CAD Manager's Newsletter #93 (September 25, 2003)

Continuing the Discussion

In the last issue I outlined the following benefits of CAD outsourcing:

• reduction in product/service cost via lower labor costs;
• use of currency conversion to lower costs;
• reduction in full-time employee head count;
• easier access to foreign markets;
• reduction in government compliance costs.

Risks of Outsourcing

Regardless of the benefits, companies must weigh these benefits, however, against the risks, which I'll address in this newsletter. Any time a company outsources a job to another party, be it down the block or half way around the world, the company loses some measure of control. The possible risks associated with outsourcing are as follows:

• longer delivery timeframes;
• language and communication barriers;
• lack of performance by outsourced provider;
• exposing intellectual property, such as patents, to foreign firms;
• unforeseen problems with foreign governments.

I'll now examine these risk metrics from the business owner's perspective. Here goes.

Longer Product Delivery Timeframes

No matter how you slice it, an outsourced CAD design department just isn't as easy to monitor or control as one that sits in the next cubicle. Of course management techniques for managing remote workers can be devised to minimize these sorts of problems, but the inconvenience of having to manage someone that can't be directly monitored builds up in delays. If we were to consider these sorts of problems with an outsourced provider who is halfway around the planet, and, thus, 12 time zones removed, you can easily see how delivery timeframes could be hampered.

I have yet to speak to any firm that, after outsourcing design or CAD services, has seen timeframes shorten. On the other hand, I've heard a number of companies complain about lengthened delivery timeframes as a result of outsourcing. The only instances I've heard of where outsourcing worked well was in non-pressure situations, such as correcting as-built prints, simple markups, or cataloging back documentation.

Language and Communication Barriers

In some cases, particularly in manufacturing environments, outsourcing to the far east creates real language and communication hurtles. The language variable is obvious but can be dealt with by using outsourcing suppliers that function in the native language of the parent company. However, communication issues are more complex. Many times good communications is more an expectation of how things will be handled than actual written communication. Anyone hoping to outsource CAD or other technical work should benchmark how direct communications would be handled, given time zone and language barriers.

I should point out that there are many cases of outsourcing technical services to countries such as Ireland and India where language barriers are negligible and time zones are compensated for by the outsource supplier working the shift hours of their customers. So, like in any other business scenario, good outsourcing partners are stepping in and providing convenient services that make working with them less risky for the parent firm.

Outsourced Provider Can't Perform

A provider that simply can't do the work can seriously damage the parent company. As an example let's say that an in-house CAD design department is replaced with an outsourced design department located half way around the world. Let's now ask a few hypothetical questions that illustrate what could happen with a non-performing outsourced supplier. If the outsourced department submits inaccurate or incomplete work, how can the parent company resolve the problem? If the outsourced department falls behind and misses key deadlines, how much leverage does the parent company have to rectify the situation? If the outsourced department lost key data how would the parent company recover? In the case of total non-performance by the outsourced department, what would the parent company's legal recourse be?

These hypothetical questions illustrate some real world problems that firms that have gone to outsourcing may experience. The bottom line is that when an outsourcing firm half a world away messes things up, the parent company simply can't go knock on its door and get the work back. Likewise, the parent company may not have any legal recourse at all should it need to recover losses via litigation. By the time an outsourcing firm gets deep enough into a non-performing scenario that the parent company should be worried, it is probably too late to salvage the situation.

Exposing Intellectual Property to Foreign Firms

Let's say that your company designs high performance jet fighters for the U.S. military under the strictest security clearance parameters. Would the U.S. government allow your company to send design data to foreign countries so their workers could perform outsourced design services? Of course not!

This scenario is, admittedly, extreme, but it illustrates what kind of risks a parent company can take when sensitive data moves over the Internet to other countries. Now consider some other scenarios. Should a U.S. printer manufacturer send key design data to an outsourced manufacturer located in a country that doesn't respect U.S. patents? Should a European drug manufacturer outsource manufacturing of medications to countries that don't respect their worldwide drug copyrights?

These sorts of questions are actually causing the most second-guessing of outsourcing trends in business circles. Is letting your cherished intellectual property leave the command and control of your company an acceptable risk? Only your company can answer this question.

Unforeseen Problems with Foreign Governments

What if a company built an engineering and manufacturing facility in a remote country and a substantial portion of the company's assets were moved to this facility? Now, what if this remote country becomes embroiled in civil war, terrorist activities, or a governmental coup that wrecks the country's banking industries?

If you think this sort of scenario is too dire, consider recent religious/political turmoil in Pacific Rim nations such as Indonesia or even the uncertainty over China's reacquisition of Taiwan. The Asian currency crisis of the late 1990's decimated some key suppliers in the Pacific Rim, which Japanese firms discovered the hard way. European firms that have outsourced to Russia in recent years have discovered that it is valuable to pay their workers in Euros to get around currency instabilities. What if your company had outsourced to a firm in Iraq?

All these examples point out what should be obvious: If your company outsources to a foreign firm, it is putting its trust in not only the outsourcing firm but also in a foreign government. In these days of unstable economies, global terrorism, and uncertainty over property rights, going global means taking global risks.

Risk-Benefit Analysis

Now it is time for the company considering outsourcing, be it CAD or any other type of task, to weigh the risks against the possible benefits and decide if the risks are worthwhile. This analysis will not be easy, nor will it yield exact numbers because of the inherent unknowns in considering the scenarios. What is clear is that outsourcing isn't a one way ticket to reducing costs without risks!

Summing Up

In the next issue of the CAD Manager's Newsletter I'll conclude the series on CAD outsourcing trends by examining some reader feedback. I'll also pass along some ideas on how you can tell when outsourcing is coming your way. If you have any information to share regarding this topic, please email me at rgreen@greenconsulting.com. Until then.