The Real Costs of Offshoring

ABSTRACTOffshoring, or overseas outsourcing, has become an important feature of the global economy. Regrettably, offshoring decisions have been made without due regard to costs that are not tangible or readily quantifiable. Even more ominously, the strategic costs of overseas outsourcing have not been clearly assessed or understood, resulting in serious long term harm to corporations due to intellectual property losses, extinction of corporate skills, and creation of overseas competitors, among others. Missing in the global manufacturing literature is a comprehensive model to guide future offshoring decisions, a construct that looks beyond wage differentials and takes into account the hitherto neglected hidden costs and strategic pitfalls of offshoring. Such an ample model must incorporate a time dimension to highlight the differential impact of short term gains vs. long term losses affecting the outsourcing corporation. The comprehensive model presented here includes short-term, long-term and strategic costs of offshoring and can be used to quantify the actual, net benefits of overseas outsourcing.A BRIEF OVERVIEW OF OFFSHORINGThe current level of global goods and services offshoring (see outsourcing lexicon in Appendix A, below) would have been unthinkable without the technological changes in transportation and telecommunications that started in the 1950s. The introduction of containerization and intermodalism in the late 1950s (Cudahy, 2006) and the telecommunications revolution that started with the first transatlantic telephone cable laid in the 1950s (Atlantic Cable, 2009) followed by the fiber optic cable network of the late 1970s and, finally, the introduction of the Internet, led to dramatic reductions of international transportation and communication costs. The resulting logistics transformation facilitated cost-effective and remarkably faster global transmission of information and goods, making far-flung offshoring ventures possible and profitable.Offshoring has been one of the fastest growing sectors of the world economy in recent decades, and this activity has been perceived as having overwhelmingly positive effects on both home and host countries. The offshoring literature almost unanimously extols the virtues of cross-border contract manufacturing, ignoring the long-term and strategic costs of global outsourcing, pointing instead at costcutting and managerial facilitation gains, among others. Even areas previously considered as strategic, such as R&D, were increasingly viewed as outsourceable in an inexorable and unquestioned hunt for supply chain efficiencies. Most works take an overall positive view of offshoring such as Contractor et al (2011) which provides practical guidelines for outsourcing, stating that any activity that can be codified and digitized can be outsourced (offshored), and that the current extent of offshoring is relatively low relative to the unexploited offshoring opportunities. Pyndt and Pedersen (2006), present short cases depicting overall positive experiences of Danish companies with global offshoring operations.Other selected works analyzing the global outsourcing industry are Schiedeijans (2005) who provides an in-depth treatment of the mechanics of outsourcing, insourcing and the rationale behind each decision. The author offers metricsbased methodologies to evaluate outsourcing decisions.as well as easy-tofollow, operationable recommendations.An excellent overview of outsourcing/offshoring in the IT industry is offered by Willcock's and Lacity (2006). This work focuses on the conceptual framework of outsourcing and examines how to build successful outsourcing relationships based on a close analysis of the core capabilities of suppliers and the recognition that outsourcing relationships change over time and need to be managed accordingly.Sahay et al (2003) examine software development and the global IT outsourcing industry as well as the importance of Global Software Alliances (GSAs). …