Companies move high-end functions offshore to access talent

by 14 Nov 2006

COMPANIES ARE increasingly moving sophisticated, mission-critical functions such as product design, and research and development to China, India and other offshore locations, primarily because these countries can provide highly skilled scientific and engineering workers who are in short supply in the US and Europe.

And even though companies continue to offshore more high-skilled work, they are increasingly concerned about the loss of managerial control that accompanies outsourcing functions close to their core business.

A recent global study has found the need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies’ offshoring strategy.

Nearly three-quarters of the companies that establish or expand product development offshore report that access to qualified personnel is the most important driver of their offshoring strategy, and almost 70 per cent of survey respondents select an offshoring location based on the availability of needed expertise.

Access to qualified personnel has increased substantially (by 70 per cent in the last two years) as a major reason for establishing or expanding innovation, product development and product extensions offshore.

Contrary to popular belief, offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally.

In the US, for example, offshoring projects that involved high-skilled functions such as research and development, sales and marketing, product design and engineering resulted in an average of one job created in the US per project. In contrast, domestic job loss for office and administrative functions averages 23 jobs per project offshored.

“Companies in the advanced economies of the US and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies,” said Arie Lewin, director of Duke University’s Centre for International Business Education and Research, which conducted the study in conjunction with Booz Allen Hamilton.

“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 US companies were in need of more than 50,000 master and PhD graduates.”

Concerns about offshoring are shifting from external factors, such as political backlash, to internal factors, such as loss of managerial control and the impact on operating efficiency.

Loss of managerial control was cited by 48 per cent of companies as a major risk of offshoring, an increase of 30 per cent over 2005’s result. In contrast, political backlash and political instability have steadily declined in importance as noteworthy risks, with only 22 per cent of respondents saying this was 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 and 2005 surveys, dropped by 50 per cent.


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