Saturday, December 1, 2007

Globalization: Are US Based Nearshored Outsourcing Centers Cost Competitive with India?

Are US based nearshored outsourcing centers cost competitive with India? Now that the initial hysteria over all our jobs going away to India, or wherever else they were going to go, is over, is this the time to discuss the possible use of other US sites to gain competitive advantage? There are two sets of variables in these types of decisions, objective and subjective. Let’s use classical economics factors of production to begin our review.
We’ll start with land. While most overseas locations that are considered for outsourcing have plenty of land, do they have the infrastructure that goes with it? Also, and let’s be honest here, American and European businesses were taking advantage of the, until recently, lax environmental and OSHA-like regulations in these locations. Buildings with the necessary fixtures to support global businesses, communications infrastructure, power grid, and public transport for workers are all required. The earlier locations, Mumbai and Shanghai, have been built out and are expensive. The second tiers are being identified and are being moved to. However, how smooth this transition will be remains to be seen. While major American cities like New York and Los Angeles are still expensive, sites in the Midwest (South Dakota) and the Southeast (Mississippi) offer promising alternatives. As businesses begin to find the true costs of building overseas and the increasing regulatory environment (or, are held accountable by public opinion for seeking out locations without these protections), local sites should begin to see interest. And, these locations are not shy about promoting themselves. Michigan has been very aggressive in getting its message out across the country lately.
Next is labor. By now, most people have probably heard about the rapidly increasing wage costs for staff with the appropriate language and technical skills and the high staff turnover resulting for those that don’t keep up. The media has reported stories of call centers that probably compromised on their hiring standards and have had bad customer experiences when they couldn’t understand the operators. Obviously, this topic is a very sensitive one. But, as with land, labor offers potential in this country particularly as US corporations begin to shed themselves of expensive health insurance and pension plans. Costs are rising offshore and regional costs in this country are starting to look somewhat appealing. Some US companies are beginning to place centers at locations near state university systems away from major metropolitan areas.
Finally, capital. The overseas locations are still not as efficient as the US. Sometimes, it’s the simple things like the low rate of adoption of credit cards in these markets. Payment systems while improving are still not at US and European levels. Then there’s the foreign exchange issue. Then there’s the long term question about the tax policies of the countries where these facilities are located. Will they see this as an opportunity for revenues when their overheated economies begin to cool down?
OK, those were the quantitative. And, while I don’t think anyone is going to rush out and throw out their current offshoring plans, the points mentioned are intended to help thinking about future trends, challenges, and opportunities. Let’s review some subjective considerations. Admittedly, these by there their nature cannot be measured and do have a somewhat emotional aspect to them. But, they shouldn’t be dismissed too lightly. Let’s group them around the three criteria that we’ve just used. First, land. Many of these places are a long way to go. As the second tier cities are used that’s even more distance to go on the ground which is why those roads and public transportation are so important. Also, physical security becomes more important the further you go form the main cities. Then there’s the political/economic risk associated with these locations. Next, there’s labor. Language and culture are very important considerations. The quality of education becomes very important. People are people. If their government is unhappy with our government then they may become happy with us. In a dictatorship like the People’s Republic of China that’s a very real possibility. Finally, we have capital. Nationalization and market risks are some of the possible difficulties here. The point here is that businesses shouldn’t be putting too many of their eggs in any one basket. I haven’t been trying to dismiss offshoring out of hand because I believe that it has a place in the regional strategies for global companies. I just want to lay out for discussion some factors that could change in the not too distant future. The current business environment is in a state of flux and I think that earlier choices that have fallen from favor may come back into consideration soon.

Contributed by Guy de Lastin

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