The Hindu Business Line : Less savings from outsourcing than expected: Study

People-related expenses, including training needs and cultural issues, are not sufficiently examined when companies decide whether and where to source their work.

New Delhi , March 2

AT a time when a controversy is raging on whether clamping curbs on outsourcing business is against the tenets of globalisation, Hewitt Associates has come out with a US study highlighting global sourcing trends and outcomes.

In particular, the study notes that companies reap less savings from offshoring than expected due to hidden costs.

The Hewitt study points out that while leaders in many companies are satisfied with their global sourcing efforts and will continue to invest aggressively in offshoring, "they must do a better job of addressing human capital costs and issues to maximise value."

Hewitt defines "global sourcing" as the component of a company's overall sourcing strategy, through which it makes business decisions about where, within its global reach, it performs work.

Of the more than 500 senior finance and HR leaders that Hewitt surveyed, 45 per cent indicated that their firms are currently using a global sourcing model or are considering implementing one within the next three years. Although cost reduction is the primary driver (92 per cent) and top means of gauging success (95 per cent), the study notes that leaders are often overlooking many people-related costs.

For example, less than half of companies analyse the tax environments of considered countries, only three-fourths measure the impact on supply chain costs and only 34 per cent assess the cost of plant or office shutdown.

"It's economics 101," said Mr Mark Arian, `Corporate Restructuring and Change' practice leader for Hewitt Associates.

"In the early rush to migrate to lower cost centres, companies have been grabbing people to fill seats where the supply of workers greatly exceeds demand, but, demand will quickly catch up.

"As their operations mature, companies that have invested heavily in offshore markets will see projected profits disappear if they have not fully examined issues around scaling, as well as future opportunities for labour arbitrage, developing leaders and retaining workers." Discussing the challenges in the outsourcing business, the Hewitt study says that people-related expenses, including training needs and cultural issues, are typically not sufficiently examined when companies decide whether and where to source their work.

Not surprisingly, most companies (88 per cent) evaluate labour costs and analyse potential return on investment (79 per cent). However, fewer than four out of 10 analyse the local economic and political climate, and only one-third routinely examine the impact of global sourcing initiatives on the community or other stakeholders (34 per cent). Fewer still (32 per cent), look at the impact of employee/union representation considerations at home or in the location to which they will be moving operations.

"Global sourcing decisions are made primarily by finance and the c-suite, with HR usually being brought in after the fact," noted Mr Arian. "However, companies can minimise hidden costs and maximise returns by enabling HR to have a seat at the table early, so they can carefully address issues, such as skill and language requirements, labour costs by market, alternative talent pools, workforce training, retention and change management at both ends of the global sourcing spectrum, that is, those being displaced and those receiving the work."

Hewitt's study shows that the percentage of jobs being `offshored' will roughly double in the next three years, with an average of 13 per cent of jobs at each company currently relocated and an additional 12 per cent being considered for relocation within the next three years.

Of those who are currently sourcing talent globally, 29 per cent began doing so in 1995-1999, and 43 per cent began in 2000-2003. Of those who do not currently use an offshoring model, 71 per cent intend to start by 2005.

After cost reduction, productivity improvement (54 per cent), focus on core competencies (49 per cent), increased flexibility (45 per cent) and 24/7 staffing (38 per cent) are the most popular drivers of global sourcing. However, the survey notes that while costs will remain the number one driver, other areas such as reduced cycle times and speed to market will gain importance in the next three years. The two most popular factors companies use to determine which jobs to relocate are routine transactions (64 per cent) and efficiencies in scale of work (61 per cent).

"Those who succeed at global sourcing develop an overall sourcing strategy first and make key decisions on what's core and non-core, and what will be sourced internally or outsourced to experts," said Mr Arian.

"Global sourcing does not mean sending work to an offshore vendor, but making a choice to create or expand internal operations offshore," he maintains.

Mr Arian feels that in the long run, HR leaders will be held accountable for hidden human capital costs and constraints that limit profitability and growth. So it is important that they be more aggressive in pushing for greater influence in the decision-making process.

The survey also reveals that the top locations used for global sourcing from the finance group include India (60 per cent), China (36 per cent), Mexico (32 per cent), Canada (15 per cent) and Ireland (14 per cent). Interestingly, the areas of greatest global sourcing expansion over the next three years will be Eastern Europe and South-East Asia, says the survey.

More Stories on : Outsourcing | Outsourcing

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Less savings from outsourcing than expected: Study

Reliance Energy raises $178 m via bonds issue

Prices of HR steel hiked

Defaulters beware, banks might bar you!

Patent challenges: Pharma cos walking a tightrope

Funds' move to trigger open offer for Matrix

Norms set for Indian Depository Receipts
Stiff entry: $100 m capital + reserves, $500 m average turnover

SEBI nod for ONGC participatory notes