01 February 2005
Faster, Better, Cheaper
By Ellen Fussell
Live with it: Outsourcing overseas is here to stay.
The phenomenon of U.S. engineering jobs going to offshore workers is no secret, and it's no picnic, but industry gurus say it's a fact of life.
"If you're a person here in the U.S. about to lose your good-paying job to someone off shore, that's not good. But I think there's still a lot to be learned as to where the limits are," said Dick Hill, vice president of manufacturing advisory services at ARC Advisory Group in Dedham, Mass. "At first it was low wage factory workers seeing their jobs going overseas to lower wage countries where the skills were not the issues, just the price of the wages. Now you're seeing a lot of white collar activity where jobs are going to places that also have skilled labor, the same kind we do."
Bill Hayduk cites a litany of concerns in his Real Time Technology Solutions, Inc. (RTTS) October 2003 article, "Offshore Outsourcing of Automated Testing: An Evaluation of Cost." Communication problems due to insufficient network structures and intellectual property and privacy laws are a few. He also cites below-average skill sets and quality in test automation, questioning whether offshore workers will keep the best interest of the customer at heart in testing products when it conflicts with their deliverable dates and geopolitical and cultural differences.
"Rubbish," said Jim Pinto, managing partner jimpinto.com, and founder of San Diego, Calif.-based Action Instruments. "Why shouldn't you have outsourcing? It's a fact of life. It will hurt and help the economy." Pinto cited how Wal-Mart has helped the economy, "and Wal-Mart now buys $18 billion of goods from China. And they're not cheap." If goods and raw materials are available anywhere in the world, so are laborers. It comes to the cost of getting goods, Pinto said. The point is it's an unpopular thing because people are losing jobs. "If I outsource manufacturing, it's cheaper and better elsewhere, so most automation companies—General Electric, Emerson, and Rockwell—outsource manufacturing to China and software development to India. Not one of the major software developers is not outsourcing," he said. Besides (industry research firm) Boston Consulting Group said you have to do it. If you're not, you're not taking advantage of a major tactical benefit."
Take the petroleum industry for example. In extracting petroleum, the easiest, most natural, and most cost effective solution would be to process raw materials near where it's extracted—near the customer. "In earlier days, it used to be extracted somewhere else and transported all the way to where the knowledge was," Pinto said. "You don't need to do that anymore. If you get oil in the Middle East, you transport it at once." Previously, plant and equipment was one thing, and knowledge of building a plant and equipment was something else, he said. Knowledge is widely available these days. "Because of the global business, why would you want to do it only in the U.S.? Extract the raw materials wherever you extract them, build a plant and equipment which is convenient, and ship to where the customers are."
But Hill said some concerns are valid, such as intellectual property rights. "The different countries of the world have different views; it's not really a question of honesty but of different cultural regard in some cases," Hill said. "If you are a software developer in a country where intellectual property is not as protected, you could be concerned your property might disappear. You're always concerned about protecting the know-how in your company, whether it's an offshore engineering firm or a system integrator down the street."
What about quality?
It's up to the individual company and how they manage their outsourcing, said Martin Zielinski, director of technology for HART and Fieldbus at Emerson Process Management, in Eden Prairie Minn. "In general, what we find is overseas employees are skilled and knowledgeable individuals who have a good set of education behind them," Zielinski said. "What they lack is experience in a particular field. That's what needs to be developed to make outsourcing effective."
"When was anyone complaining about the shoes made in third world countries?" Pinto said. "Nobody wanted to make them the old way, so they disappeared from America. Quality will be excellent because people have learned. There are no secrets in Six Sigma. Everybody who practices Six Sigma will be good at it. Why should Six Sigma be the property or the preserve of the U.S.? It came from somewhere else. Motorola has factories all over the world."
Pinto also proclaimed the Chinese are very good at Six Sigma as in other parts of the world. The Japanese know how to manufacture, and they have a different attitude Pinto said. "Way back when I was investigating Japanese quality, I remember a guy asking me, 'Have you starved? Have you ever been hungry? I have.' It changes your attitude as a culture. You cannot simulate hunger. So when you're competing with people who are hungrier than you are, you know who will win. Japanese quality is good. Where are VCRs made? How many VCRs are made in the U.S.? Would you buy a VCR made in America for $275 when you can buy one at Costco or Wal-Mart for $65?"
Hill doesn't really think quality is much of a concern either. "It depends where you are on the curve," he said. Historically, people thought products manufactured in the West now made at a low cost site somewhere else weren't good quality. "I think India and China have proven they can manufacture just as well. Under the right circumstances, they have every bit as good a quality." But Hill said testing and certification could be an issue. "If you're a company outsourcing something that used to be done in-house, you have to be able to look at the skill level of the people you're hiring. In some way, it's much like hiring a new individual anywhere. But it's more complicated when dealing with someone halfway around the world."
Zielinski agreed you have to be careful how you outsource products. "You have to invest wisely. It's not just a simple matter of taking a function and putting it overseas and hoping it'll work by carte blanche replacement," he said. "You have to develop that resource overseas and help them gain the experience that's required. You make an investment. You hire the people, train them, and don't expect a lot of productive work in the first few years."
Jobs in the U.S.
There is some discussion that although certain segments of our economy will have an immediate negative impact, the net overall effect for our economy and that of the countries into which we outsource is overall positive, Zielinski said. "There's a synergistic effect—creating more and complimentary demand as the standard of living in these countries rises. As long as the economies remain open and free of trade barriers, there are elements of truth in this argument for synergy. It's more of a gut feel as opposed to anything that's quantifiable."
Zielinski referred to the latest presidential election where articles abounded about outsourcing and criticism for President George W. Bush not creating government regulations to make it less attractive to move jobs overseas. Counter arguments were the synergistic effect of having the economies and developing nations rise and their demand for goods and services increase.
"We're outsourcing the manufacturing of our products—for both material procurement and assembly. But again, judiciously," Zielisnki said, "not the family jewels. We do some circuit-board assembly in Thailand, and it's very good."
Debunking a myth
If people want to communicate, they can; it's just a matter of attitude, Pinto said. "What is this American birthright that we're supposed to do all this work? Why would you want to have an engineer or manufacturing person paid $40 an hour unionized when you could get the same for $2 with good attitude?"
The time difference isn't a big issue either for Hill. "I think for these general class of support issues, it works fine. For a specific class of support—let's say specific details about automation in a plant here in the U.S. being supported 24/7 by someone in a foreign country—it's always an issue of how much knowledge they have in this specific application. I think that's not a universal trend at this point, though," he said.
The Indians in software and hardware development are not suffering from a communication breakdown, Pinto said, but they're on top of the communication network. "If they pick a software contract for some large company in the U.S., they actually station a guy in that place, and he's their chief communicator. He's on e-mail to India all the time."
"We pick up the phone and call for support, and it's in the middle of our day and their night," Hill said. "They're there working the night shift and doing a good job."
Pinto agrees. "They have a six-month deadline they usually beat; they do it faster, better, and cheaper."
"I don't know about faster," Zielinski said. "And better all depends on the quality constraints you put in place. Cheaper depends on how you manage it. It's not a given. You have to pay attention and manage it."
What will the future bring?
"I think we'll see in the future a higher level of work being exported—like engineering work and specific industries," Zielinski said. "We're focused in on process automation. But there are engineering contracting firms that have overseas facilities. Even development projects—parts of those are product development—typically associated with product testing."
As far as the future of big companies though, Pinto sees the big companies dying out because "they're losing their soul." So he sees a resurgence of entrepreneurs—innovation and owning your own business. "Innovation means developing new and wonderful things that will obsolete the old things."
If you look at it from an industrial or business point of view, most companies are global these days anyway, Hill said. Part of the reason people think of it negatively is they think from a regional North American view, he said. "You have to be global. If you're global, it doesn't matter if you manufacture in China or (North Carolina) as long as there's quality, dependability, and customer sensitivity."
The other up side in terms of manufacturing, Hill said, is these are all growing markets. "It's not all about products being made overseas and brought back to America. It's about products being made overseas for the overseas market. It can actually work where a company is increasing its business both here and overseas. So the company's profitability and business grows overall."
Hill's advice to displaced engineers is to look for something that's not going to easily be converted into commodity knowledge. "If you're doing a job where you're running a welding machine, somebody else could probably do this at a lower wage. If, on the other hand, you're developing some unique approach to solve some problem, chances are your approach will have a longer staying power. You have to find a way to get into a position where you're part of the innovation cycle."
Forrester Research Report
According to a February 2004 Forrester Research study on IT outsourcing, 58% of the respondents are on the offshore sidelines, and firms who already outsource work overseas plan to spend more than they did in 2003. One of the key drivers to offshoring is access to low-cost labor. In fact, "IBM's acquisition of Daksh was an admission that it needed to have a business process outsource (BPO) operation in India to be competitive," said John C. McCarthy, in his May 2004 Forrester Research article, "Near-Term Growth of Offshoring Accelerating."
While the article was mainly about IT offshoring, McCarthy said the types of jobs being outsourced will reach far beyond IT and call centers. "Other areas gaining momentum as a result of cost pressures in their industries are technology in R&D and processing clinical trials data in pharmaceuticals," he said.
Efficiency will be the key in the offshore world, creating a slowdown in services as the hiring engineer for the economy. "The combination of process re-engineering, automation, and offshoring will affect the services sector's ability to fuel job growth," McCarthy said. The loss of jobs due to offshoring of course will remain a political "lightning rod," he said. But it will also renew engineering on a smaller, less disruptive scale. And while no one result of offshoring will curb industry's appetite, Forrester projects its growth to subside due to a combination of global tensions and more imposing legislation.