Outsourcing, Part 1

Outsourcing can affect your business in ways you may not have thought of

In the past four issues of CAD Manager’s Newsletter (click here for archives), I discussed approaching the CAD management job from a financial angle. I hope you found the series useful and that it gave you a few practical ideas you could use in your day-to-day CAD management tasks.

An important topic related to CAD management finances that I have not yet touched on is outsourcing. Because outsourcing involves many more issues than just financial ones, I am devoting my next few discussions to this increasingly common business strategy. As pressure to save money mounts and cost-cutting alternatives become more limited, it is inevitable that you will have the discussion about outsourcing at some point, if you haven't already.

In the next few issues of CAD Manager’s Newsletter, I’ll cover some ways that you can gauge whether outsourcing is right for you and how to measure it, control it or even avoid it altogether.

It's a Touchy Subject
Outsourcing is a touchy subject because it somehow affects everyone’s job. Most of my readers are in North America and Western Europe, whose economies have high labor costs and generally are losing jobs to outsourcing. On the other hand, I receive at least two calls a week from outsourcing companies in India that go to great lengths to convince me that outsourcing CAD labor to them is the best thing companies can do.

I’d like to treat outsourcing in a more generic way by defining it to mean having somebody outside your company help you complete your work projects. And in the current mode of operation, in which companies are trying to minimize costs and keep head counts low, outsourcing does offer the advantage of simply hiring temporary help that can be easily let go later. For United States, Canadian, UK and European companies, the simple fact is that it has become easier than ever to staff up with an outsourced labor force that doesn’t have retirement benefits and pensions to fund.

It's Not All about CAD
The first thing CAD managers should realize is that outsourcing isn't just about CAD. Outsourcing is used throughout the entire process of design, manufacturing, fulfillment and support. There are any number of business reasons why it might make sense for a company to outsource part of its operations; I'll address these more fully later.

I always encourage CAD managers to have some understanding of the business needs of their companies and then work to support those needs. Understanding why your company might undertake an outsourcing process will put you that much farther ahead of the game. So when you're thinking about outsourcing, don't just think about CAD standards and file transmissions. Think about the business reasons why outsourcing is attractive to your company. When you understand the business reasons for outsourcing, then you can truly be a participant in the game, rather than a bystander.

Defining Outsourcing
Many senior management teams seem to think of outsourcing simply as a way of reducing cost. They typically base this conclusion on the fact that outsourced labor is cheaper than labor in their own company. For example, if an engineer in the United States makes $26 per hour, but equivalent engineers in India make $7 per hour, then outsourcing must be cheaper, right? Upon further review, when you consider all costs for outsourcing a task, you can see that lower labor cost is a component but not the entire story. In order to really understand outsourcing, you must consider all the various factors of using an outsourced labor component. I’ll highlight some of those factors for you.

Labor savings. This is typically where the savings in an outsourcing context occurs. These savings simply are due to using a cheaper labor source at another location, usually in another country.

Outsource coordination. Just because you're outsourcing a task doesn't mean that the responsibility for it goes away. Somebody still has to manage the work and know where it is, when it's done and whether it's done right. And when your company is responsible for the actual work product, it is safe to assume that your company will perform these coordination duties. This is actually a cost that is brought on by outsourcing rather than a saving.

Growing your staff, temporarily. There may be cases in which outsourcing is the only way that you can effectively increase the size of your design staff. In these areas outsourcing is seen is a very cost-effective way to bring more people on board to tackle a task without permanently hiring them. In this way outsourcing becomes the ultimate temporary work agency. You may not like this method of doing business, but there are cases where it absolutely makes the most sense from a business perspective.

Timeliness. If you're working with an outsourced provider, how can you be sure that the workers will be as motivated to complete your jobs on time as you would be? Will you lose money if your outsourcing provider’s schedule slips? These are reasonable questions and ones that directly affect the quality and timeliness of the work your company can deliver using an outsourcing partner. This may not be a cost of outsourcing, but it is a risk liability that is assumed.

Local standards. When you outsource a job, it is imperative that your outsourcing provider work to your standards; otherwise you'll be spending all your time cleaning up the work they do. The question becomes, how quickly can your outsourced labor force adapt to your local standards? Will they already know your local drafting or code-compliance requirements? These are issues that you should address because they can cost substantial amounts of money if your outsourcing provider can't deliver a product that meets your needs. If you think you've had troubles enforcing standards in-house, wait until you have to outsource the work!

Training. When you hire a new employee, you accept and understand that it will take that person a period of time to become fully productive, right? Why should an outsourcing provider be any different? If you factor in a different language, a different time zone and different local standards, you will see that training for an outsourcing provider is imperative. I can't emphasize enough that you have to impart your company's standards and methodologies to your outsourcing provider, because it won't happen automatically. This training and learning-curve phenomenon is what I see as the greatest hidden cost of outsourcing.

Legal recourse. What if an outsourcing provider doesn't complete your project on time? What if they don't do accurate work? What happens if you get sued because of work that an outsourcing provider gives you? These are all complex questions and ones that your lawyers probably haven't thought of yet! Depending on what country you're outsourcing provider resides in, you may or may not have any legal recourse, so it's best to think about these types of factors now before you embark on an outsourcing arrangement.

Intellectual property. How do you know that an outsourcing provider won't simply take one of your ideas and sell it to someone else? Scenarios like this one have played out in great detail throughout Asia in recent years; in fact it is a major point of contention between western software providers and China. The simple fact is that if you don't have the right to protect your intellectual property in the country where you're outsourcing provider resides, you have no intellectual property protection! Make sure your company management understands this fact.

Summing Up
Now that you have some idea of how to really view the outsourcing process and all its intricacies, we can move toward quantifying the process and making business decisions that make sense for your company.

In the meantime, I encourage anyone with a particularly good or bad outsourcing story to email me at rgreen@greenconsulting.com with the details. Until next time.