Outsourcing: The Finale11 Oct, 2006 By: Robert Green
Keep in mind what you've learned from this series when you are confronted with the issue of outsourcing.
In the previous four issues of CAD Manager's Newsletter I broadly covered the overall topic of outsourcing. If you haven't had a chance to read the prior installments, I recommend that you do so (click here for archives) to understand how the topic has evolved.
I continue to marvel at the range of responses and emotions that this series of newsletters has evoked. What's clear to me is that everybody has a strong opinion on the topic, and most readers view outsourcing as a threat to their careers. In this installment I'll wrap up the series by presenting some of the hidden costs of outsourcing that most companies tend to overlook.
Hidden Outsourcing Costs
Very often companies concentrate on what they perceive to be as lower labor costs without detecting the hidden costs associated with outsourcing. Missing these hidden costs makes outsourcing seem artificially cheap. And, of course, the hidden costs will become obvious at some point -- typically when it is too late and the mistake has been made.
So what are some of the other hidden outsourcing costs that you should be aware of when analyzing outsourcing scenarios? Here's a list of the more common ones I've identified, along with some background information. Although this list certainly isn't comprehensive, it will lay a good foundation for the conversation on hidden costs.
Brain drain. The classic case for brain drain occurs when a number of jobs are eliminated and outsourced to a remote service bureau. When these jobs are outsourced, human expertise is lost -- and may even go to work for the competition! No matter what, when skilled employees are gone, they're gone -- and there's no way you're going to be able to send the work elsewhere without a major productivity hit.
Along with the loss of human expertise goes the loss of continuity in how your company operates. This is a huge hidden cost of outsourcing that I don't see acknowledged in the business world. So if you outsource a $20-per-hour job overseas for $8 per hour, what are you really losing in terms of staff competency? What is it really going to cost you in terms of hour-per-hour efficiency? Will brain drain cause your company to be less competitive in the long run? These are the sorts of questions that should be pondered in detail prior to any decision making on outsourcing.
Interestingly, companies that understand the concept of brain drain are less likely to outsource, and those that don't understand the concept typically realize their mistake only after they've made it.
Intellectual property. If you have an outsourced firm operating in a country that's not bound by intellectual property laws, you may have your designs replicated or copied elsewhere. You may not even be aware of it.
Years ago, I talked to a product designer who had been on a business trip to the Far East and had actually seen one of his company's new consumer product designs on sale in a Hong Kong market. It turns out that his company had used a global outsource provider for its manufacturing and that outsourcing provider had sold his company's designs to a competing firm. Because the intellectual property laws in this particular country were not reciprocal with law in the United States, where the client firm was located, there was no legal recourse. This case is a perfect object lesson in one of the greatest risks that you take when you outsource design or CAD processes to a foreign provider.
Now, I don't mean to make anyone paranoid, but this type of thing does occur and it's something that absolutely must be addressed by your legal team and your corporate senior management before any type of outsourcing can occur. Losing control of your intellectual property, forfeiting patents or having digital files copied without your consent is a big risk. This may be enough, in many cases, to preclude companies from even investigating outsourcing.
Follow the sun. As you'll recall, I mentioned before that "follow the sun" means that by outsourcing part of your work to the other side of the planet, you can literally run two shifts back to back. While this can work to your advantage in repetitive work environments, where the entire process is well understood, you also need to be aware of factors that can work against you in using this methodology.
In companies with highly collaborative work processes, it helps to have time overlap between work teams. For example, work processes that span between New York and London or New York and Los Angeles have some period of common work time during the day where employees can talk on the phone or use other collaborative methods to resolve problems.
The inability to collaborate with those on the other side of the planet creates costs that must be factored in, because it's going to necessitate more training and present more process issues that must be confronted in order to make that outsourcing process actually work. So, while follow-the-sun methodologies are typically touted as an advantage in the outsourcing process, it really depends on what you're trying to outsource and what type of collaborative scheme you have.
Again, if you don't think through your needs and processes it becomes easy to step into an outsourcing situation that can lower your productivity rather than raise it.
The Final Checklist
Now the tough part: How to actually consider all of these different risks and reward ratios, and work out a sample cost scenario like the one I showed you in Part 3. The thing that is so vexing in analyzing an outsourcing process is making sure that you don't overlook something. It's typically the problem you don't see or the cost you don't factor in that's going to become the tipping point between a good outsourcing solution and a bad one. So, let me give you some pointers that work in analyzing this situation.
Get everybody involved. Don't allow management to make a decision based only on labor rates. Make sure you, as the CAD manager, provide a useful reference point -- an opinion on whether the types of technology assumptions that your management staff is making are actually valid. Make sure that you have power users, production users and skilled designers represented in this. After all, this is going to affect the whole company.
Keep your legal staff informed. Often there are business and legal liabilities that must be considered when undertaking a new outsourcing process. For example, no business is going to open without properly incorporating and getting all of its legal contracts in order. Nobody's going to do business with sub-suppliers without having legal agreements and controls and constraints. Why should outsourcing be any different? It frequently amazes me that a management team who won't even bring in a part-time contractor without 28 pages of contracts thinks that they can outsource a work process across the ocean to somebody they've never met in a country they have no legal control over, and simply assume that it will work.
Think -- a lot. Really consider what you're trying to outsource. Analyze the exact tasks, the exact work processes that you're thinking about outsourcing. So frequently I see people approach outsourcing with the attitude, "We'll just take this task and we'll outsource it," without any regard for the processes that revolve around that task. So don't just analyze the task you're outsourcing; analyze the entire process that revolves around that task, to decide whether you're actually creating new liabilities for yourself.
Think some more. After you've thought through these three points, go back and rethink them. Readjust. Reevaluate. Evaluating the tasks, processes, controls, training methodologies and timing it takes to outsource a job is a never-ending chore. So unless you're considering only very high-volume, low-skill tasks that can be effectively outsourced, you should think about the issues that revolve around your outsourcing process.
Know the motivation. Why does your management want to outsource work? Have you asked? Have you worked with them to negate their concerns? If not, why not? Don't just wonder about outsourcing; find out why it is being considered and react accordingly.
Understanding What You Cannot Change
Given the global realities of an expanding work force, more and more CAD workers will be affected by outsourcing. There's no way that anyone in the United States, Canada or the United Kingdom is going to stop China or India from going after business in a free market system. Therefore, the best thing that you can do to deal with and address the outsourcing process is to understand it, analyze it, and really work with your management to make sure you're doing everything you can to control the process.
I can't stress enough that sitting by and hoping that outsourcing will go away simply won't work. Only by analyzing the situation carefully and proposing alternate solutions can you mitigate the effects of outsourcing.
I think you'll find that if you really work with your management teams to understand their needs and what's driving them toward outsourcing, you'll be able to find a solution in-house more often than not. I leave it to you to analyze your particular situation using the various metrics I've introduced in this series.
I hope you found this series valuable, and I hope you'll be able to employ some of these techniques in your own workplace. Until next time.