Offshoring is about Tapping Global Talent: Study

The study finds that offshoring is evolving from a cost-saving tactic into a long-term workforce management strategy. Almost 70% of the 537 respondents across Europe and the U.S.A. stated that offshoring is driven by the need to tap the global talent pool, as opposed to last year’s survey where respondents stated lower costs as the highest incentive to offshore. Companies have stated shortfall of skilled personnel onshore as a reason for offshoring high-end work.

“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,” says Professor Arie Y. Lewin, Director, Duke/CIBER (Center for International Business Education and Research) and Lead Principal Investigator, Offshoring Research Network project. The 2006 Duke CIBER/Booz Allen Offshoring study is the third in an annual series by the Offshoring Research Network.

The findings bear significance as offshoring high-end work has gained increased acceptance among customers. Offshoring of R&D work grew 65% during 2006 as opposed to 40% during 2005; engineering work grew from 36% last year to 85% this year and product design and engineering work registered 82% growth this year as against 80% last year.

The study also finds that offshoring of high-end work results in creation of one job in the U.S.A. per project as against offshoring low-end BPO work where 23 jobs are lost onshore per project. “This is because high-end jobs are sticky in nature and create value for the customer onshore, which fuels growth and hence creates more jobs,” says Matt Mani, Senior Associate, Booz Allen Hamilton and one of the authors of the report.

In the 2006 survey the average number of U.S. jobs lost per offshore project dropped by 71% 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% between 2005 and 2006.

Interestingly, the study found that small entrepreneurial companies are more likely to initiate offshoring of high-value functions than large corporations. Forty-eight percent of the companies with fewer than 500 employees reported that their first offshoring initiative involved product development, innovation or engineering as compared to 16% in the case of large companies.

The findings shatter a long-held myth that low-skilled jobs are most likely to get offshored while high-skilled jobs would remain onshore. On the contrary, experienced customers who have offshored low-end work to leverage labor arbitrage have found that they are not being effectively served from lower-cost countries because of cultural differences. Many have initiated steps to bring back customer-support functions in-house while higher-skilled work requiring technical knowledge is offshored. For instance, AT&T recently announced that it would bring back 2,000 jobs in-house, and step up offshoring of IT-development activities.

As the pattern of offshoring moves from low-end to high-end work, the challenges faced by the management have moved from battling political backlash to grappling with issues like retaining managerial control and gaining operational efficiency.

Forty-eight percent of companies cited the loss of managerial control as a major risk of offshoring, an increase of 30% over 2005’s result. In contrast, political backlash and political instability have steadily declined in importance as noteworthy risks with only 22% of respondents citing them as either “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 2004–2005 surveys, dropped by 50%.

India remains the preferred destination for offshoring. However, China 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 becoming increasingly attractive for office-administrative work and contact centers.