2005 Statistics about Offshoring


    Last week Archstone Consulting and Duke University’s Center for International Business Education and Research issued its second biannual survey on offshoring, and there’s some interesting results about how companies go about figuring out what to offshore and where to offshore.

    First, some background. The survey questioned 96 US participants, representing 377 offshore functional implementations. (Six percent of the respondents don’t plan to offshore.) The average employment base of the companies is 36,372 employees. And the average annual revenue is $25 billion. The respondents represent a variety of industries and a multitude of functions being offshored.

    What’s being offshored? The survey offers these stats; the percentages are the number of companies doing that type of offshoring:

    • IT, 62%
    • Call centers/help desks, 38%
    • Engineering services, 33%
    • R&D, 29%
    • Finance & accounting, 28%
    • Product design, 15%
    • HR, 12%
    • Procurement, 10%
    • Other (mostly related to back office activities), 26%

    Yet, offshoring doesn’t equate to outsourcing. The survey points out that only 42% of the offshore implementations are going to third-party service providers; 58% of implementations are run as captive centers (which means, they’re owned by the company using the service).

    Removing cost from activities is the main driver for offshoring — 97% of respondents cited it. Next come — in quick succession — growth strategy, competitive pressure and access to qualified personnel, cited by 73%, 71% and 70%, respectively. The survey mentions that compared to the last survey, done six months ago, access to qualified personnel rose from 54% to 70%. Also, improving business processes rose from 35% to 48%.

    Companies that don’t offshore perceive greater risks than those that do, overall. For example, the perceived risk of corporate culture buy-in is a whopping 78% among the companies that don’t offshore; it’s 50% among companies that do. The risk of weakening employee morale is 70% among companies that don’t offshore and 38% among companies that do. The risk of intellectual property loss is 67% among companies that don’t offshore and 38% among companies that do. The only reversal involves employee turnover. Half of those that offshore say it’s a risk, and only a third of those that don’t offshore perceive it as such.

    Companies offshore specific functions to specific parts of the world — primarily to gain access to the expertise in that region. Yet, India’s the most popular location for every form of offshoring with two exceptions: procurement, where China rules, and product design services, where India and China run neck and neck. The functions going to the Philippines and Canada are most typically contact centers and HR. Eastern Europe attracts a lot of activity in procurement and accounting.

    Interestingly, companies that haven’t started offshoring yet but that plan to do so stress the importance of political stability for the countries where they choose to take their work.

    Here are the primary reasons for choosing an offshoring location per se.

    • Canada is the favorite choice for its political stability (quickly followed by “Other Asia”). China is the favorite choice for collocation.
    • India is the favorite choice for its expertise.
    • Mexico is a favorite choice for its quality of infrastructure and for having the best service provider (not sure what that means).
    • “Other Asia” is cited for its government incentives.
    • The Philippines is cited for its language capabilities.

    By the way, China is the fastest growing offshoring location with a growth rate of 46%. Mexico too is moving up in its ranking for future work — with a 43% growth rate; but that may be, the authors point out, due to the fact that it started out with such a small base. India is growing at 26%.

    Since cost savings is a major push for offshoring, are companies achieving what they expect? Overall, no. Respondents said that HR and procurement had the lowest level of savings (22% of achieved savings for HR and 32% for procurement). R&D activities had the highest savings — 59% — though the survey mentions “there seem to be important challenges in implementing these kinds of activities.” IT achieves savings of 39%. Contact centers achieve savings of 40%. And F&A activities achieve savings of 30%.

    The highest savings area — not surprisingly — is personnel (51%). Facilities-related expenses achieve savings of 26%. IT infrastructure achieves savings of 14%. And telephony achieves savings of 13%.

    As follow-on to that, offshoring tends to create more jobs offshore than are lost onshore. For example, in IT, for every 79 jobs lost in the US, 111 jobs were created offshore. In administrative functions, for 108 jobs lost in the US, 254 jobs were created offshore. The survey authors explain that phenomenon this way: “…Companies view offshoring as a way to grow, develop new capabilities and functionalities, and ultimately change their business model.” The ratio is considerably higher in the captive model (37 jobs lost in the US for every 169 created offshore) than in the third-party service provider model (128 jobs lost in the US for every 154 created offshore).

    If you go into an offshoring arrangement expecting quick results, make sure to temper your definition of “quick.” Only three out of 10 offshoring implementations took less than six months to meet targeted service levels.

    The survey includes many additional stats that you may find of interest, depending on your industry or size. You can download a copy of it here.


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