INTERNATIONAL OUTSOURCING TRENDS CREATE GROWING OPPORTUNITIES FOR ASIAN FIRMS

Journal of Asia Entrepreneurship and Sustainability, Dec 2006 by Trondsen, Tor Jarl

ABSTRACT

The purpose of this paper is to address some aspects of outsourcing with particular emphasis of offshoring, (also named international outsourcing, international sourcing, cross border sourcing).

Outsourcing projects are not always successful, whether they are local, regional or cross border. The paper addresses some of the underlying theoretical fields that should be taken into consideration to make outsourcing successful for both parties, with emphasis on the international aspect.

Competitive pressures among firms in high cost countries (HCC) have forced them to look for more cost effective ways of operation. An increasingly important source of competitive advantage is buying components, finished goods and services from low cost countries in Asia. Strategic issues for HCC firms concerning offshoring are therefore addressed, as well as the growing political concern about lost jobs in the outsourcing countries that are in the lead of this trend.

The paper further suggests some underlying requirements for Asian countries to be able to benefit from offshoring trends in the short and long run.

Finally, some areas for research in the field of offshoring are suggested.

Introduction

We are witnessing a major shift in value creation that will have substantial effect both on the HCC and Asian employment and economies. Challenging structural changes will take place in the work forces in the two hemispheres as the offshoring trend is reinforcing.

A period of change creates new opportunities for Asian Small and Medium Enterprises (SMEs), both in market expansion and profit opportunities. The first due to improved access to HCC by means of digital technology and improved physical transportation systems. The latter is due to the present cost level differences, making the buyer willing to pay premium prices seen from the suppliers' point of view. Presently, huge savings are apparently possible. Anecdotal evidence suggests that cost levels at least 50% lower than in HCCs are common. The actual savings are, however, also dependent on the transaction costs associated with offshoring. These are unfortunately much harder to quantify.

An understanding of the underlying theories affecting a close relationship between the parties could aid in both interaction with international partners and making the co-operation successful.

Surprisingly little material relating to the principal aspects of international outsourcing has been published in academic journals. Mol et al. (2005) found that from 1989 to 2000 only 7 articles contained the words "global" and "sourcing". This author found 29 articles containing these words in 2005 alone, suggesting a substantial increase, but even so, still at a modest level. The general impression is that the topics in the articles are oriented towards industry issues, dominated by the finance, IT and manufacturing industries, and very few conceptual topics discussing underlying theories affecting the success rate.

What is happening?

External procurement of components as input to manufactured goods and outsourcing of services has become common practice among an increasing number of firms that are under competitive pressures in HCC. Local or regional providers that are specialized and thus can deliver goods and services at a lower unit cost normally perform the greatest part of delivery of outsourcing activities. That is not unexpected, as that does not require adjusting to a new business environment. The decision to let outside vendors take over some activities is in itself a change in the business model that can be difficult, and many outsourcing projects are reported to be unsuccessful. Lacity and Willcocks (1998) report that the success rate of IT outsourcing is only 56%. Aron and Singh (2005) state that "According to several studies, half the organizations that shifted processes offshore failed to generate the financial benefits they expected to". Considering the fact that IT outsourcing is one of the earliest and most widespread outsourcing activities, the success rate is discouraging. Part of the cause of failures may be lack of understanding of the underlying theories regarding relationships with entities outside own organization, in addition to inadequate execution.

Over the past few years, the outsourcing phenomenon is being expanded to include offshoring of both goods and services, and it is growing at an increasing rate. Suppliers in countries with favourable factor conditions such as access to raw materials, lower priced energy, low labour cost and/or high education level are positioned to benefit from this development. Offshoring of services (business processes) is becoming increasingly widespread, and there seems to be tendency to move upward towards higher value creation activities. Asian countries have in particular benefited from the trend by offering lower cost, a pool well educated personnel and good language skills.

To make the transfer of work successful both for the outsourcer and the outsourcing partner (vendor), good understanding of strategic aspects, underlying economies and the required competencies is important. In the following, some aspects of this will be addressed.