On any given day, you can easily find numerous “horror” stories of offshore outsourcing risks that led to disappointing or disastrous results. I have personally seen some success stories and some failures. A disadvantage of offshore outsourcing is just this very inconsistency in results. A good plan must take this into account.
There is no need to turn away in fear, or back away from a decision to find a reliable source or form an alliance. It just means that you must look with both eyes wide open and educate yourself. Assumptions will always lead to disappointment and all the pros and cons need consideration.
As manufacturers consider the vast benefits and allure of offshore outsourcing, they must balance the risks and uncertainties with the potential for cost savings.
Disadvantages of offshore outsourcing
- Misleading cost reductions expectations. You cannot just take a figure such as a 40% reduction in wage expenses. In reality, most companies experience far less than expected, at least in the beginning of the learning curve. As they progress up the curve, the savings increase.
- Data and information security. Steps must be taken to ensure that proprietary information is safe. In reality this is rarely a problem, but it is important to address this issue up front. The requirements must be defined and documented.
- Consistency in product and process. Many manufacturers find that it takes substantial effort to communicate the need for consistency. It is one thing to mold a nylon part in your own machines with your own molds and controls, but it can often be quite a different story when an offshore company is doing it without following your process exactly. It can also be maddening to communicate this effectively.
- Loss of business knowledge. Perhaps your company has developed a unique process for a certain application. Once you reveal that to your offshore supplier, it is open to the world. Steps must be taken to ensure the confidentiality of your knowledge.
- Vendor fails to perform. Companies must have a contingency plan in the event that the supplier fails to come through as planned. It can and does happen that the supplier is unable to perform as promised, either due to a lack of ability or some other reason. You must have a back up plan in this case.
Companies can reduce costs by outsourcing, often by 15-25% the first year. After that, improvements will make the benefits greater, but it is a gradual process.
Offshore outsourcing risks
- Price creep. Some companies are unpleasantly surprised when the costs are more than planned. Make sure your contract takes this into account. If the price is not “fixed”, it can creep up and negate any cost savings you had hoped for.
- Government oversight and regulation. Some industries, such as electronics, have strict guidelines dealing with offshore outsourcing. Government controls have dramatically changed with the Patriot Act and the Sarbanes-Oxley Act. These place a greater burden on American companies.
- Culture. Though English is the international language of business, it does not take very long to find out that communication is a challenge. Your business partner may nod his head and agree with you, even when you speak total nonsense, just to see if he actually does comprehend you. this language and cultural hindrance can wreak havoc with your plans.This can, of course, be overcome, but it must be recognized from the start. Never take it for granted that you have been properly understood. Personally, I speak several languages, and have lived abroad several times. I know from first-hand experience how easy it is to glide along, or put your foot deeply into your mouth!
- Turnover of key personnel. With the rapid growth taking place in China and India, it is not uncommon for key people to find new jobs and move on. This can disrupt your flow of information dramatically.
- Knowledge transfer. This is often overlooked. The amount of time and effort to educate the new vendor can be substantial. It may, and often does, include numerous trips abroad, endless conference calls, emails and so on.