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Six myths of offshoring

  1. Offshore outsourcing is costing "Western" jobs
  2. There's a stigma to offshore outsourcing
  3. The cost benefits of outsourcing are overstated
  4. It's a buyer's market for workers
  5. There are huge cultural barriers
  6. The ROI of outsourcing hasn't been proven

Myth 1: Offshore outsourcing is costing "Western" jobs

A recent study by the McKinsey Global Institute calculated that for every dollar spent on a business process that is outsourced to India, the US economy gains at least USD1.12. The largest chunk - 58 cents - goes back to the original employer. US companies perform 30% of Indian offshoring, so money returns home as earnings.

The US has lost 2m jobs due to global trade over the past 20 years but in just 10 years has added 35m new jobs. [1]

It was generally Western technology - telephony and fiber - that directly contributed to the viability of offshore outsourcing. Innovation will and should remain the largest competitive advantage the West has over developing nations taking on outsourced work. Many jobs that aren't materialising during the economic recovery are lost not through outsourcing, but rather through improved efficiencies and business automation.

Myth 2: There's a stigma to offshore outsourcing

In Bangalore alone, some 110,000 people are employed writing software, designing chips, running computer systems, reading legal documents, processing mortgages, preparing tax forms and doing other essential work for US, European, Japanese and even Chinese companies. Intel, Cisco, Oracle, Philips and GE are among the multinationals with significant facilities there. In fact, it would be challenging to find a single Fortune 500 company that is not outsourcing any part of its daily business operations to offshore outsourcing firms. Again, it's important to note that most outsourced jobs are supporting operations that aren't part of these firms' core competency.

Myth 3: The cost benefits of outsourcing are overstated

With workers in offshore locations such as India and the Philippines commanding only 10% to 30% of the salaries that European workers earn (with average employee costs ranging from EUR5,800 to EUR6,500)[2], there is no doubt that savings can be achieved purely from a head-count perspective. However, the greater benefit of outsourcing is the migration from a fixed-cost environment to a variable pricing model that allows firms to gain better control over operating costs.

Myth 4: It's a buyer's market for workers

Most firms underestimate the true cost of hiring an internal employee. Taking an employee with a base salary of EUR50,000, the following additional costs could be expected: benefits (medical, dental, pension plan): EUR18,000, administrative costs: EUR8,500, settling in/training: EUR1,400. Therefore, the total actual cost of the employee would be close to EUR78,000 a year -- a 56% increase on the initial estimate.

Myth 5: There are huge cultural barriers

The first step involves comparing potential offshore countries. It's no coincidence that 260 of Fortune 1,000 companies have selected India as their nation of choice for outsourcing. Indians tend to have excellent English-language skills and a highly trained technical workforce due to the first-class education system.

The second course of action is to ensure that the outsourcing firm selected has in place project managers who can engage both the customer and the offshore resources. A good project manager will facilitate communication and help define and track goals and objectives.

Myth 6: The ROI of outsourcing hasn't been proven

On the contrary, the ROI component of outsourcing has been shown time and time again. In fact, the greatest arbiter, the marketplace, seems to give outsourcing a resounding thumbs up. Beyond reducing head count and employee overhead, additional benefits such as faster time to market and improved quality of the finished product can achieve an ROI of over 400% in some cases. Today, the question is not if a firm will outsource, but when and how.

[1] David Kirkpatrick, Rage Against Off-Shoring is Off Target Fortune Online. 9 feb, 2004.
[2] Vinay Kumar and Gabe David, Choosing a Location Outsourcing in Financial Services. Pp. 10.
This article originally appeared in a different format on the SBPOA. Our thanks to Satnam Gambhir of Global Access.