Outsourcing: The 20-Year Overnight Success Story

Cost reduction, chasing talent globally, aligning product life cycles to critical natural resources — all form the mantra that has made outsourcing the silver bullet so many manufacturers and service companies reach for when the challenges of achieving financial objectives (read cost reduction) hit.

What is troubling is that there is a common misconception that a plain and simple physics of outsourcing has emerged, all based on the price elasticity of labor. This is short-sighted and just one of many elements of evidence that have taken over 20 years to produce.

There is a growing body of research that shows one could predict where the next outsourcing geographic hub is going to emerge based on three attributes: investment in technology including a pro-government stance on new venture development; investment in higher education; and wage inelasticity across mature industries. Simply put and massively simplifying what academicians spend years looking at, the wiring of the next India Inc. is well underway by isolating on investment in new technologies and new ventures in conjunction with investment in advanced education.

Outsourcing: The ROI of Investments in Education, New Businesses and Technology

There is an excellent body of research being conducted right now showing that outsourcing is the return on investments (ROI) of resources spent on education, new business and technologies. Want to predict where the next India Inc. is? Correlate these three factors over the last 20 years and candidates emerge.

The implications for customer relationships of this dynamic are as follows:

• Supply chain competitiveness rules a flat world. It’s critical to realize that in a flat world, you’re most likely winning or losing business based first and foremost on the performance of your supply chain. How accurately, efficiently and profitably products can be produced is the basis of all solid marketing — and the supply chain must be the foundation of all future growth for any global company.
• Supply chains and their agility across multiple geographies is a major competitive advantage. Clearly those companies who have developed supply chains that are limited in terms of their ability to scale across multiple geographies, and this includes goes into supplier audits in both highly industrialized and emerging countries (like India) is the new competitive advantage. Toyota’s highly regarded Toyota Production System is so centered on supplier collaboration it illustrates this point.
• Transform quality from sound-byte to religion. Too often CEOs give this lip service and always underscore their commitment to it, both at the product and process level. The pain of making product quality a priority, however, requires a re-vamping of the entire product development cycle. One student of mine, a quality engineer, presented to our global competitive strategies class, gave an excellent presentation of how he is now a part of the new supplier audit teams in India and China. That’s commitment. So how does this relate to outsourcing? Quality is truly the only differentiator that lasts in a world that is changing so fast.
• The path to winning globally is to become a learning — not necessarily a price-driven — organization. Realize that Toyota will most likely overtake GM as the global production leader of automobiles this year, and it will be in large part due to its Toyota Production System (TPS). The essence of this system is the systematic and complete enablement of suppliers — Toyota will sometimes take years to develop suppliers. And the ROI for this investment? The suppliers’ knowledge of and re-aligning of their internal processes to Toyota’s demand signals makes the entire supply chain agile and very responsive to market needs.
• Outsourcing isn’t the reason for U.S. companies losing business, lack of best practices in supply chains are. It’s time everyone decided to quit blaming one thing or another for the lack of growth in our companies and realize that it is our ability to compete, not our ability to blame, that makes all the difference. Export policies don’t kill companies, supply chains of competitors do. Labor cost reductions are short-term gains but re-vamping how a supply chain responds to customers is along-term gain. We’ve got to quit blaming outsourcing and start embracing the fact that our competitor’s supply chains may be more attuned, more effective than our own.
• If Caterpillar can generate 5,000 new jobs in Illinois and experience 40 percent growth in China at the same time, then competing globally must work. Caterpillar, the world’s leading producer of heavy equipment, boasts that through more aggressive strategies of manufacturing and supply chain synchronization they have been able to both increase their domestic employment due to more orders and expand globally. There is a lesson to be learned: Competing globally is now the only option.

In summary, outsourcing’s overnight sensation of the last few years was actually started over 20 years ago with heavy investments in training, technology and new venture development. To reduce outsourcing to the simple elasticity of wages is to completely miss the point of over 20 years of accumulated investment.

The same foundations that create India Inc. are well underway in other regions of the world as well. What does this mean for all Westernized nations? It’s time to look at your supply chains, commitment to quality and willingness to fight for business globally every day as the new norm for surviving in a turbulent world.