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

Business Wire, Nov 22, 2006

"Many companies are struggling as they redesign their organizations and implement processes to support the rapid rise of offshoring," Couto said. "The obstacle to offshoring is more often inside a company than outside it."

India remains the preferred destination for offshoring. While much of the recent literature on offshoring highlights China as a favored destination alongside India, the research confirms that India is still the most preferred location across the board. China, however, is emerging as an important location for engineering, product development and procurement as more companies co-locate engineering groups alongside manufacturing operations. Similarly, the Philippines is increasingly attractive for office administrative work and contact centers.

While India remains the top offshoring destination for U.S. companies, German companies prefer Eastern Europe. Forty-two percent of U.S. companies chose India for offshoring implementations, as compared to only 15 percent of German companies. Meanwhile, 24 percent of German companies chose Eastern Europe to offshore operations, compared to only 7 percent of U.S. companies.

European firms perceive cultural differences as an offshoring risk, while U.S. firms are primarily concerned about service quality. Thirty-eight percent of European respondents considered cultural differences a significant risk, as compared to 28 percent of U.S. companies. In contrast, 68 percent of U.S. respondents identified service quality as a serious concern, as compared to 39 percent of European companies.

Offshoring is used as a tool to enable faster speed to market. Forty-eight percent of the surveyed companies identified "increased speed to market" as a significant driver in their offshoring decisions, an increase of almost 70 percent in just one year. Offshoring is not being used as merely a cost-reduction tool; it is being used to achieve strategic business objectives.

Other 2006 survey findings include:

* Small, entrepreneurial companies are more likely than large corporations to initiate offshoring of high-value functions. Forty-eight percent of companies with fewer than 500 employees reported that their first offshoring initiative involved product development, innovation or engineering, as compared to 16 percent for large companies.

* U.S. companies are increasingly outsourcing work to third-party providers, rather than setting up their own "captive" offshoring operation. More than 84 percent of the surveyed U.S. companies that are considering offshoring are planning to use third-party providers, compared to 7 percent that are working on joint ventures and 9 percent that are planning the "captive" model. Only two years ago, according to the 2004 survey conducted by Duke and Archstone Consulting, 42 percent of U.S. firms surveyed were planning to start their own captive offshore operation. In contrast, German and Spanish companies are particularly apt to choose a "captive" service delivery model (78 percent and 76 percent, respectively). This model fits the much higher emphasis that German and Spanish companies place on language and cultural fit in their offshoring criteria.