The Upside of outsourcing
While the move of labor elsewhere is unsettling, opportunities emerge for savvy engineers
By Bob Felton
Do the present dislocations in manufacturing represent a relatively short-lived reprise of a familiar pattern in the American economy, or are they the beginning of an enduring change as the emerging nations assume ever-greater roles in the design and manufacture of the world's goods? No less important, what should control and automation engineers be doing to protect their careers in a time of dizzying, almost daily changes?
The turmoil wrought by industrial relocations and onshore and offshore outsourcing bears striking similarities to the episodic economic convulsions that accompanied America's expansion and corresponding industrial growth in the 1800s-but with a vital difference: This time, industry and capitalism are moving not into newly opened territories, but into the emerging nations. Then, as now, large firms sucker-punched established communities with abrupt departures for strange lands.
Then, as now, workers and their families faced paralyzing uncertainties, found themselves holding bad paper, and shelving long-cherished plans. Then, as now, protectionist policies were futile. Then, as now, new cities with a polyglot of voices arose helter-skelter.
And then, as is likely this time around, too, cheap production fed increased consumer demand, which led in turn to the creation of new products and services and opportunities, and the great cycle returned to its beginning.
"I think the world getting smaller, and globalization, is a good thing for a lot of reasons," said Honeywell Chief Executive Jack Bolick. "It limits the probability of war and stuff like that as we become more co-dependent. I see that as a trend our kids and all of us are going to have to take advantage of and understand how to operate in that kind of world."
Riding the wave
Though the word "outsource" travels across the company grapevine in whispers, like the name of some dread disease, some companies have found a way to adjust to the changed business environment and turn it to their advantage.
Santa Clara, Calif.-based SafeView, for example, develops of a high-tech security portal that detects weapons, explosives, and almost any other sort of contraband somebody might be carrying. In business only 2.5 years, the company has shipped
| Up and Down a Two-Way Street
Often, and especially in manufacturing, "outsourcing" is taken to mean the offshore movement of production. The word is used by economists and statisticians, however, to mean almost any instance of a business switching to external suppliers to design, manufacture, or provide services. Moving the bookkeeping or personnel management to a firm down the street is outsourcing, and so is moving the ball-bearing factory to Mexico. Engineers who no longer design for Acme Widgets might now, instead, be working on a broad range of products in a design shop across town. Taking the long view of a career, that might be a good thing. In the near term, however, it might mean a sharp reduction of salary and health and retirement benefits. When it comes to offshore outsourcing, the biggest beneficiaries are the U.S. and the U.K. According to a study released by Duke University in December 2005: A recent article in Finance and Development showed in 2003 the rest of the world outsourced more to the U.S. and the U.K. than the other way around. The article went on to argue that despite U.S. outsourcing activities, a net loss of jobs within the U.S. has not occurred. Outsourcing is a two-way street, and so far, American can-do appears to be holding its own.
20 of the units to countries worldwide, and did it with a staff of only 32, most of whom are engineers. The company owns no production lines.
"I did end up having to hire more people than I thought I would have to," said Karen Meyer, vice president of operations.
Meyer and SafeView Chief Executive Richard Rowe both came to the company with long backgrounds in contract manufacturing, experience Meyer said contributed strongly to the startup's success. Familiar with the difficulties of designing and then manufacturing for absentee management, they took pains to establish strong relationships with their subcontractors. "You're probably not going to get perfection, and you're not going to get what you want in every single area," Meyer said. The trick is to create strong relationships that can roll with the punches. "It's a lot like a marriage," she said.
The company began by outsourcing the design of each of the major portal components, each to a different onshore firm with the specific expertise SafeView needed. By doing so, SafeView avoided the cost of a staff of narrowly focused engineers for whom they would have no work when the design was complete. Nor did outsourcing put the company's proprietary design at risk.
Jim Pinto, Action Instruments founder and former chief executive, pursued a similar course, with the manufacture of components in both Mexico and Taiwan. But "assembly of Action Pak products was done primarily in-house because we simulated our own 'special sauce.'"
It was after the design was complete that Meyer found herself adding staff to clean up the designs, tweak the details for specific installations, and install them. Those engineers, Meyer emphasizes, are multi-talented generalists willing to continue learning more about a broad range of the company's activities. Engineers who want to protect their careers will be wise to maintain a similar attitude, she said. "The days of the specialist are gone."
Meyer believes SafeView's model will become more and more common among new companies. "It's driven by money," she said, then pointing to a second, more subtle issue: the expectations of the American labor force. "When I see this work that's going over there (in Asia)," she said, "I've watched what they're doing, and I'm thinking, 'Who would want to do this in America?'"
- A "virtual company" stakes a claim in the global market with only 32 employees-more than it intended.
- A Wisconsin company sharpens its competitive edge with worldwide, 24/7 engineering design.
- Inbound outsourcing exceeds outbound for the U.S. and the U.K.
There are huge logistical problems to overcome when established firms look yearningly toward cheap payrolls offshore, however, and it sometimes happens that the legacy investment in infrastructure, training, custom software, and proprietary methodologies is so great, the move doesn't make sense.
Some firms, though, have no other choice. Paper Converting Machine Co. in Green Bay, Wis., was hit hard by the 2001 recession and lost 900 employees over the course of the next four years. Today, though, things are looking up. According to Business Week: "[The company] plans to shift some design work to its 160-engineer center in Chennai, India. By having U.S. and Indian designers collaborate 24/7, explained Vasant Bennett, president of Barry-Wehmiller's engineering services unit, PCMC hopes to slash development costs and time, win orders it often missed due to engineering constraints, and keep production in Green Bay."
"We can compete and create great American jobs," said Robert Chapman, the company's chief executive, "but not without offshoring."
Even as American engineers watch the boss' office carefully when talk of restructuring makes the rounds, demographers are watching the calendar. Millions of baby boomers are about to begin retiring, and many experts believe America will begin to suffer a shortage of engineers and scientists within the next few years. Meanwhile, steadily diminishing numbers of college students are choosing careers in science and engineering.
Not so Fast
A study released by Duke University in December 2005 notes, however, that the widely remarked disparity between the numbers of American, Chinese, and Indian science and engineering graduates might be exaggerated, arguing those countries' graduation numbers include sub-baccalaureate degrees analogous to certificates and associate degrees in the American university system.
"The effect of the dynamics of engineering outsourcing on the global economy is a discussion of keen interest in both business and public circles," according to the Duke study. Varying, inconsistent reporting of problematic engineering graduation data has been used to fuel fears that America is losing its technological edge. Typical articles have stated that in 2004 the U.S. graduated roughly 70,000 undergraduate engineers, while China graduated 600,000 and India 350,000. Our study has determined that these are inappropriate comparisons. These massive numbers of Indian and Chinese engineering graduates include not only four-year degrees, but also three-year training programs and diploma holders. These numbers have been compared against the annual production of accredited four-year engineering degrees in the U.S. In addition to the lack of nuanced analysis around the type of graduates (transactional or dynamic) and quality of degrees being awarded, these articles also tend not to ground the numbers in the larger demographics of each country. A comparison of like-to-like data suggests that the U.S. produces a highly significant number of engineers, computer scientists, and information technology specialists, and remains competitive in global markets.
If that's correct, those countries' engineers might not be so ready to steal a march on American technology as commonly supposed. It is by no means guaranteed, but engineers in some fields might find their services bid up sharply over the next decade.
It's difficult to quantify just how much onshore and offshore outsourcing of engineering work has actually occurred during the past few years. Job descriptions don't mean the same thing everywhere, and reporting is spotty. The Bureau of Labor Statistics estimates 221,000 technical jobs were lost in the U.S. between 2000 and 2004, and attributes more than half of that loss to offshoring.
Though there's little agreement about the extent of onshore and offshore outsourcing, there is widespread agreement that offshore outsourcing of engineering jobs will grow. In congressional testimony in 2004, IEEE provided salary comparisons and, not surprisingly, the U.S. was highest.
| Survey: Outsourcing Can Add to Bottom Line
The stories abound: General Motors will spend $15 billion to outsource its IT functions over the next five years. For some companies, outsourcing its manufacturing is the only way to survive. While for others, outsourcing is its only means of existence. Let's face it; outsourcing is a fact of life in manufacturing.
Along those lines, InTech conducted a Zoomerang survey seeking a snapshot of what engineers in the industry are saying about outsourcing.
When asked if their company outsources engineering work, 79% of the respondents said yes they do, while 21% said no. When it came down to how much they outsourced, 20% said from 0-10%; 33% said from 11-25%; 24% said 26-50%; 16% said 51-75%; and 7% said 76-100%.
One of the other big topics is where does outsourced manufacturing go? Does it stay in the U.S., or does it head offshore to places like China or India?
Does your company outsource its manufacturing offshore? From the survey, 74% said no, while 26% said yes. Then trying to nail down what country they were outsourcing manufacturing to became interesting. Not surprisingly, China and India were numbers one and two. China came in at 28%; India 22%; Germany at 11%; Mexico at 6%, and other multi sites came in at 33%. From an international perspective, the U.S. came in at 6%.
One of the natural fears for engineers when they hear the word outsourcing is if they are losing their job. When asked how many engineers have lost jobs due to outsourcing at their company, 49% said between 1-5; 9% said between 6-15; 9% said between 16-30; 9% said 31-50; and 24% said over 50.
Outsourcing does not always mean lost jobs; it can also mean more work. So, when it comes to companies gaining outsourcing jobs, 29% said yes, while 71% said no.
The best defense
Engineers can't and won't stop companies from outsourcing, but they can take steps to protect their careers. After all, it's not as if manufacturing is the first area to be hit by outsourcing. Take a look at the IT world; there, engineers have learned to live with uncertainty, and they give this advice: First and foremost, make yourself as knowledgeable as possible about the full range of your company's activities, volunteering for opportunities to learn more. DuPont's Nick Sands points toward self-improvement guru Stephen Covey: "Sharpen your saw," he said. "I've been reading a control book, or two, every month." He listens to other books while driving to and from the office: recently, Guns, Germs and Steel by Jared Diamond, How to Win Friends and Influence People by Dale Carnegie, and The Earth is Flat by Thomas Friedman.
Oklahoma State Professor Russell Rhinehart also recommends Friedman's book: "His advice, and I have to agree with this totally, is you can't protect your job, you can't prevent your company from outsourcing. What you can do is continuously learn and evolve."
Other things to keep in mind:
- Stay calm. Anxiety works against making smart decisions.
- This is a big cycle, not a small one; don't wait for the upturn "next year." The trends now in place will be active for years to come.
- Think small, as in company size. Small firms generate opportunities to do a wider range of activities than mossy behemoths, and they're less likely to decide some high school kid 12 time zones away should be doing your job. If the firm is successful, there's more opportunity for career growth, too.
ITS Technologies, a staffing firm that specializes in engineers, offers advice on its Web site for an often overlooked group: those who don't lose their jobs.
"One of the biggest problems is the huge decrease in production," said Susan Gebelein, an executive vice president for Personnel Decisions International, a global consulting firm.
"Employers think the problem is workers standing around talking about the downsizing, but the decrease in productivity is because people no longer know how to get things done."
Downsizing can have a domino effect. As the decrease in productivity puts a strain on customer relations, product demand suffers, and employers justify cutting even more jobs than initially anticipated. Finally, when the workplace becomes downright dysfunctional, an organization might bring in external consultants to "fix" those that remain.
What is their advice? Do everything you'd do if you'd been shown the door, but do this, too: Be a team player, keeping the company's well-being in mind and scrupulously steering clear of the backstabbing and bickering that characterize companies operating under a fear-based adrenaline-rush. A company at war with itself can't beat-up the competition.
About the Author
Bob Felton PE is a freelance writer in Wake Forest, N.C. Reach him at email@example.com.