One of the hottest debates going on in business these days is the debate regarding what work, if any, will stay in the supposedly high cost country and what work will be sent to the supposedly low cost country. This is the function that is usually referred to as off-shoring. There are many factors that seem to be taken into account with this decision, but there are also several factors that don’t seem to be included. It appears that the only major factor that companies really consider in the off-shoring decision is the relative wage differential of the existent workforce versus the prospective workforce. Having gone through, worked with and reviewed some of these types of working environments, it has made me wonder if there are other factors that should be reviewed before these decisions get made.
The bottom line in all of these out-sourcing or off-shoring decisions seems to be doing what is perceived as best for the organization’s bottom line. This is also somewhat subjective depending on which of the shores you find yourself. The idea is to save money. All other factors will be dealt with or considered in due course. And one of the best ways to save money is to try and reduce the cost of your labor associated with the function in question. Are there other people in other places in the world that can and will be paid less per person to do the work in question?
On the surface the answer to this question is almost always “yes”.
If the only factor to be considered is the wage rate paid to the resources doing the work, then the decision is always an easy one.
But things are usually never that easy.
The first jobs to experience this sort of movement were the production and manufacturing jobs. Production lines and repetitive functions were sent elsewhere. Business cases were built containing the incremental cost of building a new factory as well as the reduced cost associated with the low-cost labor to staff it. Questions were answered about how long the pay-back was on the needed off-shoring investment and decisions were made. Factories and production lines were built in these low-cost countries. The production of simple and basic products was then moved.
I am not going to continue too far down this line of thinking because we all know where it goes. More and more, and more production functions have been off-shored. These are finite directed positions that perform repetitive processes at a fixed rate, to create large numbers of similar products.
Let’s now fast forward a few decades.
Almost every business function is now subject to the discussions associated with which shore it should be on. One of the biggest issues associated with any proposed move now, is that the work being considered is usually more variable than the production work of the past, and it is more subjective in its execution.
While a production line will move along at a fixed rate enabling all participants in the production line to work at the same rate, the same cannot, and should not be said about knowledge based disciplines. Do all people who write software code, or design hardware do it at the same speed? Are they all equally proficient at their respective disciplines? Are all accountants or financial managers at the same competency level?
On an even more basic level, do all locations have the same financial drives, work culture, language fluency and associated work styles when it comes to delivering the required work products? Remember now we are discussing complex or service oriented work products, not physical products such as consumer electronics or other real goods.
It is no longer just a question of the difference in the hourly wage rates, or salaries of the teams involved. The question now moves into the somewhat murkier areas of work force effectiveness and work force efficiency.
Efficiency and effectiveness refers to how many resources it takes in each relative location to accomplish the desired work, and how long it takes them to do it. Too many times it is assumed that one workforce is as proficient as another. This might have been the case on the fixed speed production line (after appropriate training and time to come up to speed), but is it correct to apply these same principles to non-production line types of work and service products?
This is neither a case for or against the off-shoring and cost reduction push. These are tidal type forces that will continue until some sort of economic equilibrium is reached. This is more a question of identifying, accepting and analyzing the total costs associated with each proposed workforce location decision.
Just because it takes ten highly motivated, well educated, relatively expensive resources in one global location to deliver a satisfactory work product, does not mean that it will take the same number of similarly motivated, similarly educated relatively inexpensive resources in another global location to deliver the same work product in the same amount of time.
Research has shown that it usually takes more people, and more time for the lower waged (and supposedly lower cost) locations to accomplish the same tasks and deliver the same work products. (https://cs.stanford.edu/people/eroberts/cs181/projects/offshoring/failures.html)
What this means is that it is not just the relative cost of each hour of work that must be examined in the off-shoring decision. It is also the relative number of hours of work that are required at each location that must be included in the equation. That means that the relative number of people (spending hours on the work) and the length of time that they spend (how many hours) should also be taken into account.
If it takes five people one month to do the work at a higher cost location, and it takes eight people two months to do the work at lower cost location, the resulting total cost of work delivery may yield a very different work location decision that just the straight hourly wage comparison that has been so popular in the past.
On the other hand, it should be noted that if the relative wage differential is great enough, even these types of labor inefficiencies can be overcome.
I try to focus on real and definable costs. The relative number of hours used and the relative wage rates at each location in question are either known or can be estimated with some relative amount of accuracy. These are usually real numbers that deliver real relative costs. As always there are other factors that can be associated with the off-shoring question. I’ll list a few of them, but as they are less quantifiable in their effect, it will be difficult assign an actual value to them.
Are there incremental but hard to quantify costs associated with the increased complexity of the operations, IT, infrastructure and security associated with an off-shoring. In today’s hacker infested world one would think that adding facilities and resources in other global locations would have an effect on these types of costs. However, it is hard to add them into any comparative costing discussion.
There are considerations that should be observed regarding the relative quality of the work product generated in each location. Are there bugs in the software? Are there differences in the way customer support is provided that affect customer satisfaction? These are difficult issues to quantify, at least prior to having to try and resolve them.
Communications will also become more difficult. What was once a real-time conversation may now become a series of emails, depending on the relative time zones associated with the differing locations, potentially across multiple days. The overall speed at which things are accomplished, or issues resolved can become problematic.
The cost of management should also be expected to increase as well. At least initially, expatriate management will need to be present at the off-shore site to setup the new functions and oversee them. Depending on how things progress, their presence could extend over a significant period.
For those of you not familiar with the expatriate role, these people are expensive. They are normally paid at the “high cost” location salary rate, and their expenses for staying in the low-cost location are usually also covered by the company. They are in effect paid close to twice for the inconvenience of living in one location and working in another.
The final “soft” cost that I will address is the public perception of moving jobs out of their current location and to another, as well as the potential exposure associated with future governmental regulations associated with this activity. Market movements associated with drives to “Buy Local” and legislation designed to increase the expense associated with off-shoring are gaining traction in multiple locations.
It is easy to see why low wage rates in other parts of the world may be attractive. As companies continue to become more virtual in their natures’ Virtual Office can mean an office anywhere on the globe. The initial success and savings generated by moving the simple and repetitive off-shore has given rise to the desire to move more and more complex and unique functions as well. This complexity and uniqueness affects the efficiency and effectiveness of the model.
While the relative wage differential will continue to be an important factor in the off-shoring equation, other factors will continue to increase in importance as the off-shoring drive continues to move up the business complexity curve.