Weighing
the Pros and Cons of Global
Outsourcing
By Brad
Anderson, International Trade
Specialist, US Commercial
Service
with
additional links by Paul E.
Litton, Ypsilanti US Export
Assistance Center
Look around your
house--many items you own were
manufactured in a different
country. This is a business
reality in most industrial and
manufacturing sectors.
Software and other
high-technology industries are
quickly following other
manufacturers in overseas
production in order to
maintain a competitive
advantage. Additionally,
high-technology companies are
also using global outsourcing
for other business functions
such as R&D and technical
support.
Are you considering
outsourcing some of your
business functions overseas to
cut costs and increase
profits?
It is a huge strategic
decision. In an effort to gain
a competitive edge, many
companies around the world
have openly crossed borders to
manufacture, provide technical
support or expand R&D. The
appeal of lower costs and
available inexpensive labor is
luring many U.S. companies to
move a piece of their business
to another country. But what
other factors should your
company consider before moving
offshore?
Listed below are pros and
cons that play a major role in
determining the viability and
risk of globalizing your
company:
It is no secret that cheap
labor is the most compelling
reason to move some of your
company’s operations outside
the United States. One caution
is productivity. You must
measure cost saving against
productivity. Sometimes you
get what you pay for.
Outsourcing certain
business functions to a
foreign county does allow for
leaner production costs,
allowing companies to grow. In
recent years, the dollar has
been strong, making costs of
conducting business overseas
even more attractive. Growth
in turn creates higher paying
jobs on the sales and
operations side, typically
centered in the U.S. In some
cases, countries, namely in
the EU, have stricter labor
laws than we have and it can
be more difficult to terminate
contracts and people than in
Oregon. So if you have a call
center in a Western European
country, there may be more
stringent labor laws that can
affect your bottom line. Most
countries have foreign direct
investment agencies dedicated
to courting U.S. business.
They are helpful, but usually
provide only the upside.
Global events and terrorism
have elevated the importance
of risk analysis when looking
at other countries. Few
countries offer the economic
and political stability that
we enjoy in Oregon and
throughout the U.S. Several
very large companies have
shifted their operations out
of certain countries and into
others. Problems such as
unstable governments,
anti-American sentiment,
currency devaluation and
political unrest can cause
major problems for companies.
There are ways to limit
political risk. Wise
investment decisions on where
to set up operations coupled
with using available
resources, such as risk
insurance, can mitigate your
exposure. Overseas Private
Investment Corporation (OPIC)
is a US Government agency that
provides political risk
insurance. Their website is http://www.opic.gov/.
Another good site for
country-specific business and
investment information is http://www.countrywatch.com.
Ernst & Young has many
articles that provide more
information on this subject
and overseas outsourcing at: http://www.ey.com/
Keeping everything in-house
is the single best way to
monitor your quality and
control your processes.
Quality control affects
branding, production and
customer service. If you
choose to take part of your
business operations to another
country, it is essential to
structure a relationship that
meets your needs. Language,
distance and culture are
potentially huge hurdles that
accompany any global
outsourcing decision. Choosing
the right partner is critical.
Once a partner is chosen, a
commitment to managing the
arrangement can alleviate cost
overruns, quality control
issues, cultural and language
differences and channel
conflict. In some cases,
partners have completely
misrepresented U.S. companies
by flooding markets,
counterfeiting products or
exposing technology secrets.
Regular site visits and making
the partner feel like a part
of the company is crucial to
success.
On the upside, production
and tech support that is based
in a foreign country provides
you certain benefits. Delivery
time to regional foreign
markets can be reduced. You
may experience lower duties or
tariffs when shipping to
certain countries. A potential
advantage of outsourced
post-sales functions is being
closer to your global customer
in time, culture and distance
to reach the pinnacle of
customer service - 24/7
real-time support.
Also, a multi-lingual
workforce that costs less is
highly desirable and more
accessible outside the U.S.
Ability to react to your
global clients from locations
around the world is a great
competitive edge. Another
strategic advantage is local
market access. By having a
presence in a foreign country,
companies are typically looked
favorably upon since they are
providing jobs and
contributing to the economy.
This can lead to a local
strategic advantage for
developing new business.
On the negative side, you
may lose control of your
brand. It’s very difficult
to monitor all activities
happening thousands of miles
away. You run the risk of
partners creating a gray
market for your products.
Sales territory seeping can
disrupt the channel and send
mixed market messages on
price.
The US & Foreign
Commercial Service, my
organization, can provide
assistance with channel
development, managing and
strengthening. Please see our
resource page at http://www.export.gov
or contact me by email at brad.anderson@mail.doc.gov.
There is always a concern
for intellectual property
rights (IPR) protection.
Patent and trademark
legalities can be expensive
and time consuming. Tight
contracts are essential for
protection. Legal systems
abroad are much different than
here, thus creating additional
time and costs to protect you
and fight any legal disputes
that may arise. For example,
at any one time in our
Beijing, China office, we have
upwards of four billion
dollars in U.S.-based trade
complaints. Retaining good
legal representation is a
must. For a listing of
international law firms in
Michigan, please see: Legal
Services. Firms not
located in Michigan are
encouraged to contact your
local office of the US
Commercial Service and the
International Law Section of
your State Bar Association.
Look before you leap.
I have shared a lot of factors
in this article both for and
against moving a part of your
business overseas. It is a
great way to build corporate
prestige, reach more markets
and increase profitability. A
couple of underreported
factors are ways that business
is conducted abroad. Bribes
and kickbacks are commonplace
in some countries. For U.S.
firms this practice is
strictly prohibited regardless
of where you are doing
business globally, but the
expectation can put your
company in a sticky situation.
Political corruption is a
stumbling block to success in
international business, and
one thing I'd want to know
before establishing trade ties
in a country is the state of
corruption there. You can find
that out at Transparency
International ( http://www.transparency.org).
Transparency International is
a nonprofit organization that
monitors corruption worldwide,
and this site has plenty of
useful information for
businesspeople. There are
country papers on corruption,
a Bribe Payers Index, a Global
Corruption Report, news, a
Corruption Perceptions Index,
and much more. You'll get the
inside dirt on corruption
here.
Weighing carefully the pros
and cons of in-house versus
global outsourcing has allowed
companies to succeed both
ways. Doing your homework
prior to making a strategic
decision of this magnitude is
essential to springboard your
company to success. There are
many resources available to
assist in the decision-making
process. I highly recommend
using other resources to help;
they may know what you don’t
know.
About the author
Brad A. Anderson has been
an International Trade
Specialist with the US &
Foreign Commercial Service
(part of the US Department of
Commerce) for more than eight
years. In this capacity he
works with Oregon and
Southwest Washington
high-technology companies to
develop export markets.
Specifically, he helps them
design market-entry
strategies; find and evaluate
distributors, VARs, or agents;
evaluate product or service
delivery methods; and
"internationalize"
their companies. Before taking
his current position, Brad
served in temporary
assignments as a commercial
attaché in London, Brussels,
Luxembourg, and The Hague. He
is the team leader for the US
& FCS Information &
Communication Technology team
charged with planning and
implementing methods to assist
small- to medium-sized US
high-technology companies. He
can be reached at brad.anderson@mail.doc.gov
or through http://www.export.gov/comm_svc/.
Date Updated: March 27, 2007
