Study Finds Companies Moving High-End Functions Offshore to Access Talent

Business Wire, Nov 22, 2006

The need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies' offshoring strategy

NEW YORK & DURHAM, N.C. -- Please replace the release dated October 31, 2006 with the following corrected version due to multiple revisions.

NOTE: This press release was revised to indicate that offshoring studies in 2004 and 2005 referenced below were conducted by Duke University and Archstone Consulting.

The corrected release reads:

STUDY FINDS COMPANIES MOVING HIGH-END FUNCTIONS OFFSHORE TO ACCESS TALENT

The need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies' offshoring strategy

Companies are increasingly moving sophisticated, mission-critical functions such as product design and research and development to China, India and other offshore locations primarily because these countries can provide highly skilled scientific and engineering workers who are in short supply in the U.S. and Europe, according to a new study by Duke University and management consulting firm Booz Allen Hamilton.

And even though companies continue to offshore more high-skilled work, they are increasingly concerned about the loss of managerial control that accompanies outsourcing functions close to their core business.

The 2006 Duke CIBER/Booz Allen offshoring study is the third in an annual series originated by the Offshoring Research Network (ORN) led by Professor Arie Y. Lewin at Duke's Fuqua School of Business. The first two studies were conducted in 2004 and 2005 by Duke and Archstone Consulting. The 2006 study conducted by Duke and Booz Allen takes a comprehensive look at strategic factors driving decisions to offshore. It also examines offshore operating delivery models and performance outcomes of various companies' offshoring efforts. The 2006 study examined 530 companies from both the U.S. and Europe, through partnerships with universities in the United Kingdom, Germany, Spain, Netherlands, Belgium and Scandinavia. Key findings of the study include:

The need to source talent globally is replacing low-skilled, low-cost labor as the decisive factor in companies' offshoring strategy. Nearly three-quarters of the companies that establish or expand product development offshore report that "access to qualified personnel" is the most important driver of their offshoring strategy, and almost 70 percent of survey respondents select an offshoring location based on the availability of needed expertise. " Access to qualified personnel" has increased substantially (by 70 percent in the last two years) as a major reason for establishing or expanding innovation, product development and product extensions offshore.

Lewin, director of Duke/CIBER (Center for International Business Education and Research) and lead principal investigator of the ORN project, said, "Companies in the advanced economies of the U.S. and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies. The leading-edge companies are developing new ways to source and manage talent globally. They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.

"Companies offshore because they can't get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1b quota. Last year, it was estimated that U.S. companies were in need of more than 50,000 master and Ph.D. graduates."

Contrary to popular belief, offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally. In the U.S., offshoring projects that involved "high-skilled" functions such as research and development, sales and marketing, product design and engineering resulted in an average of one job created in the U.S. per project. In contrast, domestic job loss for office and administrative functions averages 23 jobs per project offshored.

Significantly, 2006 survey respondents indicated that as they increased the offshoring of high-end functions, the number of overall jobs they are replacing in the U.S. has dropped dramatically. In the 2006 survey the average number of U.S. jobs lost per offshore project dropped by 71 percent from 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006). At the same time, the average number of offshore employees per project grew by 62 percent from between 2005 and 2006.

"Clearly a new logic is driving decision-making as offshoring entails more highly skilled work," noted Vinay Couto, Vice President of Booz Allen. "It's less and less about low-skilled labor and more and more about accessing new pools of high-skilled talent."

Concerns about offshoring are shifting from external factors, such as political backlash, to internal factors, such as loss of managerial control and the impact on operating efficiency. "Loss of managerial control" was cited by 48 percent of companies as a major risk of offshoring, an increase of 30 percent over 2005's result. In contrast, "political backlash" and "political instability" have steadily declined in importance as noteworthy risks, with only 22 percent of respondents citing either as "important" or "very important." In all, companies cited greater concerns about their ability to manage their offshoring activities, while concerns about cultural differences, which ranked very high in the 2004 and 2005 surveys conducted by Duke and Archstone Consulting, dropped by 50 percent.