The Risks of Global Outsourcing, Are They Worth It?

Small and medium sized enterprises (SMEs) are often reluctant to go global. First, they prefer to stay in familiar surroundings where they have reasonable control, and second, they have been scared away by disasters that range from lead paint on toys to tainted pet food.

What can’t be denied is that going global involves a significant risk and requires that anyone contemplating this plunge, or expanding their current outsourcing efforts, needs to collect some data and evaluate the pros and cons before reaching a decision.

But you just can’t look at the risk of going global, you also have to look at the risk of not going global.

The risks of not going global include cost, service, quality, and trademark and copyright protection.

Cost.  Costs are difficult to negotiate and in the long run may be unpredictable. Even in low cost labor markets, costs can increase.  China is just beginning to feel the pressure from higher wages that have been increasing at about 10 percent a year. In addition, exchange rates introduce even more uncertainty. The Yuan in china has moved against the US dollar, further adding to the cost of imported goods.

Service.  You take the laptop out of the box, plug it in and within five minutes need help.  The customer help line connects you to a service person in India and you fail to get the help you need.  While most offshore call centers work reasonably well, the company does expose itself to additional layers of uncertainty when this function is outsourced and especially if it is outsourced to another country.  When service levels fell significantly for Dell, they responded by pulling back some call center functions to the United States. But better training, the use of highly skilled help, and accent neutral training has improved service considerably.

Quality. Maintaining quality is a real problem. .  Mattel, a company that had outsourced the manufacture of its toys for decades, was caught off guard when they discovered that lead paint had been used on their products.  And they weren’t asleep at the wheel. They had quality control measures in place in China and had assurances from their suppliers that the paint they purchased met Mattel’s standards. What about the pet food scandal in which tainted food found its way into canned pet food sold in the United States? What about Heparin, the blood thinner made in China and used in US hospitals? Even when Chinese officials were confronted with the evidence that the blood thinner was tainted they denied responsibility. Eventually, however, they cooperated.

How do SMEs respond?  When you consider that Mattel, one of the leading toy manufacturers in the word, was unable to manage quality even with on-site personnel and regular inspections, it is not surprising to find SMEs becoming more cautious before making any outsourcing commitments.

Trademark and Copyright Protection. One of the biggest fears is that the supplier you choose will reverse-engineer your product, manufacture a reasonable facsimile, and sell the product into worldwide markets.  Just think about fake Rolex watches, Mont Blanc fountain pens, Louis Vuitton bags, Bose headphones, Hollywood movies, North Face jackets and the list goes on and on.  Have you taken a close look? Sometimes it is hard to tell the fake from the real thing. Indeed when you outsource you take the real risk of diluting your intellectual property.

While there are many reasons for not going global, it is important to consider the arguments for going global. They include cost, market share, and service.

Cost. If your product or service includes a heavy labor component then you continue to be vulnerable to rising labor and benefits costs. In the worst scenario your competitors who do go global and who are able to hold their prices constant could make it difficult for your company to stay in business. Even the support activities in your company including administrative support, marketing, sales and customer service are candidates for outsourcing. For example the cost to develop and maintain a web site using offshore companies is considerably lower than using internal resources or outsourcing to local companies. Many very reputable and reliable companies in India will design and maintain a website for $15 to $20 US dollars per hour. If you don’t go global developing and managing a web site might cost two to three times what it costs your competitors.

In some industries there is no choice. Competitive pressures require outsourcing.  A sweater manufacturer in New York designs sweaters at their Manhattan studios but must find low cost producers in Asia if they expect the department stores, to whom they sell the sweaters, to be interested in their product. Of course, sweaters are different from toys painted with lead paint, tainted pet food or contaminated blood. No one has ever died from wearing a faulty sweater!

A manufacturer of telecommunications equipment had been under increasing pressure to trim its manufacturing costs. While it required a difficult its domestic production facility was closed and a wholly-owned manufacturing division was created in Mexico. Product design, engineering and prototype development remained onshore.

Market Share.
Competitive markets are merciless. Unless you hold a monopoly position you can expect that others will be take advantage of outsourcing opportunities, lower their prices and erode your market share. This process is even happening in unlikely places like health care.  Hospitals in the United States have watched as medical tourism companies like medretreat.com have succeeded in creating a network of hospitals in countries like Panama, Brazil, Malaysia, Costa Rica, India and Thailand, and are  offering low cost elective dental and cosmetic surgeries to patients looking to save up to ¾ of the cost of comparable surgeries in the United States. Only recently have US hospitals begun to team up with hospitals in these low cost countries to offer patients an alternative to their high cost procedures. What these US-based hospitals have learned is that if they fail to accommodate cost conscious patients then they may lose them to the rapidly growing medical tourism industry.

Service. The services and products you sell often need support 7/24/365. Many firms have chosen to meet this need through offshoring.  A 250 bed hospital in a major northeast city, suffering from staff shortages, decided to take a fresh look at their emergency room processes from admission to discharge. One outcome of this project was that they reached an agreement with a hospital in India to read and diagnose X-rays during evening hours and on weekends when it was difficult and costly to retain their own radiologists.  And accounting firms use offshoring not only to lower their costs but to handle peak loads, especially during tax season. Thorough offshoring, clients who send their year-end tax data to an accounting firm may still be able to file before the April 15th deadline.

What’s the answer?
Global outsourcing may not be for you, but you can only be sure after you have done your homework. First you need to explore the options; which country, which suppliers. Then you need to collect cost and quality data for each alternative. Next you need to carefully balance the risks associated with outsourcing your components, products or services and compare them with the risks of not taking this route.

But how do you get the data to support your decision process. There are state and federal agencies that can help as well as consultants who can advise you on how to proceed. Above all, you have confidence that the advice you are receiving is credible. How do you do that? Make some calls to other companies, who have gone global, you will be surprised how much help people are willing to offer.

One final word.  Louis Pasteur said that chance favors the mind prepared. Unfortunalty, too many times in business it takes a crisis before major changes are made. But when the crisis strikes it may be too late. Looking into offshoring may be wise investment. It is important to be prepared for any eventuality. Make a list. Which components and products might be candidates for outsourcing. Then, get some help and do your homework.

<< Back to Project Tips