Comment

December 2007

Outsourcing: The big paradox

Outsourcing hard reality today, but could bring better jobs to engineers tomorrow

By Ellen Fussell Policastro

Outsourcing is a fact of life. Just ask hundreds of chocolate manufacturing workers in Pennsylvania who lost their jobs this year. WGAL in Lancaster reported in October nearly 3,000 workers would be laid off nationwide. Nearly 100 workers in the chocolate plant in Hershey, Penn., have already taken early retirement or severance packages. The company is looking to shift more manufacturing to India, China, Mexico, and private contractors in the U.S. Hershey announced its joint venture with Godrej Food and Beverages in India this spring, renaming the plant Godrej Hershey Food and Beverages. Although WGAL reported Pennsylvania Governor Ed Rendell said he is disappointed, he said the trend is one reason he is pushing the state to invest more in alternative energy; he thinks it is a great opportunity for Pennsylvania to replace lost manufacturing jobs.

Although lost jobs are a cold hard fact, could the outsourcing trend mean a new horizon ahead for U.S. manufacturers? 

Jeff Johnson has been in the outsourcing business for 22 years, so he has seen his share of changes in outsourcing trends. As a U.S. regional managing director at Neoris, a worldwide consultant for nearshore outsourcing services, Johnson said he believes “there will still be lucrative careers in the U.S. because the growth and need for technical knowledge is higher than the supply. 

“Companies are doing so much with integration that demand is way above the supply in the U.S. So that model’s been proven that we’ll still grow even with Indian firms making big inroads in the U.S.,” he said. “Even if you’re working on a strategic project, usually the American side of the business is focusing more on the groundbreaking stuff, and the programming and testing is done at a nearshore facility, allowing U.S. professionals to do more interesting stuff, and to do it faster.”

Multisourcing moving in

While outsourcing has been around for 20 years, Johnson said the new buzzword is multisourcing, or moving jobs to different countries. Johnson believes one of the primary reasons companies are investigating in multisourcing is “they don’t want all their eggs in one basket. They’re familiar with the Indian model. But it does have its shortcomings,” he said.

A major difficulty with the “Indian model” lies in having to work on a project while it is lunchtime at Lowes in Charlotte, N.C., and midnight in Bangalore, he said. “They originally thought they’d get 24 hours of work done because they’re working when we’re sleeping,” he said. “But if you reached an impasse on a recommendation, the team would stop working. So there was a lack of ability to be able to interact on a real-time basis.”

Also the logistics around Indian firms coming onsite were difficult. It was not practical because of the travel time but also because of Visa restrictions, which are becoming more restricted since 9/11, Johnson said. For those practical reasons, it made sense to get a lower-cost, high-quality model closer to home. That is where another outsourcing buzzword comes in, nearshoring, or doing business in Mexico or South America. “We have facilities in Monterrey, Mexico, which is an hour flight from Dallas,” he said. There is also a big group in Buenos Aires, Argentina.

Johnson said U.S. chief information officers (CIOs) are interested in nearshoring for a few reasons, one of which is proximity. A CIO in the U.S. can get service of the same quality with a U.S. nearshoring firm based in Miami. He can bring workers from Mexico on site to the client if I need to within a day. There’s no Visa restriction, and he’s protected with NAFTA to make sure his [intellectual property] IP doesn’t go anywhere, he said.

Another nearshoring advantage is the similar cultural understanding between the U.S. and Mexico.

Then there is the issue of protecting IP. With the North American Free Trade Agreement (NAFTA), there is protection with IP “that makes companies more interested in sharing financials and core applications like their enterprise resource planning,” Johnson said. Clients such as Anheuser-Busch have core distribution logistics planning, “which is everything in that company,” Johnson said. “They have to get beer to the consumer within the effective date. They have a bunch of different warehouse management and distribution training systems to manage those scheduling systems. They’re afraid for those systems to go offshore because they have proprietary algorithms.”

With these core systems, companies may need an upgrade applied to a software package or a new piece of software implemented for the first time. They could need enhancements developed for current applications. Historically these strategic applications were only done internally. “But now with all this framework and NAFTA protection closer to home, it’s easier for CIOs to know they can do it and not lose their IP,” he said.

Johnson’s company’s role is to give CIOs the comfort level “that we can do project work with a combination of onsite consultants that are U.S.-based, backed up by technical people who can do analysis, programming, and testing of systems, or process design work at a solutions center across the border.”

Consolidation key to pharmaceuticals

Pharmaceutical device and biotech outsourcing generally started with functions the industry did not consider a core competency for the company. “About 10 to 15 years ago, we started seeing cleaning services outsourced, then the IT help desks; at that time, the prevailing knowledge was manufacturing and R&D were core to the business,” said Daniel R. Matlis, president of Axendia, a research firm that analyzes business, regulatory, and technology issues in the life sciences and healthcare markets in Yardley, Penn. The shift in the past few years, though, has lead to tremendous growth in contract manufacturing and contract research organizations.

However, the pharmaceutical industry is less interested in multisourcing and more interested in consolidation and single-sourcing, Matlis said. “Very often in the past in big pharma, they’d make the same product in multiple facilities around the world,” he said. “Equipment use ends up being low; so we’re seeing a trend toward consolidation where companies are ultimately driving to single-source or facility strategies in which they’ll make a particular product, thereby increasing asset and process utilization,” he said. In this way, they reduce waste and are able to increase asset utilization, diminishing the people they need to run that equipment.

This is especially important when manufacturers are dealing with highly automated processes; it is crucial to reduce the cost and number of resources needed to run equipment. “When you’re dealing with highly automated processes, you don’t need to outsource those,” Matlis said. Often, companies will want to keep those processes close to their headquarters, and often, they will keep those processes internally. “The ones outsourced are labor intensive. The challenge there is you have a long supply chain, but the costs go down, so you end up justifying the long supply chain.”

One of the big trends in life science employment includes layoffs in big pharmaceutical companies and medical device companies due to outsourcing. But these same employees are finding jobs in startup firms or some of the midsized up-and-coming companies, Matlis said. “In the past, when someone got displaced from big pharma A, they’d end up in big pharma B. Now, people won’t relocate where outsourced jobs are; they won’t move to China, Brazil, or India. So they often find a similar position in a smaller company where their experience is more valued because of the variety of experience and not necessarily on the focus of technology they might have had in the past,” he said. “A well-rounded individual is more valuable than a very focused individual.”

Trust is also an issue surrounding big pharma outsourcing, Matlis said. “One of the challenges dealing with outsourcing is the way other countries do business is different than the way the U.S. does business,” he said. Product adulteration (switching ingredients for those below par) is one instance that remains a challenge, especially with the recent events involving products from China. “In the U.S., if you’re specifying lactic acid USP, you better put that in; granted it may come from different sources, but if you put a suspension agent, you specify which agent you’ll use,” he said. “In other countries, something perceived to be equivalent is acceptable. In the U.S., it’s called product adulteration. It’s illegal unless you’ve made that request to the Food and Drug Administration (FDA). “When you’re dealing with outsourcing, you’re not just dealing with issues of costs and savings, but you have to look at the big picture.”

Challenge ahead

Companies in the U.S. are getting so familiar with the outsourcing process that they do not have to have as much space to accommodate people, Johnson aid. “They don’t have to have local contractors meeting security clearance. So they have a lot of flexibility to expand their capabilities. The problem will be on the supply side. If you look at what is going on in Mexico, the India firms have seen there is an advantage in being close to U.S. plants, and at a low cost. So in the past six months, four Indian firms have moved into Mexico.” When that occurs, the existing players will have price pressure “because the India firms will try to hire their people away,” he said. “The entry of those people into the market will create upward price pressure. They’re already experiencing that in India because of the competition there, but they will take that same pressure and apply it in Latin America.”

Unlike his company, many of Johnson’s competitors are subcontractors, companies whose employees are paid by the hour, he said. “I think those firms will be vulnerable to Indian firms hiring their people away,” he said. But eventually the pricing will go up, taking away any advantage of being a company with full-time employees. “The education system in Mexico is growing rapidly. We work with Monterrey Tech (the MIT of Latin America), and we have a strong relationship with them,” he said. “We have a good pipeline of talented graduates from there. Because our size and market share makes us the employer of choice in Latin America, we have a good portion of new entries. The Indian firms moving into Mexico have proven this is a good thing. But anytime people understand a good thing, it can get crowded pretty quickly.”

Engineers on contract

While so much of what we are hearing about involves outsourcing the manufacturing jobs, do not be so hasty to rule out the high-level engineering jobs. Companies today are looking at different ways to improve margin, said Bob Vogel, director of support services at Advanced Automation, a controls integrator execution and support firm in Exton, Penn. Supporting systems is the main goal behind Vogel’s business. “When you have systems in manufacturing, it takes engineers, mechanics, technicians, and those types of positions to keep things going and tweaked so everything is efficient,” he said. If manufacturers need four hours of engineering type resources everyday, “does it make sense to have an on-staff engineer when they can save money with an additional mechanic or technician and then outsource engineers or mechanics to a company like ours?”

Another outsourcing trend is the outsourcing of the full department, Vogel said. This means a company would outsource electronic technicians, mechanics, and engineering to a company so they can focus on the core, the people that run the equipment and or touch product, he said.

It is kind of the opposite of offshoring. “They realize they can control things important to them. You look at the recent recalls of the paint in China. If companies were able to keep the manufacturing aspect of their business under their control and outsource the things that are not as critical to them, they look to companies like ours to outsource those aspects of supporting the manufacturing process.

“In the past, the job market had readily available and skilled resources that companies would hire,” Vogel said. “Today finding the right, affordable skill sets in the market is difficult. It’s a tight labor market. When that happens, you have to have the right support infrastructure and on-boarding process (making sure an employee understands the systems you’re working on) and training. There’s a lot more involved to finding the skill set you’re looking for. Today it’s easier to go to companies that excel and have the infrastructure to support what you’re looking for. It’s changing the way companies are thinking; they’re realizing there’s another way to do it.”

Contracting out engineers is only one piece of the puzzle. There are also contract jobs on the rise for mechanics and electrical technicians. “We’ve done a lot around engineering; it’s the bulk of the business today,” Vogel said. “But we also have the specific skills around mechanics, so if one doesn’t show up for work that day, we have the skills to backfill quicker than [companies with traditional full-time employees],” he said.

In the steel industry, for instance, companies might have projects and internal initiatives that require specific skill sets to carry out, such as replacing and upgrading systems and technology. “We’ll put in a handful of people outsourced to us because it’s a special need. [For some] projects, some of the resources could be in there from two to three months to a year or two,” he said.

Aging workforce

The impending retirement of Baby Boomers is another challenge facing the industry that is leading to the increase in outsourcing. In the next five to eight or 10 years, a large percentage of the Baby Boomers in the positions that support manufacturing, from electronics technicians to mechanics to engineers, will be retiring, Vogel said. “And there are not enough graduates to backfill the positions. The negative connotation of manufacturing is not very glamorous. And the changing dynamic of technology in the manufacturing environment means as the controls and execution in technology improve, everything becomes networked, and the systems put in become more technically advanced, they need people to work on them. As those people come out of school, manufacturing is not one of the things they’re interested in. It’ll take every association in this industry to get the word out that manufacturing as you knew it has changed; it’s a lot more high-tech.”

The benefit of contracting out services, Vogel said, is it perpetuates a mix of skills, so employees can go anywhere and be effective. “If you work for XYZ bottling company, they may have only Rockwell equipment and maybe no MES that helps with operational efficiency. If your company doesn’t have that, you’re pigeonholed on one manufacturer’s line of equipment.” Working for an integrator, “you may work on one project and roll to another one built on Siemens’ or maybe Rockwell’s batching process. Then you could dip your toe in another one, and it’s more IT technology and you’re more well-rounded.”

ABOUT THE AUTHOR

Ellen Fussell Policastro is the associate editor of InTech. Her e-mail is efussellpolicastro@isa.org.