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EBN Poll: Outsourcing Good for Biz, But…

Respondents to a survey by EBN generally accept that the impact of outsourcing on the electronics industry has been overall positive, but their endorsement is not overwhelming.

Almost 57 percent of respondents to the EBN survey said outsourcing has been “good overall for high-tech,” confirming sentiments from research firms over the years as OEMs handed off manufacturing to companies that specialized in production activities.

It's not a ringing endorsement, however. More than one in every three respondents, or 37 percent, said outsourcing has not been good for the industry. Again, this view reflects the perception of workers, especially in Western countries, that job losses follow the outsourcing of production to contract manufacturers, which in many cases promptly relocate facilities to lower-cost locations in Southeast Asia.

The controversy is heating up. Stubbornly high unemployment rates in Europe and the US have sparked anger among voters irritated by the outsourcing of manufacturing jobs to other countries. In fact, many in the engineering community believe outsourcing has now extended into the design area from technical and other assembly line functions. It was initially assumed high-level design operations would remain in the West. That perception is changing as high-tech companies continue to establish engineering as well as other R&D centers in China, sparking fears among workers in the West.

Outsourcing has become hugely controversial in the US where hollowed-out towns in the Midwest have keenly felt the impact of job losses resulting from the shift of manufacturing to other parts of the globe. Increasingly, however, other developed economies are getting sucked into the argument. In Australia, for instance, IT workers are dreading a massive wave of redundancies, predicted by researcher {complink 7426|Gartner Inc.}

Whether you agree with or disagree with outsourcing, it is obvious many companies have been thrown into a quandary. First, the opposition is not strong enough to accelerate a reversal of the trend, and the business community also will not take actions guaranteed to be against its interests. Electronic companies have successfully pared down costs by jettisoning manufacturing plants and have reduced overall operating costs by removing from their balance sheets, not just production, but also associated costs such as payroll management, IT support services, and customer-support related call-center functions. The social cost of outsourcing, though, is becoming worrisome for many, including some high-tech executives.

For the electronics supply chain, the controversy reflects both social and profit concerns. The industry is concerned over what parts of design, procurement, manufacturing, and after-sales warranty repairs to keep in house and which to hand over to specialty services providers, because of the inherent instability when companies lose control over their production processes.

The first wave of outsourcing involved assembly work, but as contract manufacturers and other support services providers have demonstrated increased reliability, more companies, including semiconductor suppliers, have added to the tasks handed over to contractors. Now, many OEMs are nothing but design and marketing outfits with limited control over production and procurement.

Nevertheless, the reality is that most high-tech companies have little to grouse about with regard to outsourcing. They are the direct beneficiaries, and, aside from concerns related to IP theft, they see the margin improvements as evidence outsourcing is good for their businesses. Employees, on the other hand, have seen their clout whittled down and jobs disappear as outsourcing proliferated. Pressure from laid-off workers and those still fearful about future job prospects is now building on politicians who may, in turn, introduce actions that could hurt high-tech companies.

Nobody should expect workers and politicians in Asian and other lower-cost manufacturing regions to complain about the evils of outsourcing, though. The development has been largely beneficial to the economies of these regions, and high-tech companies can expect countries like China and other outsourcing centers in Eastern Europe to continue implementing policies that would attract outsourcers.

Manufacturing Outsourcing summed up the view from beneficiaries of outsourcing in an article:

    The jobs that have been outsourced are a source of prosperity and upward mobility to many skilled beneficiaries in these Asian countries. These beneficiaries in turn provide new markets. For businesses that outsource, it is a win-win situation too, as they have access to a vast pool of skilled labor that may not have parallels in their own country and more consumers to buy their products.

Do you agree?

22 comments on “EBN Poll: Outsourcing Good for Biz, But…

  1. mfbertozzi
    December 20, 2010

    In principle, outsourcing process requires a clear strategy before take decision: are you doing to bring out operational tasks within chain you definitely won't use in the future? Or for how long? Another point is knowledge transfer process to plan from you to outsourcer in order to achieve targets as per business plan conceived.

    Knowledge transfer is not only a matter of competences or skills (if have selected a specific outsources is of cource based on know how they hold), but in particular in a matter of mindset and ways of “jobthinking” (marketing, sales, design, operation or whatever) inside you.

    If you allow the outsourcer to perform well you will be in condition to deserve and focus on strategic activities as key factor for your business target.

    I believe several times happened outsourcing decisions are taken for reach in a really short term costs savings, just to paint to the board “managers currently on in charge are strongly reducing opex…” but this not the pathway of success.

     

     

     

  2. Ariella
    December 20, 2010

    Bolaji, I want to zero in one small part of your post.  You say:

    Employees, on the other hand, have seen their clout whittled down and jobs disappear as outsourcing proliferated. Pressure from laid-off workers and those still fearful about future job prospects is now building on politicians who may, in turn, introduce actions that could hurt high-tech companies.

    I completely agree with that first sentence. The second one is somewhat questionable, though.  As IT workers are not generally unionized, I don't think they can band together to gain the attention of politicians in the same way, say, the auto workers can.  I see that you suggest a stick rather than a carrot approach like the bailout of the auto industry.  What type of actions can be taken to try to limit outsourcing that would end up hurting high-tech companies?

  3. bolaji ojo
    December 20, 2010

    Ariella, Frankly, I am at a loss as to what could be done to limit the negative impact of outsourcing on Western societies. The process cannot be reversed or, at best, it will be difficult and in truth the industry does not want to reverse it. At the same time, we cannot ignore the impact on communities worldwide. In some the impact is positive and in others it is negative. Some people think outsourcing has been good for all nations. I disagree. I believe rational actions must be taken to assist those who have suffered. What those steps should be, I really don't know. It does bother me, though, that companies only see the benefits to their operations.

  4. Ariella
    December 20, 2010

    I share your concern.  I was wondering if you were aware of any steps the government might consider to reverse the trend without overstepping its usual bounds with respect to business operations.

  5. Anna Young
    December 20, 2010

    Bolaji, I agree with your assertion that “most high tech companies have little to grouse about”

    I wonder, what measure can any government take to tackle the issues raised?

  6. bolaji ojo
    December 20, 2010

    Ariella raised the same point. Can governments globally inject themselves into this discourse and help find a middle ground? We may end up in a situation where if the industry fails to act governments in embattled Western nations might be forced to take steps that could force solutions companies don't want down their throats. That would not be the best solution but right now companies are so narrowly focused on immediate profit they don't see the cauldron boiling over beneath them.

  7. mfbertozzi
    December 21, 2010

    Bolaji, that's the point.

    “right now companies are so narrowly focused on immediate profit they don't see the cauldron boiling over beneath them”

    I fully agree with. Really often outsourcing decisions are not supported by medium-long term strategy; TPI has reported past November large outsourcing contracts are plunging by 20% across the globe. Are we convinced it is only a matter of financial crisis? Then another risk comes: funds from Governments to corporations have started outsourcing process are not in condition to assure a good roi back. And people are losing jobs because of “off-shore” or outsourcing actions outside the country, are not requalified anyway due to restriction of public funds; in fact a % of them didn’t achieve any roi back. Maybe Governments involvement has to be not limited to funds but it includes also advisory support in preparing adequate plans for the process or in creating spin-off as results of outsource decisions. And shareholders are a mix of private and public investors.

    It could be a recognized schema to follow ?

  8. prabhakar_deosthali
    December 21, 2010

    Most of the cribbing for the outsourcing  has come from the Western countries where there are many job losses . For countries like India it has created a whole new world of job opportunities. But why first of all the idea of outsourcing came to the minds of US businessmen?  I will sight my own experience back in 1982. I was an engineer then and my company in India ( a very small company having just 15 programmers ) got a contract for software development from a US telecom company. I alongwith my two teammates was deputed to US to work for 4 months and finish the project.  When I arrived in US and started working in the US company I observed that the engineers there had a very leisurely working style. Thier week was of just 4 days ( Friday afternoon used to be spent on discusiing weekend plans and Monday morning used to be spent in describing how the weekend was spent) Most of the engineers used to stick to a strict 9-to-5 working schedule.  So the project schedules were made taking only those many man-hours per week into account.  In the contrast we the representatives of the outsourced company in India were there to finsih work as fast as possible and return to India. We were ready to work 12 hours everyday including Sundays if required.  I Think this contrast in the working styles of the in-house Vs outsourced workforce must have tipped the balance in favour of outsourcing in the minds of the top management as it made a better business sense.

  9. Ashu001
    December 21, 2010

    Prabhakar,

    Thanks for giving the other side of the issue.

    I am assuming you are now a US Citizen.But to hear you say you are still very positive on the outsourcing phenomenon is very encouraging news.

    There is no disputing the fact that outsourcing companies have employees who are more Goal-oriented and focussed on the task at hand(compared to in-house/more secure employees).

    In America today I am seeing a similar strain in the debate on how best to reform Bankrupt State Governments today.

    CBS News/Meredith Whitney came out with a really good report,explaining how Over-paid Union Employees with Gold plated Pension and education plans(who do hardly any work) are destroying State Government budgets all over America.

    http://www.cbsnews.com/stories/2010/12/19/60minutes/main7166220.shtml

    The Best solution outsource all services to lowest bidder and get rid of all Union employees to bring back quality service levels.

    Mike Shedlock of Sitka Capital is running a constant crusade on this issue on his blog.

    http://globaleconomicanalysis.blogspot.com/

    Regards

    Ashish.

  10. prabhakar_deosthali
    December 21, 2010

    Thank you Ashish for your comments.

     

    No I am still a very much Indian Citizen. In 1982 I consciously decided to return to India as even at that time US was going thru a recession and I saw  about 80 people getting pink-slips and just a 4 hours notice in the US company where I was working on the outsourced work.  I felt gulity at that time that those people must have lost jobs because of contractors like us.

     

    But the working style of contract work Vs regular employess is ame here in India also.  That is why many Indian companies also are relying more on outsourcing  work rather than having permenant employees with their unions backing them for every sneeze.

     

    So outsourcing is good if it is well managed and the activities of the company's key stregth areas are not outsourced.

     

    Prabhakar

  11. mfbertozzi
    December 21, 2010

    Ashish, Prabhakar, let me summarize a successful event; several years ago large contract required H24/day high IT skills and availability to support a customer on his manufacturing processes, one of the most steelworks corporations across the globe. We did the decision to start outsourcing activities in the sense of “following the sun”. Good people from Asia and India provided services when in the West region was night. As consequence of very serious knowledge transfer phase, we were in condition to provide H24 services for the fact several teams with similar skills were available in different time zone. It was a success for our customer and for the process in general, especially for the fact our partners were well evaluated not for low cost of the labour, but for strong experience and competencies achieved. In fact right now they are doing strong business there, they are making new job positions for people there and in reverse way, they are asking us to support them in organization and so on.

  12. Ashu001
    December 21, 2010

    mfbertozzi,

    Most of those who are anti-outsourcing in the west,do so for the simple reason that they have gotten used to the phenomenon of getting something for nothing-Like 99 week unemployment checks in America…. This is a Union (especially Public Sector)Speciality everywhere.

    I speak with a lot of global Outsourcing companies regularly and what they seem to say is that they don't mind hiring in the West(in fact most Indian Companies are hiring like crazy in America today);its just that the Talent pool is'nt deep enough[Not many Native Born America Citizens want to study Software Devt. today ,especially at the Graduate level] as for the Immigrants who take up these courses,increasingly more and more of them are getting frustrated with the Never ending Process of Getting an America Passport-It takes anywhere between 10 and 15 years for an Indian/chinese citizen to become an America Passport holder.

    Instead they are choosing to return home in droves where there are plenty of quality oppurtunities opening up for them today.

    The issue of Cost (what it costs to hire and retain employees) is secondary for those High-end Jobs.There just are'nt people ready to work according to an outsourcers schedule.

    In the case of Call centers ,costs are more important but even there we see a lot of Call center companies hiring massively in America(as they are getting professionals at competitive wages today for these jobs).

    Anyways,great hearing of a good and successful implentation from your side.

    Regards

    Ashish.

  13. bolaji ojo
    December 21, 2010

    Prabhakar, How should a company decide what its “key strengths” are and, thence, what to keep in-house and what to outsource? We have discussed here the social implications of outsourcing and, as crucial as that is, the reason company outsource is purely for profit reasons. Is it possible, however, for a company to outsource away its “key strengths?” Malcolm Penn, chairman and CEO of research firm Future Horizon believes this is already happening.

    How can a company strike that delicate balance of outsourcing just enough and not “over-outsourcing? It is quite possible to give away the core of your operation in the race for higher margins and efficiencies. It is also possible that management may not really realize fully the link between manufacturing, for instance, and design. These two may feed off of each other and once one part is sent outside the company the other may not operate at full efficiency.

  14. prabhakar_deosthali
    December 21, 2010

    Good Question, Ojo,  about how do you strike the balance between the in-house and outsourcing without loosing out your key strengths. Here I think we can take the project management lessons from Department of defense where strategic weapons are developed, or department of space where mission critical systems are developed. As per my guestimate, 90% of the work on these strategic, top secret projects is outsourced, yet the totality of the final product is kept within the department as a closely guarded secret. I remember to have worked in Department of Atomic energy,  in India, way back in 1974, when India  exploded their first Atomic Bomb. Hundreds of people within the department and also the outside vendors worked on the project but only the top key people knew what was going to be the final product.

    May be the industry can take a que from it.

     

     

  15. elctrnx_lyf
    December 21, 2010

    This is one topic, which is under never ending discussion. Personally I do not like to see the discussion of outsourcing, its impacts to be done again and again. Every one knows US was the technology spearhead for decades and it is still. But in the mean time there are countries like china and India lead by great people who understood that technology is a great necessary for a country. So they have put into the curriculum, next there are enough people who studied this and became eligible engineers.

     

    We see outsourcing everywhere it can be with in the country or it can be to different country wherever there is a quality and cheaper services are available. In future we don’t need to wonder if the Indian or Chinese companies outsource the jobs to companies in US or Europe. So what Americans or Europeans are going to say? Is outsourcing a bad thing. Even though I can write more regarding this I feel most of the engineers are clearly aware of the situation and this is not a topic requires to be discussed anymore.

  16. itguyphil
    December 21, 2010

    I think that logistically, as long as people are looking for work, there will be outsourcing. There are always shifts in the balance of buyers and providers, but some form of outsourcing will always exist.

  17. RaeJo
    December 21, 2010

    I have been in the engineering industry for 20 + years and have observed many techniques utilized with outsourcing of both components and labor.  It should be done thoughfully so that one gets the work done or is not short on parts if the supply chain is disrupted.   Money should not be the  only consideration, unfortunately it usually is.  This impacts everyone involved.  There is enough work for everyone if project managers pay attention to ALL the issues, not just the monetary ones.

  18. bolaji ojo
    December 21, 2010

    This is a subject that still generates a lot of passion because it directly impact people's lives. So, the issue is not going away. Numerous jobs have been lost in the West and tens of thousands created in developing economies as a result of outsourcing. That's the fact. Now, workers in the West and many politicians are asking if the trend should continue. We may not like the conversation but it is happening and it should continue.

    Personally, I believe there is a middle course companies should chart. Unbriddled outsourcing hurts communities and eventually even the company carrying out the outsourcing. Many executives have issued blanket outsourcing orders without regard for the long-term implications for their companies and sometimes even in disregard of the benefits. One reason for this is that Wall Street now demands it.

    Here's one example. A long-term executive serving at Solectron Corp. before it was acquired by Flextronics International Ltd. told me how he and his colleagues tried to explain the subject of “total cost of ownership” to a CEO at a major OEM. They told — and tried to show — the CEO why moving manufacturing to China would not reduce costs for his company once all additional expenses were added to the admittedly lower wage labor. As they finished, they expected the CEO to reflect on their presentation and were stunned when he retorted: “How soon can you move us to China?” Apparently, it was more important that the company be portrayed as trying to cut costs than to be actually cutting costs.

  19. bolaji ojo
    December 23, 2010

    Rich, Great question. 20 years in the business world is a lifetime. Only 10 years ago, many of the companies that now dominate the high-tech sector were bit players. In fact, Apple was considered roadkill. I know we'll still have taxes 20 years from now and crude oil will most likely be a lot more expensive but anyone who tells you they know how the fine details of business processes will play out more than five years from today is hallucinating.

    That shouldn't stop us from speculating, though. So, here goes: 20 years from today most manufacturing would be done by specialized companies that also compete with their customers. We see the trend today and I see no reasons for this to get reversed. Also, contract manufacturers will be so much bigger than their customers and their clout in the electronic supply chain will be huge; some of them already dwarf their customers. And finally, my safest prediction for 20 years from now: The sun will still be rising in the East and setting in the West.

  20. Ms. Daisy
    December 24, 2010

    You role with the punch! As Bola said, 20 years is too far out. What is certain is changes will occur with oursourcing as global events and national priorities change. We all need to just plan to go with the flow.

  21. jbond
    December 29, 2010

    Outsourcing is something that I have mixed feelings about. It came about due to necessities for the large corporations. Costs were exponentially rising whether is was supplies, labor or energy. In order to stay in business they needed to find a way to operate with lower costs. Unfortunately we as Americans have become accustom to having the best and being paid the best and not willing to negotiate to insure that we have jobs.

    The government is not helping this now by continually extending unemployment benefits. What this is doing is creating a large amount of the population that don’t have jobs and aren't willing to look for jobs because they are getting paid to do nothing. Now these companies need employees at reasonable wages, so they are forced to go overseas to find skilled labor at a lower cost.

    Now on the other hand there are a large amount of Chinese companies that are building plants and taking over operations here in America because the government is making it more cost effective for them to be here then for them to be in China.

    The hope is that this is a reversing trend, that some of these jobs that were lost either to NAFTA or overseas are returning due to those governments increasing taxes and costs on those companies.

     

  22. Ms. Daisy
    December 30, 2010

    I still feel that outsoursing may have been good for the company's bottom line, but it is not good for the American populace. The expectation of companies for hiring employees at “reasonable wages” is unreasonable because the cost of living in America is high so how do you negotiate below that. If the compnaies are paying reasonable wages for their executives, no unreasonable pucks and company  jets, they will not be forced to go overseas to find skilled labor at a lower cost. There will be enough money for the hard working employess and profits for the companies.

    The government extension of unemployment benefits is necessary. There are no jobs and the people laid off have to house and feed their families. Many have sold all they have to keep the basic needs. Many are willing to work but there are no jobs. I know of a lot of people who are unemployed that have gone back to school to get “re-tooled” and really need the unemployment benefits to hang in there till they get new degrees to work in such areas as healthcare that is still hiring.

     

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