analysed. The prime attraction considered by investors is that China mostly favors manufacturing and shipping operations. When we consider the business break down of offshoring we can clearly identify that manufacturing of light and heavy goods accounts for 47% of their total FDI input compared to a mere 8% in the same manufacturing sector for India. In addition to low manufacturing services offshored to India many big manufacturing companies in developed countries around the globe considering the favorable environment in India plan to increase the investment in the manufacturing sector. As China attracts more capital intensive manufacturing sectors, India attracts more technology oriented sectors which constitutes 40% of the total FDI input for India and mere 5% in the same technological sector for China (AT .Kearny 05,07,09). As indicated earlier in the next 3 to 5 years the manufacturing activities offshored will surpass the IT and BPO activities as the manufacturing activities is becoming increasingly expensive in China compared to other Asian countries. Including BPO and IT services the moving of manufacturing services to India will favor the companies in a big way, as a research by Capgemini in 2007 states that 59% of foreign subsidiaries in India are run by local managers compared to 37% in China. This reduces the cost of employing an expatriate manager by the foreign firms favored by the data that 69% of the firms stating they have surpassed the expected results by offshoring in India (Capgemini 2007).
The other nations in the race are Brazil standing in 7 according to the FDI inflow. The investors from different field ranked Brazil according to the favorable conditions persisted there for their business, the rankings are automotive companies rank it 6, wholesale and retail sector investor rank it 3, which keep Brazil in the race against fierce competitors. Adding fuel for the race comes the investment increase in Brazil's natural resource and raw material sector. Investment in chemical sector is heating up due to the successful performance of the pharmaceutical industry in Brazil (AT .Kearny 05,07,09). Mexico is consistently climbing up the order in the ranking table based on FDI from 16th in 2005 to 11th in 2009. The main reason for this is the Heavy and Light manufacturers ranked Mexico 8th and 6th respectievely, which is credited by the fact that Ford(US), VolksWagen(Germany) announced a investment of over $3bn there (AT .Kearny 05,07,09). On the other hand with increased interest shown by investors from US and Europe in Poland, it is drastically dropping in rank from 5 in 2005 to 39 in 2009. Russia after receiving a bulk investment in Oil and Natural gas sector also it expects to take over Spain, Brazil, Mexico to be in the 9th place in retail sector. Its overall ranking dropped from 6 in 2005 to 33 in 2009 due to uncertainty in the political situation prevailing there.
Impacts of Offshoring:
Economic impact comprises of impacts including impacts over job in both home and destination countries. potential impact on average standard of living, distribution of income, impact over wage. Already there has been a argument of job loss prevailing among the public in developed countries, even this argument had a impact over the political situation in many developed countries. a report by Forrester institute 2002 estimates that out of 50,000 jobs lost every month due to organization restructuring, only 3000 were lost due to offshoring . The same research claims there will be a loss of 3.3 million white collar American jobs would be transferred offshore by 2015 to low cost countries (Peter Auer et al 2006). Economist who argue that countries which outsource service or manufacturing to low cost destinations might lower the standard of living of people in their countrry and also they believe this process will threaten the leadership of the country in R&D. hey also argue that this might exert downward pressure on wages there by reducing the standard of living in he home country (GAO 2005).job losses due o offshoring is likely to remain in coming years , those who lost job has to switch over or to face a longer term of income loss (Groshen et al 2003). Conversely Economic theory suggests that offshoring will likely increase of average income of the US citizen or any other country in which a company outsource certain process (Alan Garner n.d.). Especially offshoring in service sector will reduce some cost spent o services by customers mainly due to the primary reason of cost saved by the firm. The saved cost by the firm will be passed on to stake holders in terms of dividend or used for expanding investment in home country by the company. In addition offshoring provides the company with advantages like access to new market to familiarize its products and to increase productivity by cheap labor available. This in turn provides lower price over the products of the company in the home country. In spite of all these a survey by McKinsey global institute 2003 states offshoring companies in addition to the added cost predict a cost saving of 45% to 55%. On the other hand offshoring creates job opportunities in the destination countries. The offshoring of white collar works increases in India NASSCOM the association of software and Services Company estimates 250,000 jobs in IT enabled services sector and 270,000 new jobs in software exporting sector in 2005. Also the same report expects high skilled job categories expected to hit 1.24 million by 2008 (McKinsey 2005).
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The social impact comprises of factors such as impact over culture, managerial issues, commercial issues, knowledge transfer issues and operational issues. This is a problem for the company which offshores services, as national culture is embedded deeply in every individual which affects the perception of each other when working in a multi-cultural environment. Mainly the cultural differences leads to communication problem as linguistic code words do mean a different thing. So to overcome this problem people working in cross culture environment should try speak and write in international English, should be aware of the accent. The workers should read the newspapers of the offhoring nation and should be up to date of the current events so that the workers aware of what their customers are reading and seeing and will be able to respond to them when a customer relates to a current event. Some of the other social impacts include power, time, information processing, relationship and future orientation. Power orientation is the most important orientation in business as it conveys the emotional distance from subordinates and managers. Based on the culture it differs into high power and low power orientation, the former has autocratic manager and the later has consultative managers. Time is closely related to culture in some countries, where following schedule is very strict and in some they are not. When people from both ends work together comes issues on punctuality finishing work on time. To eliminate all the difference a company should hire an expatriate managers (Erran carmel et al 2007).
Due to offshoring the management approach of the client and the vendor differs. Here change management plays an important role, it is important here to overcome difference and monitor decision making that varies between the organizations. Due to cultural difference it is difficult for the managers from the client company to control employees from the service vendors or their own subsidiary. Due to the cultural difference the internal HRM notably the recruitment of the employees for a particular process become difficult for the client (Ian Hunter n.d.).
This impact can make or break the brand image of the client company. This relates mainly to the product or services provided by the vendor to the customers of the client. And in case of social or political disaster the client should have a back up to keep the services up and running.
In technological side the communication facilities may not be up to the standard. This leads to the vendor not providing quality service to the customers lacking in good customer experience. This is also due to inexperienced work force as they lack in knowledge about the product or the process. Here comes the problem of knowledge transfer which is principal problem while setting up an offshore services center. The knowledge transfer includes transfer of skills, process, domain, work and cultural norms. Failure of not doing appropriately any of this will jeopardize the business of both client and vendor. The other operational problems include client having limited or no control over their foreign subsidiaries. Some of the other issues are data privacy, the location of foreign subsidiaries in different time zone. Finally health of the employees should also be considered as they are working in uneven times.
As a whole considering the impact it has brought both positives and negatives in all aspects of business, politics and life. The good news is that there has been a reduction in global poverty since last thirty ears were 40% population lived on less than a $1 a day is reduced to 20% now (Peter Auer et al 2006).