Three Variations on Offshoring

For those of you who haven’t seen it, I wanted to point out a column on “The Benefits of a Long Distance Relationship” that JSB and I wrote for the Financial Times Summer School series in today’s issue of the newspaper.

In this article, we explore the various motivations driving offshoring decisions by Western companies.  Unfortunately, most Western executives still make these decisions based on near-term operating considerations, especially driven by the quest for rapid operating savings given lower wage rates in emerging economies like China and India.  Elsewhere, we describe this as “wage arbitrage”.  This motivation frequently leads to disappointing results and, over time, can create a vicious cycle that ultimately threatens the viability of the enterprise itself.

More sophisticated companies view offshoring from the perspective of “skill arbitrage”.  They understand that offshoring creates an opportunity to access distinctive skills.  We point out that offshoring locations are evolving rapidly.  Any decision based on comparative skills must be based on an understanding of the dynamic context, rather than on a static “snapshot” of comparative skills at any point in time.

This leads to a third way of viewing offshoring – as “skill-building arbitrage”.  We believe that the real opportunities created by offshoring can only be captured by companies that adopt this view. Rather than merely seeking to access distinctive skills, Western companies will benefit a lot more from offshoring if they view it as a powerful opportunity to participate in relationships and environments that can build capabilities more rapidly than would be possible elsewhere. In this context, we highlight three levels of opportunity:

• Different management techniques made possible in part by lower wage rates
• Specialized business ecosystems emerging in cities like Bangalore and Shenzhen
• Global process networks to help connect companies across distributed regions.

This is a more dynamic, long-term view of the opportunity – offshoring is not just about accessing the distinctive skills or cost advantages that exist today, but positioning for longer-term capability building. With this perspective, offshoring relationships change from relatively narrow and opportunistic transactions to much more enduring and evolving relationships designed to help both parties get better faster.

Just like any relationship, the benefits are great but offshoring requires deep understanding and sustained effort to reap the rewards.