peer reviews

Debate – Spring 2021

Offshoring Group 1

(Davis Atkinson, Danielle Cerasi, Andrew Eureka, Robert Filliger, Christopher Powell, Rachel Roberts,)

MAN5716: Business Conditions Analysis

3/28/2021

Dr. Christiansen

Florida State University

Offshoring: A Fundamental Debate on the Impacts on the U.S. Economy

In today’s highly competitive business world, organizations must consider all options that could lead to a competitive advantage over their competition. One common option that organizations often consider is whether to move some or all their operations offshore. Offshoring is defined as “the practice of moving a company’s operating base to a foreign country where labor costs are cheaper”.[endnoteRef:1] Offshoring could potentially lead to a competitive edge but could also negatively impact the organization or even the U.S. economy. As there are advantages and disadvantages of offshoring, this is a common debate within growing organizations and must be thoroughly evaluated before deciding. [1: https://www.dictionary.com/browse/offshoring ]

Offshoring: Group 1

2

Advantages of Offshoring

Labor and Overhead Savings

Offshoring can provide organizations with massive cost savings by eliminating or decreasing direct labor and overhead costs, including benefits. In 2019, the average hourly wage in the U.S. was $15.35 per hour.[endnoteRef:2] In comparison, the average hourly wage in Mexico was $3.50 per hour and in India $2.49 per hour. When comparing weekly costs, based upon 40 hours per week, an employee in the U.S. would earn just over $600 per week, whereas that same employee in Mexico would earn $140 and just under $100 in India. These are significant wage differences that can have a direct impact on an organization’s bottom line and is a huge benefit of offshoring. In addition to direct labor cost savings, organization’s choosing to move operations offshore can save even further on overhead costs. [2: https://www.statista.com/statistics/185335/median-hourly-earnings-of-wage-and-salary-workers/#:~:text=In%202019%2C%20the%20median%20hourly,were%20at%204.44%20U.S.%20dollars. ]

The most significant overhead savings is from a decrease in employee benefits. These benefits can be as minor as free coffee or as major as health insurance, life insurance, paid time off (PTO), or retirement benefits. According to the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), employee benefits account for 29.8% of worker compensation in the private sector and 38.2% in the state local government sector.[endnoteRef:3] In the private sector this amounts to an average of $10.72 per hour, or over $22,000 spent annually (40 hours/week) on employee benefits, per employee. In the state and local government sector, the average reaches $20.20 per hour or $42,000 annually. [3: https://www.bls.gov/news.release/pdf/ecec.pdf ]

Employee benefits can be an enormous cost to organizations that add up quickly. Depending on the sector, an organization with 100 employees could spend between $2.2 and $4.2 million annually on employee benefits. Organizations that choose to offshore all or some of their operations are typically able to decrease these benefit costs substantially or even eliminate them completely. These cost savings can help an organization achieve a competitive advantage and give organizations the ability to expand operations with the additional capital.

Skilled Employees

In addition to cost savings from direct labor and overhead, offshoring also provides organizations with a larger selection of skilled employees. Organizations that choose not to offshore are limited to U.S. based talent pools, whereas organizations that choose to offshore can tap into a much larger selection of skilled employees across the world. India is a great example of a country that provides a larger talent pool. India is the second-largest country in the world with over 1.3 billion people, of which 125 million are English-speaking. The country has approximately 15 million college graduates each year plus 1.5 million engineering graduates. The large number of English-speaking college graduates that the country has makes it a great option for organizations deciding to offshore some or all their operations.  

Some countries’ local and regional governments even provide additional support and incentives for their citizens to obtain degrees or training in a specific industry. In Mexico, the local and regional governments aim to get their citizens qualified to work in the manufacturing industry by incentivizing them to obtain engineering degrees and specialized training in manufacturing.[endnoteRef:4] In 2009, Mexico had just over 60,000 engineering, manufacturing, and construction graduates. Today, the country has over 110,000 engineers graduate every year. As seen by the substantial increase in graduates, the government incentives appear to be successful and are increasing the number of people specialized in the manufacturing industry.  [4: https://www.ivemsa.com/manufacturing-in-mexico/mexican-labor-force/ ]

Around the Clock Service

Many organizations use offshoring as a tool to be more productive and increase profits. They can also utilize offshoring to provide around the clock service due to differing time zones. The use of workers in different time zones allows organizations to have a constant staff for customer support, technological problems, and software updates. Many organizations leverage offshoring to allow full coverage support through a global support team. As most organizations use offshoring to lower costs, around the clock service is used “to achieve drastic reductions in turnaround times”[endnoteRef:5] and to tap into highly specialized workers that aren’t available in a specific region. The result of utilizing around the clock services can eliminate large time gaps for most organizations. The large time gaps that have been hindering organizational performance are now eliminated and become an organizational advantage. Around the clock service has become a necessity for most organizations, especially those in the S&P 500 as they are some of the largest and most widely distributed organizations across the globe. Offshoring allows them to increase productivity and eliminate down time as employees around the globe are constantly working. Around the clock service is a new normal as it can be an extremely valuable asset for an ever changing and evolving world of business that requires organizations to always be available.  [5: https://www.wsj.com/articles/SB118841765731012529 ]

Business Growth

Another benefit of offshoring is the potential for business growth. As previously stated, offshoring can lead to a reduction in labor and overhead costs. This savings can provide organizations with additional capital that it had not previously had. This new capital affords the organization the opportunity to expand their services, products, or offerings. As an organization grows, the savings from offshoring can also lead to additional offshoring opportunities which would lead to further cost savings. This expands the offshoring method that the organization has undertaken and puts them in a position to pursue and profit from globalization.

Diversification

          Offshoring also provides organizations the ability to diversify across several geographical areas. This is a benefit to any organization as it decreases the risk and impact of natural or economic disaster. For instance, if a natural disaster were to occur in China, then it is highly unlikely that the same natural disaster would occur in Vietnam or the United States. Having the ability to diversify locations prevents one economic or natural disaster from negatively impacting the entire supply chain or system of operations. Having the ability to spread operations across multiple locations reduces risk and presents an exceptionally advantageous position in comparison to competitors that choose not to offshore, especially if one location must face the drawn-out effects of an economic or natural disaster.

Disadvantages of Offshoring

Lack of Quality (Perception of foreign products and services)

As the trend of offshoring for manufacturing and services continues to rise, it is important to note the shortcomings of this practice that is leading more organizations to forgo it altogether. One major disadvantage of offshoring is the reduction in quality of products and services.  This includes the perception of services provided, manufacturing quality concerns, cultural nuances, language barriers, and consumer ethnocentrism.

         Customer perception of service and manufacturing represent a challenge that many organizations do not address until after they have already transitioned into an offshoring agreement.  A study by American Banker showed 71% of customers were aware of offshoring to low-cost countries and 78% of those customers held a negative outlook on the service provided.[endnoteRef:6] A prime example of offshoring as it relates to customer satisfaction is Dell computers.  In 2001, Dell decided to offshore their customer service and technical support jobs to India.  Shortly after this transition, customer complaints skyrocketed due to the perceived lack of service and by 2003, Dell shifted their services back to North America.[endnoteRef:7] [6: Sharma, P. (2012). Offshore outsourcing of customer services – boon or bane? Journal of Services Marketing, 26(5), 352-364. doi:10.1108/08876041211245272 ] [7: Dawson, K. (2004, February 1). What We Learn From Dell's Experience. Call Center, 6. https://link.gale.com/apps/doc/A112809001/ITOF?u=tall85761&sid=ITOF&xid=be06c682 ]

According to a study from the Reshoring Initiative 2017 Data report, quality, rework, and warranty represent the biggest factors in why organizations are reshoring back to the USA.[endnoteRef:8] In addition, many consumers place value on where a product is made.  A study by consumer reports showed that 8 out of 10 American consumers would rather purchase American-made products over foreign made products.  It also found that 60% of consumers would be willing to pay 10% more for American made products.[endnoteRef:9] The negative perceptions from where a product is manufactured directly ties to other negative offshoring factors like supply chain interruptions, service corrosion, communication, and delivery challenges.  The concern of quality in production is particularly evident in low labor cost countries. [8: http://www.reshorenow.org/content/pdf/2017ReshoringInitiativeDataReport.pdf ] [9: https://www.consumerreports.org/cro/magazine/2015/05/made-in-america/index.htm ]

As diverse as American culture is, there are fundamental commonalities that most residents can recognize. Whether we are referring to pop culture references like Michael Jackson’s moonwalking or cultural norms like saying “bless you” when someone sneezes; there is a correlation between cultural impact on customer service and negative customer service ratings. The cultural impact on the surface would appear to be all about perceptions, but if you look deeper, it has more to do with understanding and being understood.  This is most apparent when the native language of both countries is different, “cross-cultural communication challenges can lead to misunderstandings in the way processes are set up and controlled or present communication difficulties for customers''.[endnoteRef:10] [10: Youngdahl WE, Ramaswamy K. and Dash KC (2010) Service offshoring: The evolution of offshore operations. International Journal of Operations & Production Management, 30(8): 798-820. doi: http://dx.doi.org/10.1108/01443571011068171. ]

Consumer ethnocentrism can play a part in the perception of quality for services and products. Consumer ethnocentrism represents a “preference for domestic products [or services] on the basis of nationalistic feelings.  Ethnocentric customers are shown to be reluctant to buy foreign products [or use services], because of a sense of loyalty towards their home country.”[endnoteRef:11] This is amplified when the customer has a poor outlook on the nationality of the service provided.  A study, focused on the selection of healthcare service providers, found that consumers who scored high on ethnocentrism were more likely to have a negative perception about imported services. [11: Sharma, P. (2012). Offshore outsourcing of customer services – boon or bane? Journal of Services Marketing, 26(5), 352-364. doi:10.1108/08876041211245272 ]

Hidden Costs 

It is no secret that one of the most intriguing benefits of offshoring is cost savings. However, there are hidden costs that should be considered when evaluating whether an organization should move operations offshore. These hidden costs can add up quickly and could potentially lead to an increase in costs for organizations in the long run. These hidden costs can include:

Transition Costs: Cultural differences, time differences, and communication are important aspects to consider during the transition to an offshore location. Communication is a crucial aspect in any business setting and even more so when transitioning to offshoring and establishing operations in another country. Time differences and language barriers have the potential to disrupt effective communication between the client and vendor which could potentially lead to a delay in the delivery of the product and/or service and tack on additional costs.

Travel Expenses: Travel to and from the offshoring location to check on production and meet with suppliers may be required. This travel expense is often overlooked but can add up quickly depending on the frequency of travel required. These costs can include airfare, lodging, and meals. There is also a major time expense associated with traveling to offshore locations. Depending on the location, traveling to and from could take days for an employee(s) and can potentially decrease their availability and productivity.

Intellectual Property (IP) Theft: The risk of intellectual property theft is a major concern for organizations when deciding to offshore certain operations. This risk is increased when offshoring because of relaxed laws regarding IP theft in countries outside the United States.[endnoteRef:12] If stolen, the loss of this information could be devasting to an organization and could lead to a loss in competitive advantage and customers. [12: https://www.google.com/amp/s/www.forbes.com/sites/forbestechcouncil/2019/05/24/the-three-non-negotiables-of-it-offshoring/amp/ ]

Lack of Agility 

As there are ever-evolving advances in technology and the business world, customer demands and market trends are constantly changing. To achieve and maintain a competitive advantage today, agility and speed are necessary. Agility requires effective communication and organizational change. Time differences can greatly hinder communications, leading to delays in production as both organizations struggle to accommodate each other. Lack of agility can also hinder an organization’s ability to innovate, putting it at a disadvantage. Oftentimes, contracts with offshore partners are very specific in nature, which can stifle an organization’s ability to innovate and therefore compete. Adapting existing offshoring operations to account for changes can be costly, both in terms of time and money.

Unemployment

One of the most prevalent arguments against offshoring is that it increases the level of unemployment in the local economy. It decreases jobs available to American workers and sends them abroad, ruining domestic infrastructure. Offshoring affects each level of the working class differently. Low-skill jobs tend to require less coordination and monitoring, making them a higher candidate to be offshored. Therefore, low-skilled workers are harmed by offshoring much more than high-skilled workers. The rise in unemployment due to offshoring was widely seen in Detroit, which is dependent on the manufacturing industry. Data provided by the U.S. Labor Department identified that “Michigan suffered a 211% increase in jobs lost to offshoring between 2017 and 2019 compared with the three years prior.”[endnoteRef:13] In addition to an increase in unemployment, employees that are left in positions that were not offshored may face job performance and productivity issues due to low morale and no sense of job security. [13: https://www.metrotimes.com/news-hits/archives/2020/10/13/report-michigans-offshoring-job-losses-doubled-in-recent-years ]

Public Image

Organizations that choose to offshore may run the risk of jeopardizing their reputation in the United States. The first reason an organization’s reputation may be jeopardized by offshoring is due to negative press and public perception on the impacts of moving local jobs out of the country. Another reputational risk is from a lack of labor laws in other countries. In many countries the regulations on labor, safety, and work environment are not as strict as that in the U.S. and many human rights violations may be observed. An example of this is if an offshore partner utilizes child labor in their operations and that information is made public. Organizations could face extreme criticism and public backlash in the United States for participating in these inhumane work practices. Organizations will essentially be held liable for any faulty business practices, products, or services coming from their offshore partner. These factors could potentially lead to a loss in customers and a severely damaged reputation.

Conclusion

As shown, offshoring can provide advantages and disadvantages that can have massive impacts on an organization. The advantages can include significant cost savings and more opportunities for organizational growth. Unfortunately, there can be a downside to offshoring that can lead to a reduction in quality and major communication issues. This causes offshoring to be a common debate across organizations of all sizes that must be thoroughly evaluated before moving forward with a decision. No matter the decision, organizations will need to develop a plan to combat against the disadvantages of their decision to reduce the negative impact.