Outsourcing, Part 4: The Bigger Picture27 Sep, 2006 By: Robert Green
Do the advantages of outsourcing outweigh the pitfalls? Doing your research is the only way to find out.
In the previous three issues of CAD Manager's Newsletter (click here for archives), I broadly covered the overall topic of outsourcing. If you haven't had a chance to read the first three installments, I recommend that you do so now because everything I'll touch on in this installment will reference material I've already presented.
I know that outsourcing is a touchy subject, but even I am surprised by the amount of mail that I've received on this topic, how global the responses are and how uniformly negative the tone of that mail is. To close out the topic of outsourcing and adequately respond to all the feedback will require both this and the next newsletter. There is simply too much to say about this very important issue to complete the discussion in this edition. Here goes.
I received several responses along the lines of this one, from a reader in Australia: "The first thing that needs to be realized is that companies offering these services in third-world countries operate using pirated software. The numbers simply do not add up."
While it is true that software piracy is running rampant in many portions of the world, I truly believe that the main cost differential for outsourcing is in the lower labor rates. It remains to be seen whether the large international software companies will aggressively go after the software pirates, but whether they do or not will neither stop nor encourage outsourcing.
It's simply a fact that annual salaries for engineering talent in China are approximately $3,000, and we see rates of $8,000-$10,000 per year in India. With labor rates in this range, a full package of AutoCAD, Inventor or SolidWorks could be amortized over a year and raise labor rates by no more than $1 per hour. And, like it or not, nobody in the United States, Canada or the European Union is willing to work for anything approaching these low labor rates, so the outsourcing continues. But, independent of that concern, we simply can't control the wage levels that people are willing to work for in other countries. No matter what labor rates might be in Canada, the United States or Western Europe, if somebody is willing to work for $3 per hour in another country, there's no law against it -- and really nothing that anyone can do to stop it.
I also received several responses that were along the lines of this one from a reader in Minnesota: "If I see anything else that could destroy my job and industry printed on this Web site, in this magazine, or online, you can remove me from your list of subscribers. Outsourcing will degrade our profession. Shame on you for presenting this topic to the masses."
Let me state, in my own defense, I don't believe that I've been advocating outsourcing. What I've been doing is trying to explain it and show you how to measure it so that you, as a CAD manager, can be educated about what your bosses may be thinking. If anyone thinks I'm trying to eliminate his or her job, please understand that's not my intention at all. I'm simply trying to help you readers understand the market forces that are in play and how they can affect you.
What I've endeavored to do in this series on outsourcing is to illustrate that outsourcing is not a panacea, and is not nearly as simple a process as many people think it is. In fact, if you read my last installment carefully you'll see I went to great lengths to compute the real cost of outsourcing. In that computation you'll also see that labor savings is the smallest and easiest part of the process to compute and that the vexing complexities of management, oversight, contracts and business process innovation can be so problematic that they entirely negate the cost benefit of outsourcing.
In this issue, I'll be talking a lot more about the other uncertainties that can add unknown costs or risks to the process of outsourcing. It's far better to understand how outsourcing really works and what the real costs are so that you can go into the whole process with your eyes open. I feel you're going to have a much better chance of protecting your own job from outsourcing if you really understand how the process works, and that's been my intent.
On the other side of the feedback coin, since my last newsletter I've received four proposals from outsourcing firms, all of which happen to be located in India. For the past six to seven months, I've typically received no fewer than two unsolicited phone calls per month from Indian service bureaus. These firms are not bashful. They openly solicit your business. In fact, they've all asked me if I would refer clients to their business, even though I have no idea who they are and no information on their background. Nor did they ever provide any references.
What this illustrates is that, with the global availability of telephones and e-mail, outsourcing firms are simply going to come find you. They'll talk to your management, quote labor rates in the range of $6-$7 per hour and promise exemplary service. Say what you want about outsourcing, but you can't deny that these firms are hungry and are pursuing business with a passion.
A First-Hand Outsourcing Story
About three weeks ago, my DSL service went out. In the ensuing two weeks, I was unable to get my service problem resolved, despite making eight calls to customer support. Every time I spoke to a technical support agent I asked where they were located. And when I pressed them, every one admitted that they were in an overseas outsourced call center. I was ultimately able to battle my way through getting back online, but it was no thanks to the technical support department of my internet provider.
The impression I now have of that DSL provider is that it doesn't value customer service enough to make it a core part of its business. This suspicion was verified when I later called the sales department to register my dissatisfaction and verified that all sales agents were direct employees located in the United States. My impression of this company is now negative and I would gladly switch if I could. When I have more broadband choices I will feel no remorse about leaving this company.
Do you think this company ever factored the cost of customer dissatisfaction and lost business into its outsourcing calculations? My bet is no.
Next time I will wrap up the discussion of outsourcing by reviewing the hidden costs and I'll give you a checklist of things you can do to make your case about outsourcing to your management. Until then.