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Home > Archive > Certifications and IT jobs/Salaries > October 2004 > Does Outsourcing Cost More Than It Saves?
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Does Outsourcing Cost More Than It Saves?
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| Kasor 2004-06-06, 11:09 am |
| By WILLIAM J. HOLSTEIN
Published: June 6, 2004
ANY executives say that outsourcing is a winning strategy. An exception is Sidney Harman, executive chairman of Harman International Industries, based in Washington, a maker of audio and electronic control systems for automakers. Following are excerpts from a conversation:
Q. You don't believe in outsourcing?
A. It's not so much that I don't believe in it. I just don't see outsourcing as central to our company's engagement or purpose. Let me identify what I mean by outsourcing: it is either the business of turning over the production or development of our products and services to another company or setting up facilities in low-labor-rate nations to take advantage of presumed opportunities. I don't think either one of those is fundamentally a good strategy.
Q. But companies that are rushing to outsource say the labor savings are enormous. Are they missing something?
A. Yes, they lose something in the very rushing to do it. A handful of years ago, 15 percent of our total cost was represented by direct labor. Today, it is less than 5 percent, and it is headed lower. I ask you: Does it take a genius to conclude that if it gets down to 1 percent or less, it doesn't matter very much whether we build the product in Indonesia or Indiana?
Q. For you, technology is more important?
A. The technology in the systems that we produce and the factories in which we produce them is driving a powerful change in direct labor costs as a percentage of total cost. If we see that trajectory and then go make the very substantial investments that one is obliged to make in setting up a facility in a low-labor rate location - not just the bricks and mortar, but also the training and many intangible costs - you're obliged to look out three, four, five years at the very least to make the investment work.
Q. Do you sacrifice something if you outsource work?
A. When you outsource, particularly if you turn the whole project over to another firm, you have in effect yielded that which provides you with the opportunity to distinguish yourself. I've seen this over and over again.
Q. Does the innovation process break down?
A. I think a host of things break down. First of all, I don't think of many things as more intrinsic to the long-range thrust of a company, to the development of a company as a place of innovation and creativity and progress than the ability to design your own products and build your own products. You have to lovingly make them and care about their quality. It's difficult to wrap numbers around that and prove it, but I think it's central. When you yield it to somebody else, you in effect abandon it.
Q. Outsourcing providers would argue that they are specialists in certain areas.
A. The answer to that, whenever that occurs, is, it's reasonable to ask the would-be outsourcer, "Why am I in the business at all? Why aren't you in it?"
Q. Another argument is that you should outsource things in which you don't specialize.
A. That clearly is a more valid argument. Then you have to define what is your core. But, yes, there are quite rudimentary things in every industry and every company that can readily be farmed out without significant compromise.
Q. Do you believe that chief executives have some moral responsibility to keep jobs in the United States?
A. I haven't said a word to the effect that I have this point of view, because it's an expression of nationalism. I'm not trying to keep jobs. That's one of the consequences of my point of view, but it's not the thing that creates the point of view.
Q. What percentage of your sales is in the United States?
A. Let me remind you that our factories where we produce are not limited to the U.S. Over 50 percent of production is done outside the United States, but it's done in our factories, and overwhelmingly they are in high-labor-rate locations - Germany, Austria, France, Great Britain and Switzerland. This is not Indochina.
So much of our business is done with the European automakers, with BMW, Mercedes, Porsche and Audi. Our factories are located where they are. In a way, this is a marvelous expression of globalization. That is to say, BMW and Mercedes are our customers over there and they are also our customers here now.
Q. Speaking of global industry, is the real debate about outsourcing or globalization?
A. I think you have to recognize outsourcing as part of this whole globalization process. It has short-term implications and long-term implications. The short-term implications are undoubtedly job loss and displacement, although I would suggest to you that in this country, productivity has a far greater impact on job creation and job loss than outsourcing.
Q. What about the long-term implications of globalization?
A. The rise of China and India are major considerations. In the long run, a prospering China and a prospering India can do an awful lot for the United States. Our overwhelming lead will doubtlessly be modified as other major industrial nations rise.
But one should not conclude that you sacrifice the standard of living in the country. Look at Great Britain. One hundred fifty years ago, its dominance of the world was as great as the United States' has been recently. Today, it is a relatively more modest player in the world. But the standard of living is much higher.
William J. Holstein is editor in chief of Chief Executive magazine.
source:http://www.nytimes.com/2004/06/06/b...ney/06advi.html | |
| itmgr 2004-06-09, 12:45 am |
| Very Interesting !!!
Outsourcing is wrong for many reasons, but one reason that I have, which is stricly an opinion of mine, is this:
An American worker who has been working for say 20 years in America and whos grandparents have migrated here through the Statue of Liberty to make it in America, all of a sudden finds him or herself laid off for a third world worker who doesn't even realize all we went through to be a free nation.
Let's say a company can save $100,000 a year in revenue outsourcing, I would rather skip the $100,000 dollars and support the American work force.
Greed is evil......... | |
| Rosetower 2004-06-12, 12:02 am |
| Interesting indeed...
Eventually, who will be able to afford to buy the products that are being produced overseas?
Displaced American workers? No.
Cheap foreign labor? No again.
Seems to me those greedy corporations are shooting themselves in the foot. | |
| itmgr 2004-06-12, 12:41 am |
| Yes !!! Very true !!! | |
| Kasor 2004-06-12, 12:51 am |
| Remember the old business way of learning. If other companies are doing it, then we will do it, too. | |
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| Not that I am, but if I were running this place here is what would happen.
These companies who were built by the American workforce only to now abandon that workforce for a fatter bottom line would be taxed right out of the country. Then, all the patents they hold would be voided (as Canada does for drugs that get too expensive). Then another firm could step to the plate and start production in this country, for this country and the offending runner's product would be kept out.
If they can't support America after being built by America I say give them the boot. | |
| JKHunter 2004-09-08, 5:38 pm |
| If you have CNN you may want to watch this
Exporting America - Wednesday, September 08, 2004 - AIRS: 6-7 p.m. ET Monday-Friday | |
| yanqui 2004-09-09, 5:06 pm |
| One of the hidden costs of offshoring is that in so many of the low-labor-cost places technological infrastructure either barely exists or is so old that it needs a lot of work. China is one example, in places where land is available and affordable to a foreign-owned enterprise, utilities are expensive if the already exist, and if the don't, bringing them is outrageously so. Communications technology in those same places is iffy and sporadic, and internet communications is difficult to establish due to the governmental restrictions on allowable communication. When an American company commits to establishing an outsourced or offshored business relationship, ending that relationship can be very expensive; the American company finds itself pouring dollars into the other country's technology just so it can keep its low-labor-cost work overseas; bottom line is that the bottom line eventually suffers. It takes several years for these costs to add up to enough for a CFO to realize that it hasn't produced the desired or expected results. We're going to see it soon; next year or the year after. OUtsourced and offshored labor will have become a hole in the earth that companies have poured money into, at the expense of good ol' American customer service. | |
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| Wow
Finally some good news on outsourcing.
I'm slightly ahead of you though,,,was already fired!  | |
| yanqui 2004-09-09, 5:25 pm |
| quote:
Originally posted by melee
Wow
Finally some good news on outsourcing.
I'm slightly ahead of you though,,,was already fired!
You won't stay unemployed long. By the time the trend ends you'll be comfortably entrenched in a fine firm that offers tuition reimbursement and professional development opportunities. | |
| curiousgeorge 2004-09-09, 6:35 pm |
| A big reason why outsourcing is so profitable is the current tax code defers or eliminates payroll taxes to employees overseas. They also don't have to pay taxes on revenues earned overseas unless it is transferred back to the US. So companies are actually rewarded with lower taxes if they outsource.
Kerry said he's going to get rid of the tax benefit if elected to slow down all the outsourcing. Bush is pro big business, so he's keeping the tax benefit. | |
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| I've been hearing of other issues related to IT support outsourced over-seas as well.
These have to do with security. Many of the countries these RDP linked support firms are running have no real way of screening the employees. The systems to track back just are not in place. No NCIC's in those places man. Hence, permissions have to be limited to a point that hinders timely issue resolution, and ensures harder systems administration here.
If I were operating a large firm (financial, biomed, you name it) I'd have a great deal of concern at this stage with unscreened 3rd world employees gaining ANY information from my employees even over the phone. These places could be training ANYONE in accent acquisition at least and who knows what at most.
The same concerns are magnified for employees entering on visas to assume ANY position state-side as well. Again, unless interpol has a file on them then it is easy to get these folks in. We can't even reliably screen air passengers yet in this country to insure that they have not been indoctrinated by enemy factions for cry'in out loud! Yet access to critical business systems needed to insure things such as basic financial transactions, communications, and other services is being turned over to unknown parties whose motives could very well lie behind enemy lines.
You would think that firms like HP would think about these things before bringing in folks from hot spot countries wanting to work as tier II support and net admins for pennies on the dollar. | |
| sandy7000 2004-09-09, 11:56 pm |
| Here's some empirical data for you. I called Earthlink & was transferred for support purposes. I thought I was still in the United States until I saw the bill.
Without warning me, they had transferred me overseas & then reversed the charges so I paid for the foreign phone call.
The support call was to simply ask if Earthlink was compatible w/ Linux.
Although countries like India do need the revenue, I am aware that bribery & corruption goes on as common business practices. The needed revenue would probably only make the rich, richer & the poor, poorer. | |
| JKHunter 2004-09-10, 6:49 pm |
| [QUOTE It takes several years for these costs to add up to enough for a CFO to realize that it hasn't produced the desired or expected results. [/B][/QUOTE]
Sadly the original CFO who started the offshoring will have probably already cashed in their stock options and bonuses while floating high with their golden parachute.  | |
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| Some companies really that off-shore outsourcing not going save them much anymore because of many minor issues.
Many small-mid firms is moving back to U.S for support. | |
| melee 2004-09-12, 10:19 am |
| Yes  I've heard that some are in fact returning services that were out-sourced to other countries back to the U.S.
FYI there were some statistics published lately (can't remember the research organization) that clearly indicated that the 2 best countries to start up a company in are New Zealand, and the U.S.
On this end the primary concern though with IT ousourcing of any kind are the security issues presented. Even software developement presents these issues.
9/11 was 3-5 years in the making. Computer Science is the prefered terrorist training ground right now. Some operatives have already been known to have engaged in at least 4 year programs in computer engineering. They are not doing this because they are having issues with XP's service pak 2. | |
| sandy7000 2004-09-12, 5:25 pm |
| I work in a hospital where by law we are required to keep medical info secure.
We could be held liable if our system is hacked into and medical records info is leaked out. It's more than just an ethical thing. We could be sued if info is leaked. We can't claim hacking is out of our control.
They were trying to outsource medical info handling overseas until HIPAA regulations kicked in & those companies realized they could be laying themselves wide open to lawsuits supported by the law.
I think outsourcing is somewhat of a fad that will run it's course once it gets too costly for businesses. | |
| twister166 2004-10-03, 1:24 am |
| I will probably get flamed here...
Let me display an opposing view about off shore or even the near shore business.
First of all, America grows under the capitalism. Therefore, the corporation must be profitable for its employee's survivability. To keep a better bottomline is for the corp survivability. Our US residents are no longer compete with US resident but the world resident. This is inevatible. This is an evalution that we cannot stop, because this is like the industral revolution. The only difference is that our sociaty today depends on more service than physical product, but service is product. Because it is CHEAPER to produce using machines, as if the out source will be CHEAPER.
That said, let me give you some facts as my company just went near shore. The cost of labor is US$1.50/hr and they have no complaint and works any shift you want because it is much more pay than working at the local firm. Wether the company make money or not is based on management and the right off shore location.
Let's touch the politic just a little, it realy does not matter Kerry or Bush is president because with or with tax breaks it will cost less to go off shore and it will not slow down.
I saw your posts, this is my advice to you all and myself. Most of IT jobs related to pounding on the keyboard will go away. We as IT have to stop think about technology but rather business value that IT can provide. The ones who can turn IT into money will be the ones stay and not worry about their job. That is what provide you the real security, obviously this comes with greater pressure...
It is getting long... all I am saying is don't bank on other's decision for your own sucess, the world in itself is cruel... The fitter the surviver... Tech certification will get you so far... | |
| JKHunter 2004-10-07, 8:39 am |
| I don't believe it would make a difference to flame you Twister166. After all Freedom of speech is what our ancestors died for.
But this is going too far!!! | |
| sandy7000 2004-10-07, 6:19 pm |
| The Onion is a satirical newspaper (like Mad Magazine) that comes out of Madison, Wisconsin.
And you thought Wisconsin was made up of these... | |
| melee 2004-10-12, 11:20 am |
| Ok, now let me explain something to you....
The American worker's struggle to overcome oppression of the robber baron era was completed with nothing short of out and out civil warfare. We BUILT these corporations. It was AMERICAN workers and AMERICAN consumers who put these companies on the map. In return these companies exploited every upstanding attribute of the AMERICAN worker to the point where there was litterally riots in the streets.
Now, if you think for one moment that these same workers are just going to lay down on this you are wrong.
IF the workers over seas would begin understanding that YOU are now being exploited, and have the intestinal fortitude to rise up and demand the same wages as your AMERICAN counterpart then BOTH sides of this equation would ballance out. HOWEVER, that (if history is any indicator) will never happen. Therefore it will be up to the powers of the AMERICAN worker to vote the politicians out of office who lay down on this issue. It will also be up to the AMERICAN worker to FORCE the politicians to initiate whatever sanctions are needed against these corporations and foreign governments to cease these practices that do LITTLE for 3rd world economies and less for AMERICA's.
That you would work for corporations who are so rich for so little over there demonstrates your lack of self respect. Until you demonstrate otherwise, don't expect the AMERICAN worker to really back you in any way until you pull yourselves up to the wage level that will be needed to insure your own economic viability. Right now your just being held in a "use once and throw away" statis awaiting the implementation of the will of the AMERICAN worker to take hold. |
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